September 6

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The Tragic Cost of Fake Recessions

FAMILY UPDATE

Since my wife is home during the day, the pets have grown very close to her.

I get mad because the cats completely ignore me, but when she walks around she has a parade of animals. They follow her everywhere, including the bathroom and shower. Every time she is about to get into bed, she has to move a bunch of furry creatures.

My orchid garden is in full bloom. It looks like Selby gardens. To see a video tour, click here.


You cannot listen to any news source lately without hearing warnings of a pending stock market correction. I’ve had several people in my office in recent days scared to death.

There have always been talks of recessions, but what makes this worse is how financial news has blended with political news. The stock market’s performance has become a political talking point.

It is completely out of control.

Remember that the news will report on anything that will get and hold your attention. Stock market pullback? Big news! President talking about economic struggles? Network executives are even more thrilled. It’s great for ratings, but it is terrible for you.

Why? It gives you the faulty perception that anyone, and I mean anyone, can predict a recession. A couple of years ago, I sat through a lecture by a highly respected group of economists. What was their message in 2018? High probability of a recession halfway through 2019. (nope)

In 2019 I went to a conference with hundreds of other advisors. What did the keynote speaker predict? Recession in 2020. (nope)

At the beginning of Covid basically every pundit guaranteed a recession. (nope)

Oops.

But they will decry, like all prognosticators, “It is happening more slowly than we realized. The recession is still coming but now we see it coming in 2023.” And maybe it will. But maybe it won’t. And if there is no recession you could be just as financially damaged as if there were. How? Let me explain through an illustrative anecdote.

Meet Betty Bonnett.

Betty worked hard her entire life as an office manager at a small, family-owned business. The company owners offered a 401k and a very generous match to any contributions their employees made. Like most small businesses, the owners genuinely cared about their employees and did everything possible to help.

After 35 years, Betty finally decided to retire at age 65. Up until this point, she had contributed money to her 401k and never gave it much thought. The financial guy at work had suggested some mutual funds, and Betty hadn’t changed her portfolio much through the years. She had other, more pressing issues to deal with. Keeping an eye on the stock markets was not really on her radar.

Once Betty retired, she was suddenly faced with a terrifying decision: What do I do with the money now? The gravity of her financial choices had suddenly multiplied tenfold. She realized that stocks and bonds are powerful wealth-building tools. Heck, she’d seen her 401k grow almost every year since 2008.

So Betty met with a planner and got her money working in a diversified portfolio. Everything was going great … until Betty started to see stories about an imminent economic catastrophe on the way.

On TV, the radio, the newspapers — the impending market pullback was everywhere.

Betty couldn’t escape it.

Betty grew sick with worry. She watched her portfolio every day. On one particular day, the market fell 3%. All in one day! It was the last straw for Betty. She called her advisor and demanded all the money be put into cash.

The market went up 4% in the next two weeks. “Now the economy is at an all-time high,” Betty thought to herself, “it is sure to crash now.”

It didn’t. Over the next six months the stock market grew by over 8%.

Betty had made a terrible mistake. She forgot that the way to invest successfully involved keeping her money working for a long time — not trying to time the markets. The 24/7 news establishment had completely derailed Betty’s financial well-being.

By missing the “ups” in the market, her long-term returns will be dismally low.

What goes down always comes up.

Put another way, if you never looked at your statement again, took out 5% of your account value each year, and then looked again at your account on your deathbed, guess what? In almost every case, you will have more than what you started with.

While I can’t guarantee this result, it has been the case since 1930.

The average retirement lasts around 20 years. The worst 20-year period in the stock market since the Great Depression returned an average of 5.6%. The best 20-year period returned an average of nearly 18%.

Nobody knows if and when a recession is coming. Trying to time the markets is a losing bet. Close your eyes to the day-to-day hysteria and Trust. The. Process.

And I know it's hard right now. With all the economic and social turmoil happening in this country it almost seems like a market correction is guaranteed. But you need to come to the realization that the stock market is not logical. Covid would logically have wrecked the economy. It did not. In fact, the market reached all-time highs.

You would think that rampant inflation would cause the stock market to go down. But studies show that inflation and stock market returns have no correlation. The stock market is not logical.

When you see a hysterical news reporter or read a hyperbolic editorial, you can confidently turn away. You know better. Their manic doomsday prophesying can’t affect you if you don’t let it.

You have a plan. You are harnessing the power of stocks and bonds. You are utilizing financial planning concepts that have worked for 200 years. You are not in danger. It might feel that way, but feelings are not facts.

Be encouraged! Be confident! And if you know someone who is freaking out over the “impending” recession, be generous! Share this newsletter with them.

Be Blessed,

Dave

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