Power Up Wealth podcast – The Shortsighted Investor – Episode 62 transcript:
Sharla Jessop 0:00
There seems to be no shortage of information or opinions regarding money. How to save? How to spend? How to invest? How does it impact our long-term focus? I’m Sharla Jessop, president of Smedley Financial. Today, my guest and colleague, Jordan Hadfield, will share the attributes and consequences of short-sighted investing.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Jordan, thank you for joining me today.
Jordan Hadfield 0:55
I’m glad to be here. Thank you, Sharla.
Sharla Jessop 0:57
Jordan is a wealth advisor at Smedley Financial. He holds both a CFP and a BFA designation. Jordan, it seems like investors are easily swayed and distracted. How does that happen?
Jordan Hadfield 1:08
Yeah, it happens for a couple of reasons. Number one, there’s a lot of information out there. The sources of some of this information is designed to motivate behaviors and stimulate emotion for viewership. And so not all of these sources, in fact, most of these sources of information are unreliable. They’re exciting, they’re catchy, they’re scary. But they’re not necessarily accurate. That’s a big problem. Another problem that I think investors and this is everyone, myself included, there’s no investor that doesn’t fall victim to this bias is the pain of loss is often much greater than the joy of gain. When we enter times of economic volatility, market volatility, the fear of any loss in an account is quite a bit more than the benefit we feel when there’s gains. And so investors, you know, just we’re hardwired to focus on short-term pain. And we try to avoid that. And because so many investors try to avoid that short-term pain, they end up making the wrong decision at exactly the wrong time. You know, the S&P 500, on average, does about 10% per year over the long-term, right, depending on where you’re looking 9, 8, 8-10% per year over the long- term. And the average investor who’s managing their own accounts, only does like 2%. And the question is why and studies show that, again, when we enter times of market volatility, investors attempt to reduce pain and losses in the account, and they make the wrong decision at the wrong time. It’s unfortunate, but it happens.
Sharla Jessop 2:43
I can see that people think if I just don’t invest, then I don’t have to worry about the volatility. Unfortunately, we don’t know when that volatility is going to occur, or when things are going to turn around.
Jordan Hadfield 2:53
You know, this is a perfect this year is a perfect example. The economic indicators that we’re looking at are flashing red. There’s a lot of risk in the market right now. And look what the markets done this year, it’s been really positive in the stock market. That makes us nervous as you know financial advisors as we’re looking to the future possible recession, there’s still a lot of question marks out there. You know, many people are saying soft landing, we’re definitely saying not yet. Inflation is still a problem. And there’s still a lot of uncertainty in the markets. And so this is causing some fear. But oftentimes, the emotional cycle of the investor is the opposite of the economic cycle. When we should be investing emotions cause investors to get scared and panic. And you know, when we should be scared, it often feels really good in the market. And so, yeah, again, investors tend to be short-sighted, and they tend to invest using their emotions, and they can’t help it. No one can help it we all again, everyone, it doesn’t matter how smart you are, how experienced you are, your emotions come into play when we’re making decisions. It cannot be avoided. It’s not something that I’m recommending investors remedy, they can’t. They just need to be aware of it. Right. And that’s another big reason why hiring a professional to help manage those emotions is so beneficial. But yeah, we tend to be short-sighted, and that tends to hurt us.
Sharla Jessop 4:12
We can’t change our behavior, but maybe we can know how to handle it, or to react and recognize the behavior that we’re having. So right now, with market volatility, and high interest rates and some guaranteed things. What are people doing?
Jordan Hadfield 4:27
Yeah, so we’re in a very interesting time because on one hand, we see risks in the market, right, particularly the stock market. There is still a concern about a recession, although we don’t think it’ll be a big recession. You know, that is possible, obviously. No one knows what what’s coming and a Black Swan event could could be really dangerous, but we do expect a minor recession coming. And so that causes a lot of fear and at the same time, because what the Fed has done with with interest rates, some of our fixed interest, our fixed investment options have become really attractive. You know, money markets are paying more than normal. High-yield savings accounts are paying more than normal, and CDs, you see it on every billboard, you know, CDs are paying north of 5%. And we haven’t seen that in so long that it feels like such a great opportunity. And so for the short-sighted investor, there is a real, understandable, logical thought process that would lead someone to say, I want to take money out of long-term accounts, or out of risky accounts and put it in a CD that’s paying a guaranteed 5% or 5 and a quarter with no risk for 12 months. That seems like a very logical decision.
Sharla Jessop 5:43
What could be the downside of that?
Jordan Hadfield 5:44
So let’s talk about that. And first, I want to emphasize for some monies, it is the right decision. If you’ve got money sitting in a checking account or savings account that you don’t need for 12 months, that’s a great place to put some of that money. I’m not saying that the CD is a bad option. But we don’t want to put too much there. And so you ask what’s the downfall? Well, the downfall is we step over dollars to pick up dimes. That’s the downfall. For a long-term account, a recession isn’t fun. If markets decline in the long-term account, we participate in some losses, that doesn’t feel good. But more money is made on the back of a recession than almost any other time. And so to take money out of a long-term account, whether it’s a joint account that’s invested for the long-term, or particularly your retirement account, 401 k, and IRA. If you’ve got these type of accounts that are long-term, and you’re tempted to take money out of them and put them in a CD, or invest in a CD inside of the account for 5%. We know that may look good in the short term, and it may feel good in the short term. But when you look back, you may say, wow, I passed up an opportunity for a 10% return or a 15% return or a 20% return. We don’t know because we don’t we don’t know what’s coming, right. But historically, the S&P 500 does a lot better than 5%. Since 1926, the S&P 500 has returned 1,278,430%.
Sharla Jessop 7:16
To be alive with an investment since 1926.
Jordan Hadfield 7:19
Yeah, right. If you put $100 in the stock market in 1926, you would have $1,278,430 now. If you reinvest the dividends. I mean, that’s fantastic. And a CD is never going to compare to that. CD rates, fixed rates, guaranteed income is never going to is never going to compare to that long-term. Again, long-term. For money in your emergency funds, you don’t want to be investing in the stock market. CDs, high yield savings is a great place. But for money that you don’t need for, you know, five years plus definitely 10 years plus, you want to keep some of this money in areas of the market that can that can produce the most return the most bang for your buck. And that’s really hard. When you know that possible losses are on the horizon. It can be difficult, it can be really tricky.
Sharla Jessop 8:12
It’s an emotional, scary, scary thing to do. So we’re talking a lot about investing and staying invested and putting money in. But what about money that’s not even invested? What about our personal spending?
Jordan Hadfield 8:23
Great question. So again, as the economy starts to flash warning signals. And we start to see some heightened risk, both in the stock market and in the economy as a whole. There’s some really wise decisions that we should start to make. I mean, really, we should be making these decisions all the time. But their importance is just increased during times of economic uncertainty. If we can rein in our spending. If we can be a little bit more careful, particularly when we’re in a time of such high inflation. It hurts emotionally to go to the grocery store nowadays, just because we’ve seen how quickly prices have gone up. And that makes it hard. That means our dollar doesn’t go as far and so to cut during the time where the dollar doesn’t go as far can be kind of tricky, but it’s wise to prepare for anything and everything in the worst case scenario. And so to cut spending where we can is a great, a great piece of advice. One area where we can and should cut spending anytime, regardless of the economic cycle is with credit card interest rates where we’re paying, you know, incredibly high amount to borrow on a credit card. So this is an interesting fact. Right now, Utah is the most indebted state in the nation.
Sharla Jessop 9:41
Ouch.
Jordan Hadfield 9:42
I know. Think about that for a second. And of all 50 states Utah has the highest debt to income ratio. That’s, that’s crazy. That’s sad. I find that sad being a resident of Utah. I find that sad. 138% of the average annual salary is our debt ratio. 138%. That’s high. We’re seventh in the nation for auto loan debt. We’re fifth in the nation for mortgage debt. And thankfully, we’re only 25, 25th, right around there somewhere, in credit card debt. We’re in kind of the middle of the pack for credit card debt. But even 25th, that’s a lot of money going for interest payments. The national average right now, the national debt, for credit card alone, this is not auto loans, this is not mortgages, this is not school debt. This is credit cards alone is $1.03 trillion dollars. And I had to look this up. 12 zeros in a trillion. That’s one and 12 zeros, that’s a lot in credit card debt alone, with an average interest rate of 24%. That’s crazy.
Sharla Jessop 10:48
It is crazy, because you make your payments. And even if you’re paying more than the minimum payment, you’re likely falling behind. You’re probably not going to get that paid off in a reasonable period of time.
Jordan Hadfield 10:59
Yeah, I know. And, you know, I know people who have got a tremendous amount of credit card debt. I know people that are struggling, personally very close to me. And it’s just, it’s eating them up. As the Fed has raised interest rates, the rates on CDs have gone up and that’s great. But people might not notice the rate on credit card debts are also going up.
Sharla Jessop 11:19
It’s something people oftentimes don’t focus on the balance, but they’re probably making payments and just doesn’t seem like that balance is going down at all.
Jordan Hadfield 11:26
Yeah. Yeah. You know, one thing I want to, I want to kind of highlight is when the Fed raises interest rates, we see it’s easiest to see the CD rates go up. But we don’t realize how it affects the entire investment landscape. As the Fed raises interest rates, investment vehicles, and debt products, like credit cards, the whole landscape changes. And so CDs aren’t the only thing that are benefiting from that. There are lots of other investments that are benefiting from a higher rate. We see a real opportunity for bonds going forward. And that’s something that a lot of people don’t think about. Again, we’ve talked about stocks and kind of the risk there. But there are some bonds that could present some really good opportunities in the short-term. And there are some debt instruments that are affected by this that are hurting us. And it’s difficult to see all of that, because the only thing on the billboard is the CD. But again, we don’t want to be short-sighted, we need to look at the whole picture. And we need to keep a long-term perspective. It’s important economically, financially, the environment we’re in is changing. And for an investor who’s looking for the long-term, there can be some real possibilities.
Sharla Jessop 12:33
So talk to us about that. So let’s say that somebody is looking to the long-term and we’re contributing to retirement plans, because most everybody in America is contributing some type of money if they’re working to a retirement plan through an employer or just an IRA. Let’s talk about that.
Jordan Hadfield 12:47
Yeah, so in times of economic uncertainty, you know, and heightened risk, particularly if we go into a recession, if we have a downturn in the market, that is the exact time to be purchasing stocks for a long-term investor, or mutual funds, you know, stock mutual funds, that’s the best time to be buying. You know, we say this so often it’s a common phrase, but it’s so important, and we can’t say it enough, you know, stocks, that’s the only market where people run away when things go on sale. You know, if Chick-fil-A’s on sale, the line wraps around the block, right? If stocks go on sale, you know, a lot of people flee, it’s a really strange thing. So we kind of need to change our paradigm, when it comes to investing for the long-term and volatility and recessions. That’s the time to buy. And it’s easy to say, but it’s hard to do. And we see it often. I hear clients repeated often. But when the volatility hits, and the fear is high, it’s very difficult to do. So be prepared for that contributing extra to the 401k’s and retirement accounts, any brokerage accounts, joint or individual accounts that are long-term. Absolutely. That’s what we should be doing.
Sharla Jessop 13:52
It makes sense. We get a lot of calls during times of volatility to the tune of, hey, I’m losing money in my 401k and I feel like every cent I’m adding is just I’m losing it. So should I stop contributing to my 401k?
Jordan Hadfield 14:04
Yeah.
Sharla Jessop 14:04
The answer’s no.
Jordan Hadfield 14:05
Absolutely not.
Sharla Jessop 14:06
Jordan these are these are good insights to help us as we’re thinking as individuals about our own financial situation how short-sightedness can really change our outcomes down the road that we don’t really focus on or think of today.
Jordan Hadfield 14:20
Yeah, and one thing I want to highlight is this can get complicated, right? The economic environment that we’re in can get complicated. There’s a lot happening. There’s a lot going on. There’s a lot of risks that weren’t there before. There’s a lot of opportunities that weren’t there before. First, I want to say I’m very positive about the future. Regardless of what we see in the short-term. I am very, very positive about what the market will return for the long-term going to the future. I’m very optimistic for my children and the opportunities that they will have. Very optimistic. So don’t let the fear get you down. We can always focus on the negative but but focus on the positive that’d be my first piece of advise. Number two, you don’t have to do this alone. Don’t make these decisions by yourself turn to a professional. If you’ve got questions, you know, okay, Jordan, you tell me that I need to pay off my credit cards. You tell me that I need to cut my spending and you tell me that I need to invest more to my retirement accounts. I don’t have enough to do all of it. Turn to me. Let me help you. Let us help you. We’re here to help you. We’re here to help you find the opportunities that best meet your risk tolerance, and your personal goals. We’re here to help you navigate through the economic uncertainty. So please don’t try to make these decisions on your own. Even if they seem little to you. They’re big and they can have an impact. Call us. Let us help you. We’re here for that.
Sharla Jessop 15:39
Thanks, Jordan. We appreciate the information.
Jordan Hadfield 15:41
Yeah, yeah. Thank you, Sharla. Glad to be here.
Shane Thomas 15:43
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
