Thoughts On Money [TOM]

Today we will pick up part two of Hodgepodge and Potpourri. As you may recall from part one, watching Jeopardy was a family tradition growing up at my house.  Nostalgia has led me to borrow these popular Jeopardy categories - Hodgepodge and Potpourri - as an excuse for me to riff on a few unrelated finance topics that have caught my interest recently. 

So, let’s jump right into it and pick up where we left off… 

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I grew up watching Jeopardy with my family; it was a family tradition. I remember being amazed by how many answers my parents knew. Every so often, I’d sneak in with the right answer on a sports trivia category. This time together would eventually morph into family Trivial Pursuit (the board game) nights, where I’d team up with mom or dad versus one of my siblings.

I remember as a young adult being over at a friend’s house and watching their family enjoy Jeopardy together too. My friend’s father had a good approach, he would record the episodes on his DVR and then pause the screen after each question to allow everyone time to think and then blurt out their answers.

As I mentioned, I was partial to the sports categories. Although, I always thought it was quite humorous how specific and obscure some of the categories could be. I thought to myself, “Someone out there actually knows the answer to five different questions on 19th-century Danish Composers!?” (The answer is “yes,” and that person is Ken Jennings.) Then there was the inspiration for today’s discussion – Hodgepodge and Potpourri. These were the “catch all” categories where all the unrelated left-over questions could be housed together under one roof, one single header.

There is no common thread that links the four topics (or curiosities) that I’d like to discuss. Each of these topics on its own does not warrant a dedicated article, so instead today we will take the potpourri approach. Here comes a hodgepodge of financial oddities that have piqued my interest.

So, without further ado…

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A recession is coming!! 

Yikes! When? 

Not sure. 

How severe? 

Couldn’t tell ya. 

How long will it last? 

Your guess is as good as mine. 

When you have an event that is inevitable, but the severity and timing are impossible to know, what do you do? You prepare, you don’t prognosticate. 

Think about it, we prepare for all sorts of things Mother Nature throws our way and preparing for a recession is similar.  

Today we will talk about what being prepared for a recession looks like. 

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Timing is…

Everything.

That’s right.

Timing is EVERYTHING.

When I proposed to my wife – perfect location, the right words, and… perfect timing.

One of our favorite dinners to cook at home is barbecued tri-tip. The key to a great tri-tip? Timing. The right temp, knowing when to flip, how long to let it cook, and the amount of time to let it rest. Again, timing is everything.

Getting that perfect start out of the gate as a swimmer or sprinter – timing. The key to comedy – timing. When to go in for that first kiss – timing.

Investing isn’t immune to the impact of timing either. Timing is such a crucial part of what drives successful investment outcomes. Today we will explore four aspects of investment timing:

Entry Points

So, without further ado…

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A lot of my friends are real estate investors. They love it; they have a true passion for investing in real estate. Some flip homes for short-term profits and others are buy-and-hold long-term investors.

Personally, I think sometimes this zeal and/or passion can distract one from realizing why they invest in real estate. In the past, when I’ve inquired, I would get answers like:

“I love real property – you can see it, feel it, touch it – it’s tangible”

Or

“The leverage makes a big difference. The fact that I can put 25% or 30% down and the bank will cover the rest is amazing”

Or

“My parents bought this property for $75,000 originally, and now it’s worth north of $500,000 – it seems like real estate just always goes up”

Yes, all of these beliefs and experiences do paint the picture of their affinity for investing in real estate, but I think people rarely articulate the REAL or primary reason. Humans hate uncertainty; people despise the fact that they don’t know what the future has in store for them. Investors also know that they will never really have the benefit of knowing the future, so they settle for the next best thing – something predictable and reliable, something they can count on.

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When it comes to financial markets, many of us have these same particular dates seared into our brains:

The Great Depression 1929.

Black Monday, October 19, 1987.

The Dot-Com Bubble of the late ‘90’s.

The Financial Crisis of 2008.

These are all memorable dates of when the stock market misbehaved. It wasn’t the entirety of the financial markets that took a beating during these events, but rather just the stock market.

In 1929-1932 the stock market returns were such -8.30%, -25.12%, -43.84%, -8.64%. During those same years the US Treasury Bond returns were +4.20%, +4.54%, -2.56%, +8.79%.

Here are some snips from USA Today on October 20, 1987 (the day after Black Monday):

“As panicked investors scrambled to grab what money they had left, the Dow Jones industrial average spun into a dizzying free fall, losing 508.32 points to close at 1738.41 Monday. The Dow’s one-day loss of 22.6% destroyed the record set by the 12.8% plunge on Oct. 28, 1929, Black Monday…

Yields on 30-year Treasury bonds fell Monday to 9.94%. But the bonds still are a relatively risk-free lure for investors frightened by the risk of stocks. Although the Fed always feels the pressure to keep rates down, West Germany and Japan have raised their interest rates, forcing USA rates up to remain competitive.”

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I'll be upfront with you. I had reservations about tackling today's topic here on Thoughts On Money [TOM]. Why, you might ask? Because my goal in this communication is to translate complex financial topics into something palatable, understandable, and relatable. AND these topics - the Federal Reserve, interest rates, and the yield curve - are intimidating topics for me to try to translate. They almost feel too complex for translation. Some of this just begs for a general base of knowledge and the financial language needed to even participate in the conversation.   

On the other hand, I absolutely couldn't help myself. I find these (the Federal Reserve, interest rates, and the yield curve) to be the most interesting topics in finance right now. I literally wake up every morning and look at the current treasury rates across all the different maturities - I study the yield curve and the day-to-day changes. Nerdy? Sure, but these interest rates permeate every corner of our financial markets; they matter a lot.  

So… here are my encouragements. Write down the words you don't know and look them up. Listen to the accompanying podcast where Deiya Pernas and I walk you through these topics - you can literally listen in on our conversation about these very subjects. Lastly, you have my email ([email protected]). Please email me any questions, as I would welcome the opportunity to help bring more clarity around any of these matters that feel esoteric.   

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There are different ways people deal with stress – some healthy, some not.

Me?

I like to organize. Yup, as weird as that sounds, when I’m stressed, sometimes organizing the junk drawer is my only source of relief. Something about just putting everything in its place gives me a little peace.

A few years back, we installed some ceiling racks in the garage. Putting everything in storage bins and tucked away was true bliss.

With that said, I do bring this same desire for order and organization to my personal finances. I value simplicity, cleanliness, and everything being where it should be.

Opening a Donor Advised Fund (DAF) gave me a similar bliss to that of those ceiling racks. Yes, as nerdy as that sounds, getting our family’s giving organized brought me a lot of peace. I figured today we could discuss what a Donor Advised Fund is and some of the benefits my family has experienced from resourcing a DAF.

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In keeping with the theme of the famed March Madness Tournament, today we are going to talk basketball, the evolution of the investment advice industry, and why you should seek out your own Dream Team. So, without further ado…

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I want you to imagine that I have never heard of a casino. I have no idea what a casino is, and it is your job to explain it to me. So, you start by explaining that a casino is a business, a business made up of a collection of games, games of chance. These games pit the customer up against the casino and wagers are placed, a type of organized gambling.

If you left the description there, you would have me scratching my head. Why? Because if these are games of chance and the customers compete with the casino, how do they stay in business? How do they make a profit? There is a very important detail that can’t be left out – each of these “games-of-chance” are slightly tilted in favor of the “house,” the casino. The probability, even if ever so slightly, favors the casino to win.

Slightly favorable odds, multiplied by a high volume of customers and wagers, makes for a profitable business.

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