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When we consider investing money to grow our wealth, most of us think of the stock market. In theory, it’s easy: Constantly buy shares, watch their value grow over time and cash out when you want to retire. 

But in practice, things are more complicated. Stock market history is filled with stories of unexpected crashes, bursting bubbles and, most importantly, disappointed investors. 

While some people see amazing returns in the stock market, it’s not right for everybody. In this episode, you’ll find out how the stock market really works so you can make an informed decision that secures your financial future for the long term. 

Want to make money decisions that grow your wealth for the long term? Listen now!

Show highlights include: 

  • How social media business models turned the stock market into an addictive game designed to empty your pockets. (2:21)
  • Why annualized stock market returns don’t put money in most people’s pockets (and how “temporary setbacks” can wipe out your complete net worth). (5:07)
  • Why the wrong “investment behavior” can slash your stock market returns in half. (7:28)
  • The scary statistics that show stock market investors have a 50% chance of running out of money in retirement. (12:58)

Remember to download Grandma’s Top Tips for an Independent Financial Future by dropping into https://grandmaswealthwisdom.com/free/. It's time for YOU to break through to a smart, stable, financial future.

If you’d like to see how Grandma’s timeless wealth strategies can work in your life, schedule your free 15-minute coffee chat with us by visiting www.grandmaswealthwisdom.com/call … just like Grandma would want us to do. 

Power Quote Ideas: “Isn’t the whole point of buying the stock to see it grow so that you can use it for something real, something tangible for yourself or for those you love?” “History is not a prediction of the future.  As the Game Stop example shows, the future is very unpredictable.”

Read Full Transcript

A hearty welcome to “Grandma’s Wealth Wisdom” with your neighborly hosts, Brandon and Amanda Neely. This is the only podcast that helps you take charge of your cash flow and leverage your assets, simply and sustainably, the way Grandma used to.

Brandon: Hey, I'm Brandon, and welcome to our Grandma's Wealth Wisdom, where we help you break through to a smart, stable financial future with the tried and true wisdom Grandma used.

Amanda: And, hey, I'm Amanda. This is Episode 74 titled, “How the stock market really works.”

Brandon: We chose the topic of this episode back in December when we had no clue the GameStop thing was going to happen. I think it's GameStop and AMC. There's all kinds of crazy stuff happening. But we're recording this during the aftermath or maybe the aftermath. Who knows? We wanted to chat about it. [01:00.6]

The breaking news headline on Friday, January 29, says this: “Wall Street had its worst week since October, falling more than 3% as it was consumed by a rush of day traders bidding up GameStop and other stocks.”

Amanda: Now, there are a lot of opinions out there about what's happening and I’ve in particular found an analysis by this guy named Matt Stoller very helpful. His take is that this is really about social media leverage along with financial leverage.

He points out, like many have, groups coming together to manipulate stocks isn't anything new. Hedge funds and other kinds of groups have been doing that for a long time. What is new this time are the social media platforms like Reddit and TikTok, and even Robinhood is more of a social media platform when you look at how they make money and how they've set themselves up. [02:00.7]

Brandon: You can see Episode 70 that we titled, “Robo-advisors: are they the answer to asset under management fees?” Now, in that we don't really talk about Robinhood specifically, but that is one of them.

Amanda: Yeah, so we don't mention Robinhood, but we're talking about Robinhood in that, the examples. But what is new right now is that there's an entire generation of investors locked at home with little to do and a set of services on their phones designed to funnel them into the most extreme, most dopamine-driving financial ideas.

Brandon: It's literally an addictive game, but with real people's real money. I have to let the cat out of the bag here. Amanda got me into one of those addictive games on my phone and I can see, and I knew this, that it’s this behavior that I'm like, Oh, I’ve got to do this, I’ve got to do this, and it's the same kind of thing done on those apps with real money, not just fake resources. [03:09.5]

Amanda: Right. To be clear, Brandon's playing a game that we have not put a diamond to and it's just for fun to give us something to do when we can't go out and do anything with COVID, but people are doing this, though, on other apps that involve real money and there's already a number of risks in the stock market. There's volatility risk, sequence of returns risk, political risk, and so forth. There's a whole list of different kinds of risks, but perhaps the new risk category that needs to be created for the 21st century is social media risk.

Brandon: I bet you, there will be some kind of study on that 20 years from now.

Amanda: Yeah.

Brandon: But let's set social media risks aside for this episode. We're going to probably hit it eventually again. Let's pretend we're dealing with the stock market as it has been. Yes, it might be even more risky in a world transformed by addictive apps, but let's leave that question for future episodes. First, let's take a good look at how much the market goes up over a long horizon. [04:14.8]

Amanda: Yeah, I'm going to talk about three different reports, three different analyses that have been done as we look at three different questions today. The first report is a public report you can find out on the internet anywhere, and it's the most commonly referenced. People refer to it on blog posts all the time, and when I share the results of this report, you'll understand why we think about the market the way we do.

The other two reports are behind paywalls. You have to pay for these reports, so they're a lot less commonly shared and talked about, and you might, as we share them, think about why that's true and who that benefits and things. But we're just going to share what the reports share and help you come to your own conclusions. [05:03.8]

This first one, they looked at $1 invested in 1900, in the year 1900, and left until the year 2019, and they looked at different places that money could have been and what it would have done, and when they looked at equities and stocks, they found an annualized return of 9.6% for that $1 through those 120 years. Then when they adjusted a little bit for buying power and inflation and that kind of thing, it goes down to 6.5%.

Now, the conclusion that this analysis came to, the writers of this report, they were sure to point out that many investors have been ruined all along the way by severe setbacks, between 1900 and 2019. There's been several of them. But when you look at that total 120-year history, and I quote here, quote, “events that were traumatic at the time and now just appear as setbacks within a longer-term secular rise.” [06:01.8]

Brandon: In essence, they're saying, yes, there are times when you could lose everything, but in general, the stock market is always moving up. I'd hate to be that one or two or three or however many people. That sucks for them.

Amanda: Yeah, but we hear this all the time, right? The general view of the stock market is that, yes, it goes up over time and that's what this analysis is showing. But the problem with this analysis is that I don't know a single person who buys a stock and doesn't do anything with it for 120 years. Either they choose to sell that stock to go buy a different stock that might perform better or, more likely, they're going to sell that stock to buy groceries in retirement.

Brandon: I mean, isn't the whole point of buying the stock to see it grow, so that you can use it for something real, something tangible for yourself or for those you love? That's the whole point is making that, not just to hold it forever, but use it for the stuff of life. [07:02.8]

So, we can't just look at 120 years. We have to ask a different question. The next question to ask is what do real investors in mixed portfolios see within their real accumulation period? Real, not average real.

Amanda: Right. We found this report that was done by this group called DALBAR and they put it this way. I love this sentence in the report, quote, “Investment results are more dependent on investor behavior than on fund performance”, end quote.

What they were looking at is what real people are experiencing over real timeframes? They covered a period of 30 years from 1987 to 2016—you can think of a 30-year-old in the ’80s who is now a 60 year old in 2016—and they don't just have $1 from 2018 and see how it grows to 2016. They assume money goes in over time, not all at once, just like a normal person wouldn't put in $1 and leave it. They would put in $1 one month, $1 the next month, right? That kind of thing. [08:09.0]

What they found through looking at this section is that the average investor using the stock market over that 30-year period saw a 3.98% annualized return. 3.98, that's a far cry from the 9.6 to the 6.5 from the previous study and 3.98% is only slightly more than inflation. I mean, what gives? What's happening here?

Brandon: What's happening is moving money around. The typical investor only stays invested in their funds for four years.

Amanda: Yeah, four years are a lot shorter than 120 years from that previous study. But I wonder why would people move money around it not stay invested? I mean, the report doesn't go into this, but we came up with at least seven reasons why people sell their stock.

Brandon: Yeah, under performance or perceived under performance because their coworker or the guy on TV said they're getting more. You might have a really good stock and you sold it to do GameStop, for example, right now—and you know who you are if you've done that, right? [09:13.6]

Amanda: Yeah, or they simply take a loan from their 401(k) to go buy a home, pay off a credit card debt, deal with an emergency, right. When you take a loan from your 401(k), you have to sell some stock in order to get that money out.

Brandon: They needed the money for something else. Somebody else needed help, so they pulled it for the family member. Who knows?

Amanda: Yeah, or they left their job and rolled it over to another account. Anytime you're taking an old 401(k), you're rolling over to an IRA, guess what you're doing? You're selling stock and you're buying new stock, and that's going to be part of that moving money around. [09:47.6]

Grandma always said, “Eat your vegetables. Look both ways before crossing the road. And never risk your financial future on elements of the market you can’t control.” That Grandma, always good for some tried-and-true advice. And although some of her wisdom seems to have skipped a generation, you don't have to be left behind.

Download “Grandma's Top Tips for an Independent Financial Future” absolutely free, when you visit Grandma’sWealthWisdom.com. Don't wait. Get Grandma's best tips today.

Brandon: The financial professionals promise some other investments will do better. Then they say, This will do better. You should sell this and do this. Then there's a change there.

Amanda: Yeah, and then we kind of alluded to this before shiny objects like, Ooh, that GameStop thing is happening and I’d better jump on it, or, Ooh, I need to buy silver right now, or what have you.

Brandon: Yeah, when the GameStop thing is on the news in the morning, I think that's pretty crazy, so I don't know, it's one of those things. People are jumping on it. Number seven, operating expenses. They are charged fees and stocks are sold to pay those fees. [11:01.7]

Amanda: Yeah, so that's moving money around, too, paying the fees. Now, I can hear you, our listener, thinking right now that your investments are doing way better than 3.98% and I hear you.

Brandon: You're different always.

Amanda: That you're beating the average guy or gal is getting 3.98%, and I just would simply ask you a couple of questions. Are you looking at a 30-year horizon? Are you just looking at the past 10 years? Right? Also, could whatever paper wealth that you've built, that paper return that you see, could that disappear tomorrow? And even if it looks you've got a large return, it's not real until you sell. Can you be sure that you're going to get more than 3.98% the day you decide to sell?

Brandon: And what are those costs to sell all of those things? I think that's, again, doing the math.

Amanda: Right, and how much of that extra growth are you going to owe to the Internal Revenue Service, too?

Brandon: Yeah, and I don't know very many people that have actually done the math. They just read their statements and say, This is what I got. This is amazing, but they don't actually do the math themselves, which is a hard thing to do. Right? I'm not going to lie. [12:12.8]

Is it worth it for only a 3.98 annualized rate of return? We can only answer that if we look at when those funds are actually used and what they can do for the person at the end. Finally, let's ask what do real investors see within their spend down period?

Amanda: Yeah. Remember we looked at the 120 years, what the stock market always goes up over the long-term, right? And then we broke it down to the 30 years that someone would accumulate money when they would be putting their money into their investments.

To answer this question about then what happens the next 30 years when they're going to be spending those funds, we've got to look at another report and this one comes from Morningstar. This time they acknowledge that, especially as we age, we don't keep a hundred percent of our funds in the stock market. We balance our portfolio with some safer products like bonds and we use some fancy things like Monte Carlo simulations to look at what our spend down period is going to look like. [13:15.2]

You might be familiar with a Monte-Carlo. You might have heard of that. You might have also heard of the 4% rule that you can use 4% of your investments every year and you'll never run out of money. This report uses a much more robust analysis than just a simple Monte Carlo. They look at real returns, right? And what they conclude is that 4%, the 4% rule, has a 50% probability of success, which means it has a 50% chance of failure.

What does this mean? If you're 65, when you retire and you think there's a chance you're going to live to 95, 30 years, if you follow the 4% rule and take 4% of your portfolio to live on, you'll have a 50-50 chance of running out of money by the time you're 95. [14:02.8]

Brandon: Again, I ask this. You might see your family and they're experiencing this right now. Would you get on a plane if you knew that it's a 50% chance that you wouldn't land? Would you get on that plane? That's a question only you can answer, right? It's a one out of five chance that a 65-year-old today will live to age 95. One out of five will live to age 95 and that number is expected to be more by the time I'm 65. Yeah, the chances of running out of money before we run out of life is real. Do you want to take that chance?

Amanda: Yeah. This report, that they put forth a new safe withdrawal rate of 2.8%, and just to give you an idea of what all these numbers mean, we tried to take these reports and put together a sample of that 30-year-old from 1987 through what could have happened to them. [15:01.8]

Let's say you were 30 in 1987 and you started saving 10% of your income in a retirement account, and you're making 5,000 bucks a month and you're putting in $500 per month. That would be a lot of money in 1987, but go with me here. Let's say you get no pay raises, right? You're putting in 500 bucks a month, every single month for 30 years. By 2016, following that 3.98%, you would have $343,000, and then following the 2.8% rule for a safe withdrawal rate, you could only take out $797 per month to make sure that you don't run out of money before you run out of life.

Now, that might sound nice. You save $500 per month for 30 years or you invest $500 per month for 30 years, and then you get $797 per month for 30 year. Until you factor that in, remember $500 per month was 10% of your income. [16:03.8]

You are making $5,000 per month for 30 years. That's $60,000 per year and now you're being asked to live on $797 per month. That's only 16% of your former income. Imagine you retire tomorrow and you have to cut your expenses down to just 16% of what they were before. That's highly unlikely to work.

Brandon: Which means you've got two choices and I think this is a lot of what's happening with retired people right now. With that challenge, they can only do two things, invest more so you can, fingers crossed, spend more later. And this is what Wall Street wants you to do, right, that we see that rise, or, two, find a financial vehicle where volatility does not cause severe setbacks, where you can access your funds for this stuff of life, without breaking compound interest, where you won't be tempted to buy or sell by the latest fad and where you can safely withdraw about 5% of your account value without running out of money before you’re 95. [17:14.4]

Amanda: That sounds like a really good financial vehicle if that would do all those things. I only know one financial product that does all that.

Brandon: Me too, and it starts with high cash value and ends with dividend-paying life insurance and some very smart people like us call it bank on yourself.

Amanda: Let's recap today.

Brandon: All right, do it to say we're smart, I hope.

Amanda: Okay, you can say that about yourself. Remember the reports we reviewed today only looked backward. History is not a prediction of the future and, as the GameStop example shows, the future right now is very unpredictable. None of these reports mention something like GameStop happening. This is a new anomaly, something that's not really happened before the way that it's happening now.

I think, Brandon, you've got some questions for us. [18:01.3]

Brandon: Is it worth 3.98% or less to ride that roller coaster? Again, only you can answer that. Is it worth that? Is it worth trying to figure out how to live on 16% of your former income when you're old? Do you really want to do that? And, again, thinking about the future you is important and don't forget there's a whole huge generation of boomers who are in their spend-down down right now and pulling their money out of the market to live on like for groceries.

This brings me to two additional questions. The boomers are at the first generation to rely mostly on the stock market for their retirement, and in general, how's that working out for them? You want to do some research and see how is that working out? As the market has been as high as it's been, how is that working out for the people who have been on that wild ride? And, more importantly, for us, can we count on even a measly 3.98% over the next 30 years as those boomers sell their stocks or is it going to be less? [19:11.8]

Amanda: Now, if you want to look into a financial vehicle where, one, volatility does not cause severe setback, two, where you can access your funds for the stuff of life without breaking compound interest, three, where you won't be tempted to buy or sell by the latest fad and, four, where you can safely withdraw about 5% of your account value without running out of money before you're 95, please reach out to us at Grandma'sWealthWisdom.com.

Brandon: And join us next episode, where we're going to dig into how the government may be issuing stay-at-home orders on your money. How much does the government control your financial future? More importantly, how much do you want them to control it?

Amanda: Until next time, keep building your wealth, simply and sustainably, so you can break through to a smart, stable financial future. [20:04.4]

The topics presented in this podcast are for general information only and not for the purpose of providing legal, accounting or investment advice. On such matters, please consult a professional who knows your specific situation.

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