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Welcome to personal finance for
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long-term investors, where we believe
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Benjamin Franklin's advice that an
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investment in knowledge pays the best
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interest both in finances and in your
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life. Every episode teaches you personal
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finance and long-term investing in
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simple terms. Now, here's your host,
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Jesse Kramer. Hello and welcome to
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Personal Finance for Long-Term
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Investors. My name is Jesse Kramer. This
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is a bonus episode. We might not give it
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a number. If we do give it a number,
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it'll be 105. But I think there's a way
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we can release it as a bonus episode.
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I'm recording this on April 10th, 2025.
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We're going to try to get it out to you
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by April 14th, 2025. And in case you
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can't keep track in your own head, cuz
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who can? We're recording this on
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Thursday. This is one of those days
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where the market was down. Yesterday,
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Wednesday, the market was up 9%. Today,
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the market's down
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3.4%. We're recording this, of course,
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to talk about tariffs and some tariff
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related things. And I know you might be
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tariffed out at this point, but uh I'm
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still getting a good amount of questions
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and we've written I've written a bunch
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of blog posts in the last few days and I
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figured for those who don't read the
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blog but do listen to the podcast, you
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might want some content, too. So, just
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for a quick recap of kind of where we
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are as far as uh what's going on, the
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tariff news hit last Thursday and Friday
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and we had these backtoback four or 5%
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down days. The bad news continued into
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Monday this week. Kind of leveled out on
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Tuesday. Wednesday was the day where
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President Trump announced that the
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tariffs were off. It's kind of like the
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snip snap snip snap reference in uh from
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the office if you know what I'm saying.
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And then today, Thursday, the market
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slid another another 3 or 4%. So, we are
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off. I'm looking at the S&P 500. Right
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now, we're off 14% from the highs back
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in February, and we're down about 7%
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from where we were before this first
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before April 2nd, right? April 2nd was
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uh what was it called? Liberation Day.
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Is that what President Trump called it?
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I think. So, whatever we want to call
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that day, we're down about 7%. What I
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want to do today is take some of the
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articles that I've written in the past
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few days and explain them or kind of
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maybe add some voice to them and share
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them with you listening on the podcast
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because I think that'd be helpful. And
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then I have some some other thoughts to
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share too, inspired by Doc G over at the
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Earn and Invest podcast. He put out
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something pretty cool that we'll share
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in the show notes. And uh I want to
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expand on on some of his thoughts.
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Pretty ironic, pretty coincidental. My
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family and I, we flew to Florida for a a
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mostly fun but semi work-related trip on
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Saturday. So again, the markets were
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down Thursday and Friday. Not great.
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going into the weekend. We flew down
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there and uh I spent too much time, more
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time than I wanted to over the weekend
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and into uh this early week when I
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should have been vacationing. I spent
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some time talking to clients and writing
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on the blog, writing to you all, which
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is fun. I mean, right, I think it's
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really fun. I'm It's the classic strain
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that we feel, I suppose, between resting
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and relaxing and spending time with our
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family, which we all need to do with
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making sure we do our our work
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obligations. It's just, hey, if I have a
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client who's really worried or a client
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who's panicking, it's a big important
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obligation that I make sure that they
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feel heard and and make sure that they
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understand why that's probably not a
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good thing to do. And I just really like
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the writing portion. So, I wrote a bunch
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in the last few days. And I'm going to
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start with the 15 tariff questions I've
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heard the most because my blog inbox, my
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professional inbox, they did explode
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late last week and over the weekend with
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tariff questions. And at first, I
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thought, well, everybody's already
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talking about it. do I really need to
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add my voice into the fray? But the
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questions kept on coming and you know
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again April 3rd, April 4th last week
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were were terrible. The futures market
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looked really glum as soon as it opened
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up on Sunday night heading into Monday.
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At that point I think we were heading
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into Monday we were down something like
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10% since April second. So I wrote up a
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Q&A. My goal is to make it rapid fire,
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easy to consume. And if you're sick of
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tariff talk, I mean feel free to skip
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this entire episode. And if you know
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everything already, feel free to skip
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it. But if you want some simple yet
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thorough breakdowns, then then let's
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chat. So what's a tariff? Tariff is a
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tax that a government like the USA in
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this case charges on a foreign import.
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The tax is typically a percentage of the
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price that the domestic buyer would pay
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to the foreign seller. Why are we
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enacting tariffs? Well, the glass half
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full rationale is mainly to protect
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domestic industries against cheap
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foreign labor and as leverage against
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foreign economies. you know, hey, our
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tariffs will make your lives harder, so
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come to our table and negotiate. But
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more likely than not, the self-inflicted
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pain of tariffs far far outweighs the
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benefits of tariffs. Now, another a
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really good question. Okay, those are
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some basic questions. We're now getting
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into some of the interesting questions.
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Who actually pays for the tariff? The
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answer is just about everyone. I mean,
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on their face alone, we already said the
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importer is the one who pays the tariff
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to the government. But the importer,
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that importing business, they don't want
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to stomach the entire bill of the
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tariff. They're going to pass on the
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cost of the tariff to perhaps to the
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foreign exporter, definitely to the
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eventual buyer. That'd be us consumers.
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So the the short answer is we all pay
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for tariffs. The next question I'm
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getting, so so tariffs are bad then,
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right? Well, regardless of economic or
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political loyalty, most economists agree
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that tariffs are more bad than good.
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Many are saying they're far more bad
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than good. They cause inflation. They
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slow down economies. And that duo of
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effects is called stagflation. And
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that's very bad. Why did the markets
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drop in over the last week? Well, market
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prices are all about expectations,
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right? What do we think will happen? And
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what would the appropriate stock price
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be if that were the case? President
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Trump's tariff announcement and the
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subsequent 14% and counting selloff as
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of when I wrote this article made two
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things clear. Well, the first is that
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many investors were uncertain whether
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President Trump would follow through
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with his threat of tariffs. And then the
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second thing was if he did follow
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through with tariffs, many investors
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underestimated the magnitude of those
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tariffs. The announcement and now the
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unannouncement mainly the first
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announcement was significantly worse
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than expectations. Hence a rapid and
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significant price correction. How can
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everything be down and how can nobody
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benefit from these tariffs? Again, US
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stocks were down 10%, international
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stocks were down 6%. Bonds have been
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roughly flat. Real estate is down, gold
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is down, other commodities are down. How
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can everything be down? Surely someone
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in the economy must be winning. Well,
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the answer is that tariffs are a tax
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that everyone pays for in some form or
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another. The extra costs are felt in all
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corners of the economy. The only winner
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in terms of dollars and cents would be
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the government who's collecting the
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tariff and government's collecting more
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revenue is not necessarily stimulative
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of the economy. The next question, why
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is this time different? The famous
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saying in investing is, you know, the
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four most dangerous words in investing
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are this time is different. And in some
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ways, this is not different. I've
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written many posts about market history,
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including the frequency of choppy
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markets. But in one major way, yes, it
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feels different. This feels
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self-inflicted. Sports fans, for
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example, we expect that our team could
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lose. We know it's a possibility. It's
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the nature of the game. But what we
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don't expect is for our own player to
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turn around, to run the wrong way down
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the court, and slam dunk on his own
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basket to lose us the game. That's not
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the kind of loss we expect. And this
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tariff tantrum selloff, it feels like
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that. As other commentators have
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written, he pressed the red button or he
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shot the hostage. Everyone agreed how
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bad it would be if we pressed that
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button or shot that hostage or dunked on
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our own basket. And yet here we are
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anyway. And that aspect of what's going
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on right now certainly feels different.
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The next question I've been getting is,
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well, Jesse, but markets always come
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back, right? And so far in history, yes,
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they do. Eventually, yes, they do. But I
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don't think that's a reason to feel good
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necessarily about current market
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conditions. And uh we will come back and
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tackle this topic later. The next
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question, they say that you can't beat
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the market. How was the market so wrong
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by 10% over two days? Like how has the
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market changed so much over the past
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week if you can't beat the market or if
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the market is always right? And the
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answer there is that market values are a
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representation of the average investor's
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opinion on appropriate pricing
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understanding all the current facts. And
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this sell-off proves again, like we
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already said, that the average investor
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was either unsure if Trump would follow
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through on the tariff threats and or was
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optimistic about the magnitude of what
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the tariffs would look like. As soon as
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those expectations got reworked based on
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the new reality, we saw stock prices
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change very, very quickly. The next
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question, should I sell off all of my US
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stocks or all my international stocks or
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all stocks altogether? I pound the table
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here on the podcast and I pound the
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table on the blog that stocks are a
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long-term investment and for most of us
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a 10 plus year investment. And so I went
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back I got a I printed out a really cool
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chart. We'll show it in the show notes.
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Uh it shows VT Vanguard's total world
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stock ETF. It shows 10 years of data.
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It's inflation adjusted, meaning it
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shows a a true increase in purchasing
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power, a real return. It includes
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dividends being reinvested and it also
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includes the past week of market turmoil
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and even including this recent week and
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despite the constant drag of inflation
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an investor's real inflationadjusted
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returns over the past decade have been
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6.2% per year or if we were to remove
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inflation and measure in nominal terms
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it would be 9.8% per year. The point
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being when judged on a 10-year timeline
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that I think about stocks have been a
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wonderful investment for the past
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decade. Is that guaranteed to continue
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for the future? Absolutely not. I
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certainly don't know. Nobody knows. But
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I am betting on it. The next question,
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are you rebalancing? It might sound
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crazy, but yes, I am still using my
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personal predetermined rebalancing
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rules. I am not selling stocks. In fact,
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I've been buying stocks. It's not easy
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to do. I It takes some cognitive I don't
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I don't know how to describe it. I
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suppose some cognitive guts to do it,
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right? to watch your portfolio drop by
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five or six figures or seven figures
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depending on how much wealth you have
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out there listening to watch your
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portfolio drop to see that stocks are
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the reason why and then to buy more
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stocks anyway to rebalance it's
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certainly not easy but it is the proper
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way to go about portfolio management
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personally I rebalance both on a
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calendar basis and on thresholds meaning
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I rebalance every six months simply to
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ensure that I won't go years without
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doing it and then I also rebalance when
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my portfolio allocations go more than 5%
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percentage points off target. The next
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question I've been getting, will tariffs
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affect my monthly budget? Most likely
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they will. Tariffs are inflationary as a
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portion of the tariff tax gets passed
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through to the final prices we all pay.
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There's one estimate from Yale
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University suggesting that the average
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US household spending will go up about
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$3,800 a year. Now, this was based on
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the initial tariff announcement, which
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then President Trump rescended, brought
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it back. As of now, as of this
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recording, there's a 10% tariff on every
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single country except for China, which I
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believe has 125% tariff on it. The
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government, the president brought the
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tariffs back down to earth. They still
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exist, and I think we should still
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expect that our monthly budgets will go
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up. The next question, will the tariffs
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affect my job? Possibly. You know, as
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businesses struggle to cope with
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increased costs, they will. They're
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going to look to cut costs somewhere
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else, and labor costs are going to be
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one of those places. they will lay off
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their staff in some part if push comes
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to shove. So if you don't have a
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substantial emergency fund, I would
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consider building one right now. Another
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question I've been getting from
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listeners, will tariffs affect my
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business? And certainly the answer is
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yes. And it's for the same reasons
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listed above is that your costs, whether
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it's the things you spend money on that
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are domestic or imported, it's all going
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to get affected. You know, the economy
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is so interconnected that everything
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will feel some sort of tariff inflation
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most likely. The last question I got is
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basically how should I feel or or how do
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you feel, Jesse? And again, the answer
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there is not great. I think the
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self-inflicted nature of this feels bad,
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but this is the magnitude of risk that I
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at least signed up for when investing in
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stocks in the first place. I actually
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take that back. I signed up for way more
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potential downside risk than this. You
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know, I will shout from the rooftops
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that stocks can and likely will again at
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some point in the future go through a
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50% draw down or more. And that kind of
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draw down can last for months or even a
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few years. And as of this recording, we
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are not there yet. We're not even close
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to being there yet. What's going on
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right now feels like a a classic
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combination of one that yes, something
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fundamentally bad is happening and that
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should negatively affect stock prices,
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right? Fundamentals of how corporate
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profits will change in the future that
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should affect stock prices and that
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certainly is right now. But there's also
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the the second thing that's going on
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right now, which is panic or at least
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some sort of fear induced selling.
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You've got this first order fear that is
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pushing investors to sell and then other
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people are seeing or feeling or
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predicting that fear and they're trying
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to dump their stocks before it gets too
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bad. You know, it's almost like second
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order fear or others are trying to buy
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the dip or others are trying to guess
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what's going to happen a week from now.
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And that's not fundamental in many cases
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or in most cases what's going on right
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now. That's kind of panic selling. It's
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the opposite of the the positive
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euphoria that creates bubbles. And so
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the lesson here is to not forget that
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Mr. market, right? Benjamin Graham's
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famous parable, Mr. Market is a manic
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depressive during times of raging bull
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markets and bubbles, there's a mania,
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right? It's an illogical buying
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pressure. And sometimes in the panicky
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bare markets, there's an illogical
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selling pressure. There's the depressive
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side of the manic depressive. Mr. Market
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is a manic depressive. And that's
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actually a good transition into the
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second article I'll read right now,
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which is 15 questions for scared
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investors. It's actually funny. I
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pressed publish on this article on April
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9th, about 45 minutes before President
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Trump announced the 90-day pause on
00:13:42
tariff, sending the market rocketing,
00:13:44
where I think the market increased
00:13:45
something like 8% over the course of 90
00:13:48
minutes. It's just funny timing on that.
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But anyway, here's a list of um punchy
00:13:52
Socratic questions that I just want to
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float them out there and let them sit.
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And just like in the article itself that
00:13:58
I wrote, I asked these questions. I
00:14:00
didn't provide answers cuz my goal here
00:14:01
is to ask these questions and get you to
00:14:04
pause and think about your answers. In
00:14:06
fact, after each question, I'll probably
00:14:08
leave a second or two pause in case you
00:14:10
want to actually pause the podcast
00:14:12
episode and think about this question
00:14:13
yourself cuz at the end of the day, I
00:14:15
think your answers matter here. My
00:14:17
answers might be fine or best practice
00:14:20
answers might be fine, but really your
00:14:21
answers matter. And maybe it's a bit
00:14:23
like therapy where it's not really about
00:14:25
me, it's about you and it's important
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that you come to your own conclusions.
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So the first question speaking of Mr.
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Market is this question. Is Mr. Market
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being manic or depressive right
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now? Question two, did your goals change
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in the past
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week? Question three, did your timelines
00:14:43
change in the past
00:14:45
week? Question four, what does your
00:14:48
financial plan require you to do right
00:14:50
now?
00:14:52
Question five, if the stock market
00:14:54
closed for the next 5 years, would you
00:14:56
be comfortable with what you own
00:14:58
today? Question six, if the political
00:15:01
party flipped but the other facts stayed
00:15:03
all the same, would you still feel the
00:15:05
same way that you feel right now? Number
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seven, are your current decisions being
00:15:10
driven by evidence and
00:15:12
analysis? Question eight, what does
00:15:15
long-term mean to you? Question nine,
00:15:19
what will happen if you do nothing at
00:15:20
all right now? Question 10, are you
00:15:23
chasing certainty in an uncertain world?
00:15:27
Question 11, is discomfort a reason to
00:15:29
act or part of the ride you signed up
00:15:32
for? Number 12, what are your
00:15:35
expectations of a worst case scenario in
00:15:37
your portfolio? And are we there yet?
00:15:41
Question 13. If you sell now, what's
00:15:43
your plan for buying back in? Question
00:15:46
14, have you rewritten your personal
00:15:49
investment
00:15:50
philosophy? And question 15, if you
00:15:53
weren't already in the market, would you
00:15:55
choose to invest today? So, those were
00:15:58
the 15 questions for investors who are
00:16:00
feeling a little bit of anxiety right
00:16:01
now. And I think thinking through your
00:16:03
own answers might make you feel better
00:16:04
or might lead you to make better
00:16:06
decisions in your portfolio right now.
00:16:08
The last article I wrote recently starts
00:16:10
with this little parable about Marie
00:16:12
Antuinette. You know, the French queen.
00:16:14
Historians doubt that Marine Antinet
00:16:16
ever said the famous phrase, "Let them
00:16:17
eat cake." The apocryphal tale is that
00:16:20
upon hearing that French peasants had no
00:16:22
bread. She ignorantly suggested that
00:16:24
they eat brio instead, which is richer
00:16:26
and a more expensive pastry. Kind of
00:16:29
shows how out of touch she was. But
00:16:31
historians doubt that she ever said it.
00:16:32
The quote likely originates decades
00:16:34
earlier uh used to criticize um out of
00:16:37
touch aristocrats. But still, the myth
00:16:39
stuck, fueling this image of a clueless
00:16:41
queen symbolizing indifference during
00:16:44
the French Revolution. But fast forward
00:16:45
to modern times, and I personally read
00:16:48
account after account of panic selling
00:16:51
over the past week, the tariff tantrum,
00:16:53
the Trump slump. It instilled many
00:16:55
investors with a deep level of fear. And
00:16:57
for some, the fear is purely financial,
00:16:59
like will my portfolio recover? Will do
00:17:02
I have enough time? Will I be able to
00:17:03
retire on time? It's really a
00:17:05
numbers-based financial fear. For
00:17:07
others, it's a sociopolitical fear.
00:17:09
Essentially, what will President Trump
00:17:10
do next? And for many, it's a mix. You
00:17:12
know, some people are abandoning their
00:17:14
plans and abandoning their portfolios
00:17:16
for a mix of the two reasons. Now, I
00:17:18
don't like seeing this. I don't want
00:17:19
anyone to make short-term emotional
00:17:21
portfolio decisions. But there are
00:17:23
billions of people out there, and at
00:17:24
least many millions of them are market
00:17:26
participants, and I can't change all
00:17:28
their minds. None of us can. And
00:17:30
unfortunately, some of those people,
00:17:32
they need to make mistakes in order to
00:17:34
then learn the lessons. And that's why,
00:17:36
as uncalously as I can muster, I think
00:17:38
to myself, well, let them trade stocks.
00:17:41
Okay, why are people trading right now?
00:17:43
Let's walk through the most frequent
00:17:44
reasons I see people trading right now.
00:17:47
The only good reason, as far as I'm
00:17:48
concerned, there's only one of them, and
00:17:50
that's to rebalance your portfolio. We
00:17:52
already talked about it. I rebalance
00:17:53
based on calendar and based on
00:17:54
thresholds. There's no emotion in a
00:17:57
rebalancing decision. It's purely
00:17:58
rules-based, and you set the rules up
00:18:00
upfront. you include them in some sort
00:18:02
of uh financial plan or investor policy
00:18:05
statement or whatever you want to do and
00:18:07
then when the rules kick in they kick in
00:18:08
and you follow the rules and if your
00:18:10
personal rebalancing rules are kicking
00:18:12
in right now carry on. You could say
00:18:15
that you might want to tax loss harvest
00:18:17
or execute a Roth conversion right now
00:18:19
as a function of falling stock prices.
00:18:22
That said, neither one of those
00:18:23
practices should involve selling one
00:18:25
asset to buy a completely different one.
00:18:27
like you shouldn't really be trading per
00:18:29
se when you do tax loss harvesting or
00:18:31
Roth conversions. Personally though, as
00:18:33
I write about in in two links that we
00:18:35
will share in the show notes, one about
00:18:37
tax loss harvesting and one about Roth
00:18:39
conversions. Tax loss harvesting is not
00:18:41
the miracle drug that many DIYers
00:18:44
believe it is, or at least I certainly
00:18:45
don't think so. And I think those who do
00:18:48
think that tax loss harvesting is some
00:18:50
kind of miracle drug, they simply they
00:18:52
don't really understand what tax loss
00:18:53
harvesting is. they haven't actually
00:18:55
gone through and done the math
00:18:56
themselves. And then on the Roth
00:18:57
conversion point, I don't think it makes
00:18:59
sense to wait for bad markets to then
00:19:01
execute Roth conversions. It really is a
00:19:03
form of timing the market in my opinion.
00:19:05
So that's why if you are tax loss
00:19:07
harvesting or doing Roth conversions
00:19:09
right now, I'm not going to tell you not
00:19:11
to. I mean, you're better off doing
00:19:12
those things now than you were a month
00:19:14
ago. That's for sure. But I do think
00:19:16
moving forward waiting for bad markets
00:19:19
to do Roth conversions, it's like what
00:19:20
if the bad market doesn't come in a
00:19:22
particular year and you're just missing
00:19:24
out on a chance to do a Roth conversion.
00:19:25
I think there's that. Or just what if
00:19:27
the market runs away from you and you
00:19:29
were just best off doing the Roth
00:19:30
conversion in January. There's always
00:19:32
that possibility. And then yeah, tax
00:19:33
loss harvesting, it's better to do it
00:19:36
during times like this than it is to
00:19:38
wait for the end of the year. I think a
00:19:39
lot of people, they just kick it down
00:19:40
the road to November or December. That's
00:19:43
not smart. you should tax loss harvest.
00:19:45
If you're going to do it, you should do
00:19:46
it when there are losses. And right now
00:19:48
is a very likely time when there might
00:19:50
be losses in your portfolio. I just
00:19:52
think it's not something that's so high
00:19:53
on the priority list that you must do it
00:19:55
every time the market changes because
00:19:57
the actual benefit of tax loss
00:19:58
harvesting isn't huge. But anyway,
00:20:01
that's the one thing that you you should
00:20:02
be doing right now is rebalancing for
00:20:04
sure if your predetermined rules suggest
00:20:07
that you do so. Some people are making
00:20:09
changes right now though, as we already
00:20:11
talked about. They think it will get
00:20:13
worse. They think that the portfolio,
00:20:16
that their economy, the new trade war,
00:20:18
the world is heading in the wrong
00:20:19
direction. And the belief is that it'll
00:20:21
get worse before it gets better or even
00:20:22
that it'll get worse indefinitely. Now,
00:20:25
these people may be right and I may be
00:20:27
crazy, but I don't know if that's true.
00:20:30
And I don't like what's being done. I
00:20:32
don't agree with the decisions being
00:20:34
made economically or the logic of the
00:20:36
people who are making these decisions.
00:20:38
But I do know for sure that if you know
00:20:40
for sure that stocks are a poor
00:20:42
investment going forward, then I don't
00:20:44
know enough to determine if you are
00:20:46
right or wrong. Maybe it will get worse,
00:20:47
maybe not. I don't know. That might have
00:20:49
been poorly worded. It might be like
00:20:51
Bill Bo Baggins in The Hobbit or in Lord
00:20:53
of the Rings saying, "I don't know half
00:20:54
of you half as well as I should like and
00:20:56
I like less than half of you half as
00:20:57
well as you deserve." But basically what
00:20:59
I'm saying is that you might be certain,
00:21:02
I'm not certain. And I don't know how
00:21:04
you could be certain. And some of you
00:21:06
will hear those words and you're going
00:21:07
to say, "Jesse, of course things will
00:21:09
get better. That's what humans do. We
00:21:11
improve over time." And others of you,
00:21:14
you're going to hear it and you're going
00:21:14
to say, "Jesse, the current events are
00:21:16
pure insanity and we are irrational
00:21:18
beasts and the world as we know it is
00:21:20
crumbling and you're just being blind
00:21:22
and obtuse." Maybe one of you is right.
00:21:24
I don't know. Financial planning and
00:21:26
portfolio design are exercises in
00:21:28
probability and risk management. And if
00:21:30
I knew where the world would be in 5
00:21:32
years, I would triple down on my
00:21:34
specific bet and I would become a
00:21:35
billionaire. And if you know where the
00:21:37
world is going to be in 5 years, I
00:21:38
encourage you to do the same thing. Go
00:21:40
make your billions and don't forget
00:21:42
about little old Jesse when you make it
00:21:44
big. But if you're like me and you're
00:21:46
unsure where the world is going, then
00:21:47
I'd ask you this. How is that simple
00:21:50
truth that you and I cannot predict the
00:21:52
future? How is that simple truth any
00:21:54
different than it was a month or a year
00:21:56
or a decade ago? It's not any different.
00:21:58
We've never known how the future would
00:22:00
unfold. Never. I build financial plans
00:22:02
for myself and others with that fact in
00:22:04
mind. Good portfolio design accounts for
00:22:07
the fact that the future is inherently
00:22:08
unknowable. That is one of the risks
00:22:10
that we take. It's the major reason why
00:22:12
we investors demand compensation for
00:22:14
investing. And since that fact hasn't
00:22:16
changed, I'm not changing my portfolio
00:22:19
allocation. Time will tell, right? You
00:22:21
may be right. I might be crazy, but I'm
00:22:23
not betting on it. Okay. Other people
00:22:25
are saying, "Well, future events aside,
00:22:27
Jesse, or sociopolitical events aside,
00:22:29
my plan, my portfolio can't handle
00:22:32
this." These people are looking past the
00:22:34
causal events. They're looking past the
00:22:36
global, the political, the economic
00:22:38
events, simply focusing on their own
00:22:40
personal financial plan. And they are
00:22:42
concerned that their portfolio dropped
00:22:44
too far and too quickly over the past
00:22:46
week, that the situation is untenable
00:22:48
based on the sheer financial math of it,
00:22:50
and they need to cut their losses from
00:22:52
stocks right now and reallocate to a
00:22:54
much more conservative portfolio. Now,
00:22:56
the crazy thing is some of those people
00:22:58
are right. But if that's the case, then
00:23:01
that truth for them, which is that they
00:23:02
ought to be more conservative, that has
00:23:04
been real for years. If it's true right
00:23:06
now, it means it was also true before
00:23:08
and they should have reallocated their
00:23:10
portfolio years ago. And now faced with
00:23:12
the downside of carrying so much risk.
00:23:14
They see the downside in their portfolio
00:23:16
value. It's dropping. And now they're
00:23:18
realizing that they had too much risk in
00:23:20
the first place. This is the driver who
00:23:22
only after crashing their car is
00:23:24
realizing that they've been a maniac on
00:23:26
the road. The crash itself isn't the
00:23:28
reason to change. The crash is just the
00:23:30
the approximate event. Now, risk
00:23:32
tolerance, it seems quaint when the
00:23:33
market is doing well, but sudden
00:23:35
negative shocks like this one often make
00:23:37
investors realize, "Oh, my risk
00:23:39
tolerance isn't what I thought it was."
00:23:41
This is where we insert that Mike Tyson
00:23:43
quote about, you know, everyone has a
00:23:44
plan until you get punched in the face.
00:23:46
These tariffs didn't change the truth.
00:23:48
It just brought the truth to light. So,
00:23:50
some people have this fear and they're
00:23:52
right about it. They should have been
00:23:53
making these changes years ago. They
00:23:55
should be more conservative than they
00:23:56
are. And yeah, unfortunately now they're
00:23:59
going to most likely have to make a
00:24:01
portfolio change even after suffering
00:24:03
losses, which isn't great, but is
00:24:05
probably the right thing to do. But
00:24:07
another group of people out there, they
00:24:09
share the same fear that their portfolio
00:24:11
can't handle such losses or that their
00:24:13
portfolio is misallocated, but they're
00:24:15
simply mistaken. Despite their fear,
00:24:17
what they ought to do is stand there and
00:24:19
do nothing, as John Bogle would say.
00:24:22
That said, I I completely understand
00:24:23
where this mistaken fear comes from. You
00:24:25
know, take a 65-year-old retiree with $2
00:24:28
million in a 60/40 portfolio. Their
00:24:31
portfolio has likely decreased a h
00:24:33
100,000 or $150,000 in the past week,
00:24:37
maybe $250,000 over the past 6 weeks,
00:24:40
cuz really we peaked in in midFebruary.
00:24:42
Now, to see $2 million turn into $1.75
00:24:46
million over over a couple months,
00:24:49
that's the equivalent of watching
00:24:51
multiple years of living expenses just
00:24:53
kind of not disappear. I don't like when
00:24:55
people say that, but the portfolio value
00:24:57
is gone. It's scary stuff. I understand
00:24:59
why that retiree might want to abandon
00:25:01
SHIP. However, their 40% allocation in
00:25:04
bonds has remained essentially stable,
00:25:06
and that allocation ought to account
00:25:07
for, say, 8 to 10 years of living
00:25:09
expenses. The bonds are buying them
00:25:12
time, literally, right? They must ask
00:25:14
themselves, should I assume that my
00:25:16
stock allocation can recover and then
00:25:18
some over the next 8 to 10 years that my
00:25:20
bonds are buying me? The answer is
00:25:22
likely yes. It's not a guarantee, but
00:25:24
then again, it never was in the first
00:25:26
place. There's a third group of people
00:25:28
who are saying incoming inflation,
00:25:30
incoming recession, this industry is
00:25:32
going to fail. That sector is going to
00:25:33
fail. They're citing specific
00:25:35
fundamental reasons for jumping ship.
00:25:37
All of that fear, all of that
00:25:39
probability is already priced into the
00:25:41
market. Now, if the worst case comes to
00:25:43
pass, then the stock market will surely
00:25:45
get worse before it gets better. But if
00:25:47
President Trump andor other world
00:25:49
leaders deviate over the next few weeks
00:25:51
or months, then perhaps none of those
00:25:52
fears will come to pass. The market is
00:25:54
trying to sus that out. And it's
00:25:56
changing not by the day, not by the
00:25:57
hour, but by the minute. And that's a
00:26:00
really important thing to realize.
00:26:02
That's the reason why the biggest up
00:26:04
days in the market occur concurrently
00:26:06
with the biggest down days. All of that
00:26:08
uncertainty shakes out in both
00:26:09
directions. we suddenly realize or the
00:26:12
market suddenly realizes that it's been
00:26:14
more optimistic or more pessimistic than
00:26:16
it should have been. The point is
00:26:17
whenever the market turns around, it's
00:26:19
likely to be sudden and sharp. If your
00:26:21
money is on the sidelines, you won't
00:26:22
have time to get back in. Now, again,
00:26:24
I'm not saying I told you so here,
00:26:26
listeners, but I wrote this article on
00:26:28
April 8th, which was Tuesday. Tuesday, I
00:26:31
think, was the relatively flat day last
00:26:33
week. I wrote that on Tuesday, and then
00:26:35
on Wednesday, yeah, the market was up
00:26:37
9%.
00:26:39
It's not a good thing, by the way. To
00:26:40
have the market go up 9% isn't a good
00:26:42
thing. It's crazy a crazy amount of
00:26:45
volatility. They call it volatility
00:26:46
clustering in some cases where the the
00:26:49
biggest up days and the biggest down
00:26:50
days happen near each other. And if you
00:26:52
let the biggest down days scare you out
00:26:54
of the market, then your money's going
00:26:55
to be on the sidelines. You won't have
00:26:57
time to get back in during the sudden
00:26:58
and sharp increases. The same exact
00:27:01
phenomenon happened in 2023. It was
00:27:03
amazing to watch unfold November of
00:27:04
2023. I wrote an article about it. We'll
00:27:07
link it in the show notes. It's called
00:27:09
last week's terrific real life stock
00:27:10
lesson. That same thing is going to
00:27:12
happen again. I don't know when and
00:27:13
neither do you, but it will happen
00:27:15
again. The last reason that I wrote why
00:27:17
people are trading right now is to buy
00:27:19
the dip. We are going to talk about
00:27:20
buying the dip in a minute. Buying the
00:27:22
dip is not smart. We'll come back to
00:27:24
that. But the whole idea of this article
00:27:26
was that you can lead a horse to water,
00:27:27
but you can't make them drink. There are
00:27:28
many reasons why people are trading in
00:27:30
their portfolios right now. Most of
00:27:31
those reasons aren't good.
00:27:33
Unfortunately, history would tell us
00:27:34
that many people learn painful lessons
00:27:36
this way. Perhaps it's the only route to
00:27:38
learning those lessons. I'm just not
00:27:40
sure. So, I say, "Let them trade
00:27:42
stocks." The only thing that you and I
00:27:44
can do is to control our own investing
00:27:45
choices, to share good evidence about
00:27:47
the right and wrong investing choices,
00:27:49
to do our best to understand others
00:27:50
reasonings, and if they'll listen, to
00:27:52
share our own. It's not really fun out
00:27:54
there right now, but this is part of the
00:27:56
investing process. Here's a quick ad,
00:27:58
and then we'll get back to the show.
00:28:00
Every week, I send a quick free email to
00:28:02
thousands of readers that shares three
00:28:04
simple things. One, my new articles and
00:28:07
podcasts. Two, the best financial
00:28:10
content of the week from all over the
00:28:12
internet. And three, a financial chart
00:28:14
that explains some important concept in
00:28:16
the news that week. It's a great primer
00:28:19
to boost your financial knowhow. But
00:28:21
Jesse, I don't want another email. Well,
00:28:24
this might not be for you, but I do hear
00:28:26
you, which is why I make it very short,
00:28:28
sweet, and full of only the essentials.
00:28:31
A whopping 66% of subscribers read my
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email at least once a month. They're
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enjoying it and maybe you will too. You
00:28:38
can subscribe for free on the homepage
00:28:41
at
00:28:42
bestinterest.blog. Again, that's a free
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no strings attached subscription at
00:28:47
bestinterinterest.blog. Okay. And then
00:28:49
the last part of this bonus episode, as
00:28:50
I alluded to earlier, inspired by Doc G
00:28:53
over at the Earnin Invest podcast. I'm
00:28:54
going to link to his recent episode that
00:28:56
inspired me here in the show notes. Doc
00:28:58
G shared what he called an unpopular
00:29:00
opinion. And the idea is that in some
00:29:02
DIYer circles, mainly in Facebook groups
00:29:04
and Reddit subreddits that are dedicated
00:29:06
to personal finance and financial
00:29:08
independence and retirement planning,
00:29:09
probably some groups that you listening
00:29:11
right now are a part of, maybe a group
00:29:12
where you first heard of this podcast.
00:29:14
Some people there are celebrating the
00:29:16
financial implications of what's going
00:29:17
on right now. I don't want to get into
00:29:19
the political aspects of this. I think
00:29:20
we all probably know that some people in
00:29:22
the US are wildly celebrating tariffs
00:29:25
for political reasons. Other people are
00:29:26
mourning tariffs per for political
00:29:28
reasons and I'm not really a fan of
00:29:31
either one of those. Something I try to
00:29:32
do here and you guys can let me know if
00:29:34
you think I'm any good at it. I might
00:29:35
not be. I try my best to leave my
00:29:37
politics at the door knowing that you
00:29:39
don't come to me for politics. You come
00:29:40
to me for financial planning. So, I want
00:29:42
to leave politics aside. But what I'm
00:29:44
saying is that some people are
00:29:45
celebrating our current market upheaval
00:29:47
for financial reasons. And that's what I
00:29:49
want to address today. They're saying
00:29:51
things like, "Oh, stocks are on sale.
00:29:52
It's time to be buying. Back up the
00:29:54
truck. Bring on the recession. Could be
00:29:56
a generational buying opportunity. Buy
00:29:58
the dip. Of course, I'm buying. The
00:30:00
market always recovers. It always does.
00:30:02
Now, in many ways, the people saying
00:30:03
these things are readers and listeners
00:30:06
and consumers of personal finance
00:30:08
content, and they're now regurgitating
00:30:09
things they've heard back into other
00:30:12
personal finance communities. It
00:30:13
literally, I mean, it's the echo chamber
00:30:15
that we all hear about. That is the echo
00:30:17
chamber. I heard something somewhere,
00:30:18
and now I'm going to regurgitate it. And
00:30:20
listen, I know that there are many
00:30:22
thousands of you listening to my
00:30:24
episodes. So out there, I think it's
00:30:26
pretty safe amongst the thousands of you
00:30:28
that maybe some of you are excited about
00:30:30
the financial opportunities in the
00:30:31
future. And I just I think the
00:30:33
excitement isn't merited here. I also
00:30:35
think that fear isn't merited here. In
00:30:37
fact, I think we'd all do better by
00:30:39
leaving our emotions at the door when it
00:30:41
comes to portfolio decisions. But
00:30:43
specifically, I want to call out
00:30:44
excitement. So if you're saying that
00:30:46
stocks are on sale, buy the dip. it's
00:30:47
time to back up the dump truck full of
00:30:49
money and go all in. If you're saying
00:30:50
that, you have a flawed investing
00:30:52
approach. And we'll come back and I'll
00:30:54
explain why that is. If you're cheering
00:30:55
for a recession as a means of decreasing
00:30:57
stock prices so that you can buy in at
00:30:59
lower prices, you're cutting off your
00:31:01
nose despite your face. And I'll come
00:31:02
back and explain why. And then last, if
00:31:04
you believe that the market always
00:31:06
recovers, that stocks always go up, and
00:31:08
that the risk of investing essentially
00:31:09
is imaginary, then we need to revisit
00:31:12
market history together. We need to
00:31:13
discuss risk together, and we'll come
00:31:15
back and explain why. Okay, let's start
00:31:17
with buying the dip. The whole idea of
00:31:19
buying the dip, right, is that someone
00:31:21
somewhere has this cash hoorde, this
00:31:24
cash sitting on the sidelines waiting
00:31:26
for the market to do what it's been
00:31:27
doing over the past few days. And now
00:31:29
that the market is 15% off its highs,
00:31:31
they are going to buy the dip. Doesn't
00:31:34
make sense. Not a smart thing to do.
00:31:35
First off, holding cash on the
00:31:37
sidelines, waiting for a dip means
00:31:39
you're losing money to cash drag. In
00:31:41
general, the money go the market goes up
00:31:43
and to the right. And if you have money
00:31:44
sitting on the sidelines, not doing
00:31:46
anything, not growing in any way, well,
00:31:48
you're going to miss out on potential
00:31:50
gains. While you're waiting for the
00:31:51
market to crash, you're more likely to
00:31:53
miss out on larger gains. Back test
00:31:55
after back test shows that if you
00:31:57
consistently try to buy the dip, if you
00:31:59
consistently have money sitting on the
00:32:00
sidelines waiting for that dip to come,
00:32:03
you are going to lose out. Whereas, if
00:32:05
you had just invested the money in the
00:32:07
first place, simple dollar cost
00:32:08
averaging, you would have done better.
00:32:10
So, right away, buying the dip doesn't
00:32:12
make sense. Now, some people have a
00:32:14
counterargument to that. They say,
00:32:15
"Well, Jesse, I don't have extra money
00:32:16
sitting on the sideline. What I have is
00:32:19
my emergency fund, which should be there
00:32:21
anyway and is a smart part of a
00:32:22
financial plan." I agree with that. They
00:32:24
say, "I'm going to borrow from my
00:32:25
emergency fund in order to buy this dip
00:32:28
right now." Well, that's illogical. That
00:32:30
puts the rest of your financial plan in
00:32:31
jeopardy. If you have a $30,000
00:32:33
emergency fund and you convince yourself
00:32:36
that you can take 15,000 of it and buy
00:32:38
the dip, just have a $15,000 emergency
00:32:41
fund. that bottom number that you
00:32:42
choose, eventually you're going to say
00:32:44
like, "Whoa, there's no way I'd let my
00:32:45
emergency fund go lower than 15,000."
00:32:48
That is you telling yourself that you
00:32:50
only have a $15,000 emergency fund,
00:32:52
right? You shouldn't have had 30 in the
00:32:53
first place. So anyway, there's a real
00:32:55
logical problem with that argument. And
00:32:57
then some people even have a
00:32:58
counter-argument to that and they say,
00:32:59
"Well, Jesse, you know, I'm going to
00:33:01
keep my emergency fund as is. What I'm
00:33:03
going to do is I'm going to skimp and
00:33:04
save for a few weeks. I'm going to slash
00:33:05
my dining out budget and I'm going to
00:33:07
cancel Netflix and then I'm going to use
00:33:09
those savings to to buy the dip. I mean,
00:33:11
like technically, I think from a
00:33:12
financial planning point, that's okay.
00:33:14
It's just incredibly logically
00:33:16
inconsistent because, okay, as of right
00:33:19
now, the S&P 500 is where it was about
00:33:21
11 months ago. The S&P 500, we're at the
00:33:23
same level now as we were in May of
00:33:26
2024. But at that point, in May of 2024,
00:33:29
we were on the way up. we were up about
00:33:31
15 50% 50% over those previous 18
00:33:35
months. So if you believe that today's
00:33:37
stock price is attractive enough to
00:33:39
skimp and save in order to buy stocks,
00:33:42
then you should have been doing the same
00:33:43
thing at the same price level 11 months
00:33:45
ago. But nobody was doing that, right?
00:33:47
It's pure anchoring bias. Nobody was
00:33:49
doing it then because at that point
00:33:51
today's stock level as of May of 2024
00:33:54
was all-time highs was 50% up over the
00:33:57
past 18 months. Now that we're down
00:34:00
compared to a recent high, we're
00:34:01
anchored to that recent high. We let
00:34:03
that one recent number in our head, that
00:34:05
recent stock market high, we let it
00:34:07
cloud our judgment. It's the same thing
00:34:09
as Amazon raising its prices right
00:34:10
before Black Friday to then offer you
00:34:12
30% off. It's smoke and mirrors. It's
00:34:15
anchoring bias. It's totally illogical.
00:34:17
So anyway, buying the dip, no matter how
00:34:19
you define it, is a losing proposition
00:34:21
or a completely illogical one. Cheering
00:34:24
for a recession in order to get lower
00:34:26
stock prices is kind of like toasting
00:34:28
your own marshmallow on the fire that's
00:34:30
engulfing your neighbor's house. First
00:34:32
off, I think about the fact that there
00:34:33
are many people listening right now,
00:34:35
enough people such that I can
00:34:36
confidently say that in a recession on
00:34:38
the whole, it will harm those of us here
00:34:40
more than it will help us. Right? If I
00:34:41
took the average effect of a recession
00:34:43
over my entire listener base, we are
00:34:46
going to be harmed more than helped.
00:34:47
Enough of you will lose jobs or lose
00:34:50
customers. Your income will decrease.
00:34:51
Your savings rates will decrease. You
00:34:53
might even have to tap into accounts you
00:34:54
wish you didn't have to. Your investment
00:34:56
accounts will decrease in value, too.
00:34:58
You won't have free, easy cash to then
00:35:01
invest with. But yes, some of you will
00:35:03
be financially fine during a recession.
00:35:05
You might even actually flourish during
00:35:06
a recession, right? That's the way
00:35:08
averages work. Some people do poorly,
00:35:09
some people do well. And some of you
00:35:11
will be able to invest in assets like
00:35:13
stocks at lower prices. If that's true
00:35:16
for you, good for you. But that's not a
00:35:18
reason to get excited, right? Excitement
00:35:20
isn't an emotion that benefits us as
00:35:22
investors. It's a couple steps away from
00:35:24
exuberance and mania, which we know are
00:35:26
downright dangerous as investors. And I
00:35:28
just think it's best off to leave our
00:35:29
emotions at the door before we go off
00:35:31
and we make portfolio decisions. I don't
00:35:33
know if you've seen The Big Short, but
00:35:34
there's that one scene where Brad Pitt's
00:35:36
character says, "For every 1% increase
00:35:38
in unemployment, 40,000 people die."
00:35:40
Now, that stat is a bit off perhaps, but
00:35:43
it's definitely grounded in truth. There
00:35:44
are many intro economics books that cite
00:35:46
similar data and there's just not really
00:35:49
a reason, I think, to cheer for
00:35:51
recessions. If it ends up working out
00:35:52
for you, stay calm. Certainly be
00:35:55
grateful that it's working out for you
00:35:56
and continue making smart personal
00:35:58
finance decisions, which might mean
00:36:00
investing at lower prices. But again,
00:36:03
excitement, first off, I just don't
00:36:04
think it does you any favors as an
00:36:06
investor. And also, I think there's that
00:36:08
it is again, it's kind of like toasting
00:36:10
your own marshmallow on your on your
00:36:11
neighbor's house as it burns. And then
00:36:13
last, perhaps my favorite one here and
00:36:15
maybe the one that is most controversial
00:36:17
because it's an opinion that I have that
00:36:18
I think is not in agreement. I think a
00:36:21
lot of people in the personal finance
00:36:22
community disagree with my statement
00:36:24
here, but I'll see if I can convince you
00:36:26
guys to those people who think that the
00:36:28
market always recovers. Well, it's
00:36:30
always recovered so far in history. But
00:36:33
there's no iron rule of nature that says
00:36:34
the market must always recover. There's
00:36:37
no iron rule that prevents us as a
00:36:38
society from enacting policies that harm
00:36:40
our own economy or that harm our markets
00:36:43
that create negative issues from which
00:36:45
we might require decades and decades to
00:36:47
fully recover from. It's not an iron
00:36:49
rule of nature. Something I hear other
00:36:51
financial planners saying and perhaps
00:36:53
something I've been guilty of saying
00:36:54
before maybe. I I know at one point I
00:36:56
wrote an article that involved asteroid
00:36:57
impact. I don't remember exactly what I
00:36:59
said in that article, but the thing that
00:37:01
you hear people saying is they say,
00:37:02
"Well, if the market goes to zero, we
00:37:04
have bigger issues to be concerned
00:37:06
about." And yes, I do agree with that,
00:37:07
right? If the stock market went
00:37:09
literally to zero, we would have a
00:37:11
bigger issue to worry about than our
00:37:13
retirement and our portfolio. But what
00:37:15
if the market doesn't go to zero, but
00:37:17
simply enters some long period of
00:37:19
malaise? Not the end times. There's
00:37:21
still going to be food in the grocery
00:37:22
stores. There's still going to be gas at
00:37:23
the pumps. But maybe we'll all have a
00:37:26
lot less extra income to buy iPhones or
00:37:28
to buy NFL tickets or to buy trips to
00:37:30
Antigua. It's possible. It's possible
00:37:33
that corporate America makes less profit
00:37:35
than they're making right now. That's a
00:37:37
possibility. And it's possible that it
00:37:38
could stay that way for a while. There's
00:37:40
no iron rule saying that that's not
00:37:42
possible. But that's the risk that we
00:37:44
take on as stock owners. And I think
00:37:46
it's misleading to suggest that because
00:37:47
stocks have always recovered in the past
00:37:50
that they must also always recover in
00:37:52
the future. It's possible that they
00:37:53
don't. Now, is it probable that they
00:37:55
don't? No. I think it's probable that
00:37:57
they do recover, that this two shall
00:37:59
pass, that equity ownership will play
00:38:02
out to be a smart decision when we
00:38:03
viewed over a a long timeline. But it's
00:38:06
possible I'm wrong. And if you haven't
00:38:07
internalized that truth, I think you
00:38:09
ought to. Now, in in 2021, I wrote an
00:38:12
article about someone had told me that
00:38:14
it was impossible to lose in the stock
00:38:16
market. And I wrote an article saying,
00:38:18
"Actually, it is possible." And one of
00:38:20
my readers said, "Jesse, you need to
00:38:22
read this quote from JL Collins. If you
00:38:23
don't know JL Collins, he's one of the
00:38:25
most well-known financial independence
00:38:27
authors out there. He wrote a very good
00:38:30
and well-known and well- read book
00:38:31
called The Simple Path to Wealth. And in
00:38:34
that book, JL writes, "The market always
00:38:36
recovers, always. And if someday it
00:38:39
really doesn't, no investment will be
00:38:41
safe and none of this financial stuff
00:38:43
will matter anyway." Sounds kind of
00:38:45
familiar. Well, everyone, I think needs
00:38:46
to take a deep breath because that
00:38:48
statement above made by JL Collins,
00:38:50
echoed by countless others, in my
00:38:52
opinion, it's a self-defeating prophecy.
00:38:54
The more people who believe it, the more
00:38:55
true they want it to be, the more
00:38:57
dollars wagered on that idea being true,
00:39:00
the less likely the statement will hold
00:39:02
water in the long run. Now, why is that?
00:39:05
Well, let's start with one of Burton
00:39:06
Malke's famous quotes from the book, A
00:39:08
Random Walk Down Wall Street. Burton Mal
00:39:10
wrote, "If we knew that a stock would go
00:39:12
up tomorrow, why it would just go up
00:39:14
today?" He describes the notion of
00:39:16
pricing in the future value of an asset
00:39:18
into its current price. The more
00:39:20
confident we are about the future, the
00:39:22
more accurately today's price will
00:39:23
reflect that presumed future. Again, the
00:39:26
more confident we are about the future,
00:39:29
the more accurately today's price will
00:39:31
reflect that presumed future. Because
00:39:34
well, if we're confident about the
00:39:35
future, it means that we're perceiving
00:39:37
less risk. And that means the closer
00:39:39
today's price will resemble the future
00:39:41
price. And when today's price resembles
00:39:44
tomorrow's price, that's another way of
00:39:45
saying, well, there's less gain to be
00:39:47
had here. So again, that should all make
00:39:49
sense, right? The less risk an
00:39:51
investment has, the less gain there is
00:39:53
to be had. Now, if we apply that idea to
00:39:56
market recoveries, we have to ask
00:39:57
ourselves, so the more confident we are
00:40:00
that markets always recover, the more
00:40:02
likely today's price will already
00:40:04
account for that presumed recovery. Does
00:40:07
that make sense? No. How does that
00:40:08
actually play out? How does the market
00:40:10
already account for that presumed
00:40:11
recovery? This is I think maybe a little
00:40:14
bit pretzel circular logicy. Now, if
00:40:17
market recovery was a rule of nature, if
00:40:20
it had to be that way, if the markets
00:40:22
always recovered as an iron law of
00:40:24
nature, then recovery would always be
00:40:26
priced in. Stocks would never drop in
00:40:28
the first place. And if a stock never
00:40:30
drops in the first place, right? Because
00:40:31
it's always going to recover. Why would
00:40:32
it drop if it always recovers? Well,
00:40:34
then stocks are guaranteed to only
00:40:36
increase. And if stocks only increase,
00:40:38
then there's no risk involved. It's only
00:40:40
going up, right? There's no risk. And if
00:40:42
there's no risk, then there should be no
00:40:43
real return above the risk-free rate.
00:40:46
And if there's no return above the
00:40:47
risk-free rate, then what's the point of
00:40:48
investing in stocks in the first place?
00:40:50
That's kind of circular logic. Maybe
00:40:52
circular in the way that MC Cher's
00:40:54
famous waterfall is circular. We end up
00:40:56
where we started, but the whole world
00:40:57
kind of turns upside down. But the more
00:40:59
people who believe that the market will
00:41:01
always always recover, the more likely
00:41:03
that claim will be rendered false in
00:41:05
actuality. Instead, we need to realize
00:41:07
that the risk of permanent loss is one
00:41:10
of the driving factors behind stock
00:41:12
returns. If stock returns were
00:41:14
guaranteed, like a treasury bond, then
00:41:15
they wouldn't outperform treasury bonds
00:41:17
over long periods of time. They would
00:41:18
have the same investment return. So, the
00:41:20
more guaranteed an investment return,
00:41:22
the lower that return must be. So, I
00:41:25
don't begrudge JL Collins for a
00:41:26
statement at all because it is a
00:41:27
paradox. People doubting that markets
00:41:30
will recover is synonymous with saying
00:41:32
markets are risky. And if stocks are
00:41:34
deemed risky, well, investors will
00:41:35
demand higher rewards. And over time,
00:41:38
any diversified stock portfolio would
00:41:40
see high enough returns to hopefully
00:41:42
recover from any correction. And so far,
00:41:45
that's played out repeatedly, as we've
00:41:47
seen throughout stock history. This is
00:41:49
why markets have always recovered in the
00:41:50
past. They only recover because of the
00:41:53
risk that they might not recover. Sounds
00:41:56
kind of crazy, but it's true. Markets
00:41:59
have recovered. They've gone up over
00:42:00
time. We've seen gains over time. gains
00:42:03
above the risk-free rate only because
00:42:05
there is a risk premium there in stocks.
00:42:07
There is a risk we get rewarded for the
00:42:09
risk that stocks might not recover. But
00:42:12
as soon as faith in those recoveries
00:42:14
becomes too universal, well, the market
00:42:16
wouldn't drop in the first place. After
00:42:17
all, who would ever sell their stocks to
00:42:20
drive down a price if they knew that
00:42:22
recovery was guaranteed? Does that make
00:42:24
sense? Who would sell their stocks and
00:42:27
selling stocks is what drives down a
00:42:29
price? Who would sell their stocks if
00:42:31
they knew that a recovery was
00:42:32
guaranteed? It doesn't make sense. No
00:42:34
one sells if they know the price isn't
00:42:36
going to fall. But if there's no fall,
00:42:37
then there's no recovery. So, yes, it's
00:42:40
pretzel logic. It's a bit of a
00:42:41
self-defeating prophecy, but it's a fun,
00:42:44
maybe small, nuance idea that ought to
00:42:46
intrigue anyone who thinks that markets
00:42:48
are guaranteed to recover. There's not.
00:42:51
There's risk involved. So, this doesn't
00:42:53
mean we avoid stocks in the first place.
00:42:55
Far from it. It just means that we
00:42:56
allocate our capital appropriately to
00:42:59
stocks or potentially to other less
00:43:01
risky assets based on the timelines in
00:43:04
our portfolio, based on our risk
00:43:06
tolerance, based on the understanding
00:43:07
that certain assets might need a long
00:43:10
time to recover, if they're going to
00:43:11
recover at all. And so, if you don't
00:43:14
have a financial plan, you probably need
00:43:15
one. If you don't know why you're
00:43:17
investing, you should fix that. If you
00:43:19
don't know why you own what you own, you
00:43:21
should fix that. Feel free to reach out
00:43:23
to me. Let's start a conversation. I
00:43:25
hope we're all getting through some of
00:43:26
this tariff mess in one piece. We'll get
00:43:29
back to our regularly scheduled blog and
00:43:31
podcast publication starting now. So,
00:43:34
thank you all for listening to this
00:43:35
bonus episode about tariffs. Thanks for
00:43:37
tuning in to this episode of Personal
00:43:39
Finance for Long-Term Investors. If you
00:43:42
have a question for Jesse to answer on a
00:43:44
future episode, send him an email over
00:43:46
at his blog, The Best Interest. His
00:43:48
email address is
00:43:50
[email protected]. Again, that's
00:43:54
[email protected]. Did you enjoy
00:43:56
the show? Subscribe, rate, and review
00:43:58
the podcast wherever you listen. This
00:44:00
helps others find the show and invest in
00:44:02
knowledge themselves, and we really
00:44:05
appreciate it. We'll catch you on the
00:44:06
next episode of Personal Finance for
00:44:08
Long-Term Investors. Personal Finance
00:44:11
for Long-Term Investors is a personal
00:44:13
podcast meant for education and
00:44:15
entertainment. It should not be taken as
00:44:17
financial advice and it's not
00:44:19
prescriptive of your financial
00:44:20
situation.
