he S&P has been very volatile since January, after reaching many record highs over the past seven years. It’s hard for any investor not to feel overwhelmed and worried during these turbulent times. Watch nationally known financial commentators and co-hosts of the award-winning podcast Friends Talk Money, Terry Savage, Richard Eisenberg and Pam Krueger discuss how to stay focused during this market storm of inflation, the prospect for higher interest rates and global political and economic uncertainty in the aftermath of Russia’s invasion of the Ukraine.

Discussion Recording Transcript

Richard Eisenberg:

Hi, everybody. I'm personal finance writer and editor, Richard Eisenberg. Normally, Terry Savage, Pam Krueger, and I get together and record our Friends Talk Money podcast as an audio version, but with everything going on in the world and the markets this week, we thought we would do our first video version of Friends Talk Money on this Thursday afternoon, March 3rd, to talk about things and to share our advice. The stock market in the oil market have been very turbulent lately. That's understandable, given the news of Russia invading into Ukraine. Nobody knows how or when this is going to end, so it's a little frightening, and it's making a lot of us even more jittery than usual better. Terry, maybe you can start by telling our audience what you're thinking and what you think people should be doing or not doing. Then after that, I'll do the same, and then Pam will finish up talking about things with her thoughts. Terry?

Terry Savage:

Thanks, Richard. Well, I think I want to start this in a different place. I know we're here to talk always about personal finances, your money and how to invest, but let's just say a word here. What we have on the line in the world as we know it is democracy. Democracy is at stake here, and what's really critical, all the actions that are being taken now finally by the West to impose sanctions on Russia, will impact our economy and probably our markets and our own investments, but we really need to keep it in forefront of our minds, the big picture that if we don't make a stand now, if we don't do some of the tough things that will impact our own United States economy and the Western world, then we could face far greater problems. If we let one madman get away with it, aren't we more vulnerable to others? Think North Korea or think even China. We're going to talk today about your money, your investments, and the market in this context, always understanding that there's something much larger at stake.

Now, having said that for the last 100 years, according to the Ibbotson market historians, there's never been a 20-year period where you lost money in diversified portfolio of large company American stocks with dividends reinvested, even adjusted for inflation. This goes back to 1926, through World War II and the Vietnam War and the great inflation of the eighties and the financial crisis of just a decade ago. In the long run, stocks have always been, a diversified portfolio of stocks have been a great investment and have outperformed, even adjusted for inflation. That's something you want to keep in mind. Now, some of you are approaching retirement, or in retirement. You're saying, "Well, wait. 20 years is great, but I need to spend my money, probably most of it over the next 20 years," then you're in a little different position. Let's talk about the forces that work in the market today and then get back to the basics. How much should you have invested and how should you do it?

First of all, let's put this in another context. Even before this entire Ukraine thing blew up, we've had unprecedented inflation, unprecedented, unless you remember, as I do, back in the early 1980s. It means 7%, even an increase in social security payments, isn't keeping up with that. Now, in addition to that, and knowing that the Fed has said, "Whoops. We waited a little bit too long. We're going to be raising interest rates," we have an additional shot. We haven't, at this talking, yet put full sanctions on Russian oil exports, knowing that they do export a huge amount of energy, and whether it's to us or to other Western European countries, a lack of Russian oil on the markets could send prices skyrocketing. As we talk, we're well over $100 a barrel, so we're going to have an impact in the US. Even if there aren't additional sanctions, gasoline now is at its highest levels in quite a few years, since 2011.

But I'm suspecting that's only logical to suspect that you are going to be paying a lot more to fill up your gas tank and everything from jet planes that are going to fly you on the vacation you've been waiting to take to the truckers that bring the produce across country have an energy component that will add to the cost of everything, from food to restaurant meals, et cetera, so we're going to be dealing with inflation. The Fed might have to raise interest rates more than it wanted to.

What's the bull case for the stock market? Only two that I can see. Number one, historically, stocks beat inflation, so you could see money move into the stock market out of fear of inflation, and there's plenty of money around. The Fed hasn't started vacuuming it out yet. It's still put in lots and lots of money and they're only just beginning to raise rates, not sell their bond portfolio and suck money out, so inflation could be a plus for stocks in that sense. The other thing that could happen is there could be some quick resolution. Doesn't look like it as we talk, but some resolution of what's going on in Ukraine, and that would be considered very bullish for stocks.

Are you a trader? Let's just talk about why you care about the stock market. If you're listening to us because you want day-trading advice, you've come to the wrong place. All of us are pretty conservative. We've been around the markets for a while. But if you're saying to yourself, "Could this be the end of the great bull market?" Yeah, it might. We're actually down significantly. The NASDAQ is still down double digits for the year. But the real question is, where are you positioned, for not only this year, but for the next five, 10, 15, 20 years of your retirement? That means taking a look inside your portfolio.

Let me just give you these few thoughts. A lot of baby boomers, particularly, are shocked at how much money they've accumulated in their 401(k) plans. It wasn't our genius, it was an incredible bull market. This might be the time to look, and perhaps with the cool-handed look of your financial advisor, a fee-only fiduciary advisor, not someone who's trying to sell you something or get commissions from you, at your asset allocation, which says, how exposed am I to the stock market? Am I exposed in the right areas? Am I now looking to peel back maybe and go to dividend-paying stocks, some more conservative companies? Take a look inside, particularly your target-date funds. They were said to be the safe haven for 401(k) plans. You're going to retire in 2025, 2030, so you would be in a target-date fund that may have an awful lot more exposure to the market than you think.

Right now, we're having a relatively calm moment, but things are going to be very volatile in the weeks and months ahead. The time to make a decision is not when you turn on the TV and see the market down X-teen percent in one day, but when you're calm and cool and you can move into something more conservative.

Let me just add one last vote for something that I call "chicken money." The world of the market is divided into the bulls and the bears, but I add a third category, chicken money, money you cannot afford to lose. Yes, you're penalized today. The banks don't have to pay high rates because there's plenty of money around, so if you move money into CDs, or short-term, or treasury bills, you're going to get a very low rate while you know inflation's eating away at your money, but that liquidity is the price you pay for sleeping at night when the stock market is going wild. It lets you stick with your investment plan, stick with your conservative equity income fund in your IRA.

This is the moment right now, over the weekend, when you can talk quietly and calmly and think, "What's the upside? Oh, it could be a bull market. I might miss out. What's the downside? I'm going to have to live on this money in retirement." The most devastating thing that can happen to a retiree is a bear market at the start of retirement because you're always playing catch-up. While I don't have a crystal ball about where the stock market is going to go, I can be sure to tell you it's going to be volatile, and there're going to be some very scary moments, so in the calm moment that you have now, please take a look at your retirement portfolio. If you're younger, remember, you've got a long-time horizon. Keep putting that $400 payroll deduction in your 401(k) plan, S&P 500 stock index fund. You don't have to beat the market, all you have to do is be the market over the long run, but if you're getting closer or in retirement, take a look and have some liquidity, some chicken money on the side. That's a Savage truth.

Richard Eisenberg:

Well, thanks, Terry. I think all of your points make so much. Let me just start by talking a little bit about what you described as "chicken money." I do think there are a lot of people now who are going to be more interested in putting money into money market funds and things like that, not because they're going to get much of a rate of return, they know they're not, but because it's safe and they know that it's not going to be volatile like the stock market or the bond market, so yeah, they won't be earning very much, but they know they can sleep at night. I wouldn't be surprised if we see more money going into that and I don't think that's such a bad idea.

I do think some people may be wondering, is the money they have in their 401(k) or their target fund in any way going to be affected directly because of what's going on in Russia? I found that very, very little money in target-date funds are in Russian stocks or Russian bonds, less than 1%, so even though it's great to be diversified, and you probably have some money in your mutual funds or your 401(k) in international stocks, there's a good chance you don't have very much in Russian stocks or Russian bonds.

I'd say the only case where that may be different is if you have a lot of money in what are known as "emerging market funds." Those tend to be a little bit more risky and they are more likely to have some money in Russian funds, so I would say it would not be a bad idea to take a look at your 401(k), your mutual funds, and see where that money's being invested right now. If there's something in there that makes you nervous about what's going on in the world, you may want to think about rejiggering your money, and moving some money around. That's what I would say as far as investing.

I was heartened, I would say, to see the Federal Reserve chairman say that he's only going to be raising interest rates by a quarter of a percentage point in a few weeks. Some people thought it was going to be a half a percentage point. We all knew that rates were going up. It seems like they're not going up as much as some people thought they would. I know this isn't going to be the last time he's going to raise rates, we're going to see more of that later this year, but it seems like right now, at least, it's going to be gradual, it's not going to be dramatic all at once. Now, that could change. If inflation gets even worse, if things happen that we're not expecting. He says he may reevaluate, but for now, that's his plan, so I think we should all take that into account.

As far as inflation goes, as Terry said, lately, it's been around 6%. Some people have said more like 7%, it depends on sort of how you calculate it, but if the price of oil goes from $100 a barrel to $120 a barrel, I've read that that could mean inflation of more like 9%, which would be really amazing and sad and difficult for a lot of people. I'm not saying that's going to happen, but I'm just saying that could happen depending on what happens in Ukraine, something we need to keep an eye on. I will tell you that I just came back from some weeks in California. The price of gasoline there was almost always over $5 a gallon. Here in New Jersey, where I live, it's more in the high $4 a gallon, but some people are already paying over five, and it may go higher than that.

I would say if you're thinking about traveling anytime soon, expect that your airfare is going to be going up because there's going to be a lot of money that goes towards gasoline and fuel tanks to pay for those airfares to fly you around the country and so expect that it's going to cost you more. I would say you may want to try to book fairs soon to try to lock in prices before they go up even higher. If you're going to be taking a road trip, probably not a bad idea to check out a web app like GasBuddy or Waze. These are places that will tell you are the lowest price of gases where you are and that could be really helpful as you're driving around. Let me stop there and let Pam say a few things.

Pam Krueger:

Thanks, Richard. Gosh. I'm in California and I have not found any gas under $5, either. It's just awful. I actually have to have my car transported back east very soon and I don't even want to look at what the cost is going to be. I can't help but to think about circling back to the kind of investors who we're talking to, who either have the bulk of their savings invested in 401(k) plans or IRAs, retirement accounts, or rollover IRAs. I think about all these people who have well over half of their money invested in the stock market right now. This is one of those moments where you, sometimes you just feel like no matter what you're doing, it's wrong. You feel like, "If I'm in this place here, even if I'm in the right place, somehow I must not be in the right place."

That's what I want to try to quell a little bit here. I want to just give three tips as we see all of this news playing out, knowing that, just like you both pointed out, inflation may be trending higher. We already know that interest rates will be slightly higher. We know we're seeing or gas prices. We know that the stock market is always going to react to every single little tidbit of news. The point is that we don't have to react that way. Let the market react that way because when we react that way during these times, that's when we make the biggest mistakes. The cardinal sin of investing is selling a growth portfolio, selling stocks, assets that are growing over time when they are down.

There's obviously a lot of reasons for that, but sometimes the returns that you get over a lifetime can come down to a few days in just a few years, just literally, maybe 10 days out of 20 years in the stock market. That's when you're tested. It's when the stocks have dropped and they've taken a steep dive. Just like Richard pointed out, and Terry is saying the same thing, it's taking a moment to not react, but to reassess. Maybe you did rebalance when stocks were higher. I hope so. We actually did a podcast on that, the best time buy the umbrella is before it rains, and at the same time, even if you didn't, you want to take a look at where your allocation is because you may have drifted off, and you may have had your target with 70% stocks, and maybe you're 75% stocks and then the market drops, and then it could also be the other way. There are opportunities here because stocks have dropped and maybe you want to increase your allocation.

This kind of choppy seas and choppy markets also brings out the deal hunter and the value hunter in us, where some investors, some individuals say, "I want to look for opportunities to buy here," and so you've got all these different emotions going in different directions, but really, the most important thing to me is that you're taking a look and you're making sure that you do have a target in the first place and that you understand how much in cash, how much in stocks, how much in bonds, to just have target, whether you're using an advisor to help you figure out where that target asset allocation may be, or whether you're not using an advisor, and you've been doing a great job all by yourself, you really want to make sure you understand the targets.

The second tip I have is that it's your financial plan that informs your investments strategy, and so I think this is the time to not divorce the idea of, "Oh, financial planning is a nice to have, something that would be just kind of nice to have in place when I have the time," and then focusing on investing without having a plan. These two things go hand in hand. They are married to each other. It's the foundation. The planning has to be dynamic, which means that it's changing with you. It's changing as things in the environment around us change.

That dynamic plan is going to, and here's the key, it's going to help you figure out your cashflow. That is what's going to inform how you build liquidity into the plan. In other words, how much cash do I need to live on? Do I need one year, do I need two year, or do I need three years worth of retirement withdrawals? That's a lot of money. Is that how much I really need to have liquid in cash so that I don't have to sell stocks when they're down? That's the key to buffering and reducing risk. The asset allocation, knowing that diversification wins all battles with your investments, and knowing that without a plan, it's literally like steering the boat without a rudder. I just feel like financial planning is just so plain vanilla. We kind of take it for granted. This is when it matters. This is when it matters.

Now, whether you have an advisor or you don't have an advisor, to sit down and really understand how important it is to be able to have a plan that's already set out for you, this is what the big pension funds do. This is what the smart money on Wall Street does. When they sit down and they're investing billions and sometimes trillions of money, their whole goal is to stay invested so they don't have to sell at the wrong time. That means having the exact same basis, the same foundation, asset allocation, diversification wins all battles across different industries. If you're invested in index funds and you're invested more, I'd say, on the passive side and you already are diversified and you've got a really good diversified portfolio, then you are already taking steps to reduce your risk.

But my bottom line is that this is the moment in time to really go back to the foundation and say, "Do I have enough liquidity built into my financial plan? Am I working with an advisor or not who can really develop a robust and accurate financial plan?" That's what's going to help you develop the investment strategy and then stay invested, which is exactly the goal, no matter who you are, of every kind of investor.

Whether you're betting on one horse at a time, just individual stocks, or whether you're in it in the index funds where you're really buying the whole race, not betting on one horse, but you're betting on the whole race, the overall market, either way, just revisit where you started from with your target, with your plan, with how much cash you really need on hand. That's going to give you the comfort. That's going to give you the peace of mind to know that, "Okay, things are falling apart over here, the market's taken a deep dive." That's what's going to help you give you the confidence. All three of us have lived through up markets, stupendous up markets, crazy, and steep and really scary down markets, so I hope that the advice that we're giving you and that the tips we're giving you help to fortify why all the experts say, "Invest for the long run," giving you some ideas on how to do that, and stay really levelheaded when it's not so easy to do.

Richard Eisenberg:

Thanks, Pam. That's so important. Just want to say to all of our watchers this time, March has come in like a lion. Let's hope that it goes out like a lamb for the world, for us as consumers and investors, too. Thanks so much and listen to us on our podcast very soon. Bye-bye.

Pam Krueger:

Now, let's take a minute to learn about our sponsor.

Richard Eisenberg:

The North American Securities Administrator Association, known as NASAA, N-A-S-A-A, is the oldest international investor protection organization. NASAA's members include state and provincial securities regulators from the United States, Canada, and Mexico, who serve on the front lines of investor protection. Recognizing that education and awareness are powerful tools in the fight against investment fraud, NASAA members are pleased to sponsor Friends Talk Money.

Terry Savage:

Here are three important tips from NASAA to help protect you and your money from fraud. First, with investing, you know there are always risks, so be cautious of anyone telling you that a certain investment is guaranteed or an investment that promises huge investment returns with very little risk. Make sure you understand the costs and fees of the investment and the liquidity. That means whether you can sell your shares and withdraw your funds whenever you need. Last and most importantly, be sure you are working with a licensed or registered financial professional. You can check if your investment professional is licensed by visiting www dot N-A-S-A-A dot org to obtain your state securities regulator's contact information.

Pam Krueger:

Remember, your state securities regulator and NASAA are your partners in helping you avoid investment frauds. Visit the investor education section on N-A-S-A-A dot org to learn more about keeping your money safe.

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