Fisher Investments Reviews Your Questions on Building a Portfolio, the European Economy & More

Transcript

Ken Fisher:

Not the only thing that caused the recession, but what caused the recession worst is the big bad thing that comes along that no one expects. And you should be trying to largely put aside on the shelf all the things everybody talks about, and look for what other big bad thing could happen that nobody's talking about.

So every month I get all these questions that come in. This month's are actually particularly unusual, so that makes it more interesting. I'm going to whip through them pretty quick. I try to do that. I'm not very good at doing that, but I'll try.

What happens if we don't make it to the euphoria stage of the market cycle?

Well, as I have long quoted, Sir John Templeton's famous phrase: "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." And the fact of the matter is, this question is recognizing that and asking, "What if we don't get to euphoria?" Sometimes big bad things come along that no one's expecting that wallop the world in a negative way, a little bit like Covid did. A lot like Covid did. Or FASB 157 in 2007 that cut back bank lending capability by killing their balance sheets and tail-spinning us into the so-called mortgage crisis and all that went with it in the 2007 to 9 recession.

Those things can come along and prematurely cut off euphoria. When that happens, the market goes down. We get recession. It's big. It's bad. It's ugly. And what you should do is always be thinking about the fact that the part that moves the markets the most, and the part that causes recession worst— not the only thing that caused a recession but what caused the recession worst is— the big bad thing that comes along that no one expects. And you should be trying to largely put aside on the shelf all the things everybody talks about, and look for what other big bad thing could happen that nobody's talking about right now?

I can't see that, but it might be out there. When that happens, that's the time, and one of the only major times in the world where you actually want to get defensive against a bear market.

How can European stocks go up when the European economy is performing so poorly?

It's easy. The reality is the European economy is performing poorly, but it's performing way the heck better than people thought it would at the beginning of the year. And markets move on the difference between expectations and subsequent realities. So if the European economy is doing badly as it is, but the badly is still better than people thought it would be, that's a positive surprise. It's positive surprise that moves the markets up. It's negative surprise that moves markets down. That's the way that works.

When building a portfolio should you invest all the cash at once or spread the investment out over time?

This is an age-old question and the reality is there's not a perfect answer for it. Let me say it partly depends on who you are in terms of your ability to be comfortable and confident at what you're doing without being overconfident. It's partly a function of what you think we're doing at a point in the cycle, and if you have a lot of confidence in your ability to discern that correctly, which most people don't—but some people think they do. Some people do, but most people don't. A lot more people that don't think they do than do have that ability.

What I want you to see is that me, I've, you know, been doing this stuff all my adult life, and I don't have any hesitancy to do it all at once. But I can understand why that could be a scary thing for someone. And the whole purpose of your investments is not to scare the bejabbers out of you.

The whole purpose of your investments is to try to do well for you with the goals that you have, and one of those goals can be your comfort. So it's okay by me if you spread money out over time.

Let me put this a different way, however.  If you're thinking about stocks, stocks rise in history, about two thirds of history—a little more. So therefore the odds of you winning when you do it slowly, other things equal, are 2 to 1 against you. Or said, the flip-side of that coin, 2 to 1 in your favor. You put all the money in at once because stocks rise more than two thirds of the time, about 70%. So therefore, when you do it slowly, if the market acts the way it acts, two thirds of the time, you're hurting yourself. You're waiting for that downturn. And the next question you have to ask yourself, if you get a downturn that other third of the time, are you going to actually put the money in then or are you going to hold back out of fear? And that's another question you have to ask yourself.

My mortgage interest rate is just under 3% fixed. My husband thinks we should pay it off before we retire, but I disagree. What say you?

Well, first off, the last thing I want to do is get into a spousal dispute between husband and wife here. So, you know, that doesn't really make a whole lot of sense. I've been married 53 years, and I've got plenty of spousal disputes myself to deal with, and I just don't really want to go there.

But I tend to believe that there's not a lot of real advantage in paying off a 3% mortgage in a world, unless your fear is aggregate debt anyway. This is going to come down to a decision about what else you've got going on in your life, and your ability to handle interest payments. But if you can pay it off, you can probably handle the interest payments. 3% money is pretty cheap today. And if you've been doing that for a long time, I mean, you know, you obviously got that 3% mortgage before long term interest rates started rising. But if you've got a 3% mortgage, you say why is it financially in your interest to pay it off? It probably isn't.

So I'm probably on your side and against your husband on this, but it comes down to, well, you pay it off and why you want to pay it off. Is it just because you're afraid of the future payments, and where's your cash flow? If you can't afford the future cash flow of the 3% mortgage, you ought to sell the house while you can and get your principal out of it and go live someplace that's cheaper for you. So that's about all I can say about that.

Are rising insurance costs a risk to the market?

No, they are such a small part of the economy overall that, remember, things like this are out of one pocket into another. Somebody benefits, somebody loses. The trade off is there's a small net benefit to the insurance company, obviously, if they can get you to pay all that. But the fact of the matter at the same time is what's one person's cost is another person's profit, and overall at a total small portion of the total economy, it doesn't have much impact on stocks at all.

I watched your video on stop losses and agree with you.

My video on stop losses says that stop losses are bad for your portfolio, and the investment return is not good. That they appeal to people because they kind of imply you're not going to have losses and people don't like losses. But the fact of the matter is, there's all kinds of embedded problems in that strategy that make it not work toward getting a good future investment return.

But how do you protect yourself from huge losses when a stock decides to change the trend?

Well, stocks don't decide to change the trend. Buyers and sellers change what they do in relation to a stock as they see fit at a point in time. And this goes back to the question of how do you decide when's the right time to sell a stock? It just so happened that this month I've done a video on that topic. And rather than try to retread that which I was unable to do in less than eight minutes— and that's not what I'm supposed to be doing here, I'm supposed to be doing short answers, and I'm not very good at short answers, and I told you that when I first started talking— the fact of the matter is go look up my video on when's the right time to sell a stock. And that covers this topic.

And with that, thank you for the grab bag questions this month. I look forward to doing more with you next month. And thank you very much.

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