Hi, I'm Zak. I am the Co-Founder and CIO for Denver Wealth Management and am passionate about helping individuals and families achieve their financial goals. As a podcaster writer, and public speaker, I share my expertise and insights with audiences around the world.
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Updated: Sep 18, 2024
Advisors and co-hosts Zachary Bouck, CIMA®, CFP®, and Austyn Garcia, recap our May 2024 portfolio meeting, discussing what happened in the markets over the last month, our approach to traditional asset allocation (cash, fixed-income, equities, and alternatives), and our general outlook for the next 6-12 months in the markets.
Updated: Sep 18, 2024
By: Zachary Bouck, CFP®
I’ve been a financial advisor since August 30, 2008. For you historians out there, that’s just 16 days before Lehman Brothers went bankrupt. While most people think that the greatest financial crisis since the great depression would be a bad time to become a financial advisor, I didn’t look at it from that perspective.
I had a few things working to my advantage. One, I didn’t have any clients or assets, so although markets were down, I wasn’t having a hard time. Two, many financial advisors were shell-shocked by the unprecedented losses, and as we said in the industry they were “hiding under their desks”.
This meant a young ambitious Zak could call people who were absolutely freaking out about the losses and have a conversation. I didn’t get many clients in 2008, but I certainly didn’t have any trouble getting people on the phone. Investors were desperate to talk to someone.
What I learned during those conversations was simple: people don’t want to lose money. There were two degrees of losing money to investors. One, seeing the value of your investments fluctuate down, and two, losing money that you would never get back.
Some investors generally didn’t mind watching their investments fluctuate, but they were very worried about a permanent loss of capital. I think this is a good framework. How can we invest to maximize the chance that we never have a permanent loss of capital? A secondary question, how do we make the right decision even when the market value of our investments go down in value?
It turns out people aren’t very good at discerning between which of those two things are happening. Is this drop in market value a temporary fluctuation or a cataclysmic event?
Framework One: Individual Companies, Individual Bonds
What do you own? Do you own an individual company or a diversified investment? If you own an individual company like Apple, Enron, or Pfizer it is incredibly difficult to know if a downturn is just a small downward blip on an up-trending long-term chart, or the beginning of the end.
For example, Apple has had 11 days since 2000 dropping over 20% and one day that it dropped an incredible 51.89%!
Then, after the 50% drop, Apple began one of the greatest market runs in history, from a split adjusted $.30 per share up to the current share price of $170/share. You can barely see the 50% drop in 2000.
Now look at a similar chart (much uglier though), because YCharts doesn’t have Enron historical data.
From March to April 2000, Enron stock plunges to $52.00 / share (The letter C on the chart). Is this a bottom or just another stop on the way down? Surprise, Enron reports earnings of $536 Million dollars, and the stock rebounds back to $60. Aren’t you glad you didn’t sell?
Then, surprise again! The CEO abruptly resigns. And the stock falls. In this case, it is the beginning of the end. The company was a scam. I highly recommend this documentary if you want to see the financial bloodbath in all its breathless drama.
Apple gets cut in half then starts the greatest stock market run in history, turning thousands into millions. Enron gets cut in half and promptly goes to zero. Buy and hold doesn’t always work, and neither does selling when things get rocky. One final example.
Here’s the current ten-year chart of Pfizer, the whale of the pharmaceutical industry.
Is the current decline from $60 to $25 the beginning of a great stock run, or the beginning of the end? Is their fraudulent corporate accounting or is there a super wonder drug in their pipeline that will make us all skinny, beautiful, and reverse aging? It’s much harder to predict in real time. We as investors are only educated guessing. I have my guess on Pfizer, but that’s for clients only.
As investors we know there are no guarantees. Even if the company flourishes, the investment may do poorly if you pay too high a price, or the company stock falls out of favor.
Framework 2: Diversified Investments
What about diversified investments? Let’s start in the US. Here’s a chart of the S&P 500.
As of today, the only people who have lost money in the S&P 500 are those who bought the index in February and March of this year. Everyone else who bought the index and didn’t sell has had investment appreciation. In fact, the chart shows that every dip, no matter how severe, has eventually rebounded. The 2008 financial crisis, COVID, and the 2001 recession have all caused the market to go down in value, and subsequently rebounded to new all-time highs.
The same story is true with the Nasdaq. One interesting feature. If you bought the peak in 2000, it took over 15 years to be made whole. But notice that historically, a broadly diversified index is never going to zero. The fear of losing ALL your money has never materialized.
The benefit of buying a diversified index is that while an individual stock’s price may go to zero, it is less likely that all the underlying stock investments will go to zero.
In conclusion, if you want to decrease the chance that you make a big incorrect investment decision, buy diversified investments, stubbornly hold them, and add to them when they go down in value. If you don’t sell during a downturn, and your investment rebounds, you will not lose money. For more thought-provoking conversation of when to sell an investment, check out my article, How Not to Sell Your Investments.
Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock investing includes risks, including fluctuating prices and loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Updated: Sep 18, 2024
Zak and Austyn discuss the final part of of Nathan Barry's Ladders of Wealth Creation (https://nathanbarry.com/wealth-creation/): The 8 Principles of Wealth Creation. This episode explores recounts the lessons throughout the 7-part podcast series that help on the pursuit of wealth creation.