In this month’s edition of “Money Matters,” Scott discusses the financial lessons learned in 2020 as the financial world faced ramifications from a pandemic, and how investors can use the lessons moving forward to achieve their financial goals.

Money Matters: 2020 Financial Lessons Transcript

0:00:00.0 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a Certified Financial Planner and adjunct professor. He's taught hundreds of financial professionals, retirement planning and wealth management strategies. Scott joins us now by phone. Welcome, Scott.

0:00:22.9 Scott Oeth: Good morning, CJ.

0:00:23.9 CJ: Good morning. So you are gonna give us a little crash course, Financial Lessons Learned in 2020.

0:00:32.3 Scott Oeth: Yeah, what a year, huh?

0:00:33.9 CJ: Oh, my gosh.

0:00:35.4 Scott Oeth: Incredibly tumultuous year in so many ways, and not the least of which is around money and finances.

0:00:42.6 CJ: Indeed.

0:00:43.8 Scott Oeth: We had a strong start to the year, and then once the realities of COVID started hitting, we had a tremendous market crash. S&P 500 was down almost 35%, and it reached that fall-off in a stunningly quick drop, and then turned around and came roaring right back, but there were also a number of other financial issues, there's job losses, there's illnesses, there's businesses and the economy shut down that just impacted people in so many ways. And as I went back in 2020, I think there's a lifetime of potential financial lessons in this one year as we sit here and look at... We look at 12/31, we say, "Oh, the S&P 500 finished up almost 15%." In the future, we'll look back and say, "What was the big deal?" It was a big deal. There's a lot going on. I think there's some major themes there we can think about in terms of financial lessons.

0:01:38.9 CJ: Okay, so let's talk about those lessons. You have a four-point plan here or a...

0:01:43.8 Scott Oeth: Yeah, yeah, I think there's many, but a few as I was kind of thinking about this that really come to mind is thinking about the value of planning, the value of balance in your financial situation and life, flexibility proved to be incredibly, incredibly important, and controlling and monitoring your sources of information, particularly on financial issues, I think was some real key ones. In terms of the first on planning, the Boy Scouts taught me long ago, “Be Prepared!” And that's a big part of what I do, helping people put together a well-constructed financial plan could help keep you from getting blown off course. So yes, it's about crunching the numbers in regard to how much we need to put aside to fund future goals, and it's looking at insurance and tax planning and retirement planning investments. But very importantly, I think it's thinking ahead in a moment of calm and when you have some breathing room and some white space, planning ahead, "How will we react when bad times come? How will we make decisions? How will we make decisions about when to sell or when to trade?" And doing so in a time when it's not in a panic or a crisis situation. I think that's very important.

0:02:51.3 Scott Oeth: Balanced, talking about a major theme of having balance, a big part of that financial planning is trying to optimize, trying to live the best lifestyle today, but not robbing your future self, okay? So making sure that you're saving enough today to be prepared for tomorrow, but also in terms of what you're actually doing with the portfolio or your investments or your holdings. You need to have a balance there. Everyone's situation is different. You need to think through it for yourself and get your own expert advice, but generally, you want to take advantage of that wonderful opportunity for compounding and the growth that markets and the economy can deliver over the long haul that come in stocks and business ownership and real estate ownership. But boy, the problem is, sometimes it's very volatile, it's very rocky, it's risky, and it can go in through long funks. And so you have to balance that with more stable, short-term liquid holdings that you can get to if you need to if you have that job loss or an illness or your business shuts down. I think we were... As troubling as the year was, as hard as it is, and a lot of people are really struggling, we were also very lucky in that things were able to re-open and the economy did get moving fairly quickly again. But having that balanced approach, an all-weather portfolio and not forgetting the future in terms of what could happen today is very important, very important.

0:04:20.1 CJ: Well, did you notice any one sector that did better than others in 2020?

0:04:26.8 Scott Oeth: Yeah, that's a great question. We certainly did. Something we've talked about before on this show and I've written about and we're working on and have been watching is that technology stocks have done very, very well. What would be considered growth-oriented companies have done very well for a number of years, an abnormally long period of time. And when we normally look at market histories, these things go in cycles. They don't tend to run forever where you have one area of the market, what we consider asset class, wildly outperforming others. There tends to be what's called a mean reversion. That'd be the academic term where it comes back to its long-term average, and so we would have expected that at some point this is going to turn. But what happened is markets fell, gas prices got the bottom knocked out of them, interest rates fell, so that really hurt energy and financial companies, which are supposed to be considered value-type companies. And everyone was sitting at home and everyone's on Zoom and everyone's streaming Netflix non-stop and buying things on Amazon. And so even more breath got blown into those technology companies. And we're just seeing really historical spread between information technology and the technology sector and really the more traditional businesses. That's great, I hope people have been able to participate and capture some of those gains, but it's also something to keep in mind. Folks need to take a look at their own situation and consider if they're potentially over-exposed in that area. I think, CJ, flexibility is another big one. There was so much uncertainty. At the beginning of 2020, there was all kinds of people offering forecasts and prognostications, and no one saw what was coming and a lot of people had to deal with unexpected circumstances. And when I'm looking at someone's financial situation, often there's different types of routes they can go with, say, funding their child's education or planning for retirement or any number of approaches. And almost every time, if I can, I try and lean towards the more flexible approach.

0:06:36.3 Scott Oeth: There is a bit of a trade-off here because if you have too much flexibility, you really have to have good discipline or good reinforcement because it can be easy to waffle out of a plan. But some strategies and in particular real estate investing—I think real estate can be a wonderful, long-term wealth-builder, but it can also be very illiquid and it can be high transaction cost, high friction in terms of getting your dollars back out when you need to. So you need to be very careful about how you go about building your plan on something like real estate investing. I've seen articles about people that were investing and using Airbnb to rent out lots of properties and that got shut down. And they were very leveraged, and they were on the hook for these mortgage payments on all these properties with no income coming in. So it's good to be very thoughtful and careful about how you're building your plans. And the last one, sources of information, and the inputs that we're all dealing with. I was thinking back on this, and it's like 30 years ago I was doing my undergraduate in finance, and how would I get my information? Well I got a paper copy of the Wall Street Journal every day, and there was the nightly business news. If I really needed to do a deep dive, I would go to the library, and I would get a paper copy of Value Line or Moody's. I'd have to order research reports, and now...
Then we evolved into the 24-hour news cycle, and now everyone has smartphones where we're getting things pushed to us in social media. And I'm just not convinced that the real education or decision-making has benefited from this. And in fact, unfortunately, I think what we're seeing is a lot of very negative influences that can really swing people off course. Going back to Biblical times, we've known that fear and greed are natural impulses, and they've played major forces in the market and it's just gotten worse. We've seen well-known sports commentators switching to giving stock advice, encouraging people to become day traders because sports were shut down and political commentators really using fear on both sides to, I'd say, essentially buy votes. “The sky is falling if the other side gets elected” and causing panic. And what we see is that's just not the case over the long-term. We can look back... We talked about this before recently on this show. If we look back at the history of presidential elections and who holds different seats in Congress…people do well over time if they have a good plan and stick with it. So the spread of fear and panic is bad. It's very easy to get caught into an echo chamber that reinforces it. With social media, you'll keep getting fed more and more of the information that you're seeking out. That's bad. And then on the flip side is the fear of missing out, as the kids, the FOMO, the greed side of things. It seems like everyone has the high school friend who won't stop talking on social media about how much money they're making with cryptocurrency. And you think back, "Well, who is this person and what do they really know?" Are they lucky or are they good? So I think you don't have to play those games. We've seen time and time again is people can do very well. They don't have to hit home runs. They don't have to be fast-paced traders. They can take a long-term thoughtful approach. I really try and be effectively like a noise-cancelling machine for my clients when it comes to media noise and influence. And I think looking at long-term history is a great guide. We can see there have been these cycles before. There have been terrible times before, and there's been consistent growth and recovery, and the large part about how you position yourself to handle those downturns, but still let yourself capture the upswings.

0:10:30.9 CJ: Yeah, well, I think the digital information source thing is not gonna go back in the bottle. That genie's out. So how do we focus on the ones that we can rely on? Is there something we can look for that will help us find trusted sources of information online?

0:10:51.4 Scott Oeth: Yeah, that's a great question. Unfortunately, I don't think it's a really easy one. I think, some obvious things you wanna look, "Okay, who's this person or this company or this source? What is their background? What's their education? What's their experience? What's their approach?" Try to vet them somewhat. I'm amazed how much of a megaphone some sources have with really no background, no history, no training, so I think that's one thing. Always try and look at, "What's the angle?" Follow the money trail. "What is driving this?" To the issue of political commentators giving a lot of thoughts about what's gonna happen to the economy or people's portfolios. Well, they're trying to buy eyeballs and votes. Your views, your following is what monetizes their site or their blog. And you may think, "This is about politics." Well, behind it all, it's probably really about business for that person running that site.

0:11:48.6 Scott Oeth: So I think looking at the angle, looking at, "What are the incentives? Are they selling products? Are they selling advice? Is the actual experience and credibility there?" There are many, many, very good sources, good pundits, good blogs. I think as a starting point, there are a few associations that take a pretty balanced approach, very thoughtful. The Financial Planning Association (FPA) has a nice blog with good consumer information. The National Association of Personal Financial Advisors (NAPFA), has very good information, the CFP Board, Certified Financial Planner Board. All three of those organizations have good, I'd say very thoughtful, non-emotional prudent-type advice. Prudent is boring, but it often is what really works very well over the long haul.

0:12:41.0 CJ: Indeed. Well, that's a good place to start. We can go there and go from there.

0:12:46.0 Scott Oeth: Yes. And WTIP. Right?

0:12:48.0 CJ: Of course! And this will be... This interview will be on our website in the next day or so. So yeah, thank you, Scott.