Kersten Wealth Management Group - Money Sense 12-28-24

Episode Transcript

Speaker 1 (00:00):
Hello, and welcome to the show. You're listening to the
advisors of Kirsten Wealth Manager Group, Kevin Kirsten and Brad Kirsten.
Happy to be with you today and Merry Christmas and
happy upcoming New Year to everyone out there. We are
in the final stretch of the year. We're in the
final stretch for the stock market for the year and
smack dab in the middle of what we talked about
last week, Brad, which was the Santa Claus Rally, which

(00:21):
this year it changes a little bit because it is
the last five training days of the year, but this
year it did start on Christmas Eve, which was a
very nice upday on Christmas Eve, and we'll see how
this shakes out going into the first two days of
the year. One of the many precursors that we look
for to see if twenty twenty five is going to

(00:42):
start out on the right note and hit the various
indicators that would lead us to believe that twenty twenty
five is going to be a positive year. Certainly, the
full month of January is a bit indicator. Take that
with a little bit of grain of salt, because then
if January is up, you only have eleven months left.
But it is a pretty good indicator if you combine
that with the five days of the Santa Claus rally,

(01:03):
which started on Christmas Eve, and boy, Christmas Eve was
a huge up day, brad for the overall market. Now
that's one of those shortened days where the market closes
at one o'clock and yeah, just a lot of momentum
all the way into the end of the day and
accelerated into the end of the day. And I think
we've had a couple of these days. To look at
those half days, Christmas Eve and also the Friday after Thanksgiving. Yeah,

(01:26):
you could do have a decent year if you just
bought those two days year in in Europe. There might
be one other half day. I can't think what it
would be, but maybe actually I thought New Year's Eve was,
but it's not. That's a full day this year, but
we've had a lot of positive is almost always a
full day, yeah, yeah, and this year it is, But
there's been a lot of a positive market action. One

(01:49):
being just the lack of foul through on cell off days,
even on big sell off days. You know, we had
this big one here a week ago. Very next day
up and pretty mild the second day after. I think
that's positive market action. The other is we've had a
lot over the last maybe since the election, a lot
of down mornings that just get continually bought throughout the day.

(02:10):
We're seeing that today the day after Christmas, where started
down about a half a percent, small caps were down
the most. They were down about three quarters at one point,
and then just a continuing buying effort throughout the day,
and even the things that are sold off the most,
like today being small caps, eventually getting to the point
where they're up the most, and the sectors that are

(02:31):
down the most being up the most before the end
of the day. That market action, I think is a
really positive one. And the other is the continue follow
through for the sectors that lead in the summer when
Trump started doing better led up to the election when
it looked like it was going to be Trump followed
through after the election when the results were in, and

(02:51):
now we're continuing to see it on positive market days,
leading sectors versus lagging sectors. Let me give it to you,
since the election, we have three that are up pretty big.
I would say since the election. Here we are seven
weeks since the election and We have consumer discretionary up seventeen,
we have technology up seven point seven, we have communications

(03:11):
services up seven point five, and financials up six. That
is a pretty big move for not even a two
month period. We have three flat sectors industrials, consumer, staples,
and utilities, and we have three negative sectors real estate, energy, healthcare,
and materials. And they're not just down a little. I
mean you've got real estate down five, energy down five

(03:33):
and a half, healthcare down five, materials down eight point four.
That is a as much as the move is after
the election for things like Tesla and Amazon and consumer discretionary,
this move for materials and energy is a huge one
for a seven week period. And I just think that
anytime we're going to have sectors leading and lagging like that,

(03:57):
it is something we have to maybe be mindful of
once we get three four months down the road, how
far did things get ahead of themselves. But the market
is telling you what it likes for the economy, that
it expects under the current administration and the makeup of
Congress and what is going to be coming, and I
think you have to pay attention to that, and if
you're making decisions on how you're going to allocate, you
have to lean into it. And if you're trimming, obviously

(04:20):
you can trim for a while. But as you come
back to the market, I think you have to pay
attention to what the market wanted to see, what was
the leaders when the election was over. And that's why
we keep talking about what are these leading sectors in
this month or two. I'll stop doing it here in
a little bit, but I think this first month, this
FIRS first quarter is really important to see what those

(04:42):
leaders were. So there you are. It's a growth versus
value leadership, and it is pretty exaggerated. I mean, you
look at the top to bottom. You're talking about twenty
twenty five percent difference in stock market sectors. Some people
just think I own stocks, I own bonds. No, there
is winners and losers in this stock market post election. Yeah,
and for the full year, Brad is one thing I

(05:02):
was interested in looking at and looking at the full
year to date performance, looking at the S and P
and the other sectors. If you're to come into the
year and said, okay, own communications services, consumer discretionary, both
growth sectors, and tech. Okay, But then after that, utilities
up twenty five percent on the year and consumer staples

(05:26):
up almost seventeen percent on the year year to date.
So you look at those two and you say, boy,
it was the ultimate barbell in twenty twenty four where
high growth but then also the most low volatility sectors.
The only sectors to avoid if you're going to look
for the full year anything in the single digits in
my opinion, and that's materials, healthcare and energy would be

(05:50):
the ones to avoid. Also value sectors, but not that
low volatility value. In twenty twenty four, you wanted to
have that ultimate barbell with high growth, high growth equity,
but then also low vole utilities and staples and utilities.
If people remember middle of the year, we were talking
about that how the market rally broadened out utilities. I

(06:12):
don't think they did anything in the first month, and
they certainly haven't in the last two because it's one
of the negative sectors since the election. That utilities rally
was just a six to seven month rally middle of
the year as the market rally broadened out and then
it came back. But I think some of it with
utilities is just supply and demand. You look at what
we're going to when you have a growing economy when
you have new technologies like the Internet or now AI,

(06:36):
and you look at what it costs and how much
energy we need to support these systems, whether it be underground, server,
farms or whatever it is that they're they're doing the
push for EV vehicles. I mean, all of that is
going to be increasing demand, and you can't increase supply

(06:56):
at a rapid rate. Therefore, what has to happen Prices
go up, profits go up. Yeah, and so it's kind
of the opposite of of of the energy problem. Like energy,
they're gonna increase supply, will it Will it increase supply
faster than demand? We'll we'll see, But prices there should
go down if they're increasing supply. But utility is definitely

(07:17):
a slower moving uh line on supply demand and uh
And so if there's gonna be this push with regardless
of who is president, I think you're gonna can have
this continued EV push. I mean the energy sector is
in terms of what we're looking at here on this
page and how the performance of the energy sector, it's
almost one hundred percent oil. Okay. The utility sector is

(07:41):
utility companies. Just to describe it to people, the utility companies,
but it's more exposure to electricity, water, you know, natural gas,
not so much oil exposure in the utility sector. Just
to see the difference in performance there energy as a sector,
which is almost because people think energy, right, you're gonna

(08:02):
think of all energy, but it's not that's not the
way it works. Utilities are your utility companies, natural gas,
you know, solar and wind. That's what goes going into
the utility sector. Whereas all those market cap weightedc look
up at any xl E or XLU, the two main

(08:22):
market cap weighted indexes that we're referring to, and you'll
see the largest of the large makeup that index, and
so we're looking at performing. There's some overlap there too,
because utilities is primarily the companies that provide you the
electricity or the natural gas or whatever it is, Whereas
in the energy sector, the people who pull the natural

(08:43):
gas out of the ground would be in exl E,
whereas the utility companies themselves are the ones that are
in EXLU. But it's interesting to see that difference and
to see that sort of crossover now between the technology
sector and the utility sector, or which you would have
never thought of even a decade ago. Oh no, I

(09:04):
think you could probably make an argument for I want
some crypto exposure, how can I get it? Well, when
they're mine and bitcoin, they're using a lot of utility
energy and to do the processing. If there's going to
be more of it, you could make an argument that
utilities might be one of the benefactors of continued crypto

(09:27):
talk and digital currencies in general. There might it might
increase demand. So on the bond side of things, Brad
not a great year in twenty twenty four, only up
one point one percent on the US aggregate bond index.
Short duration bonds have done a little bit better. The
short duration bond index is only up two percent, but
we're seeing a lot of the portfolios that we manage

(09:48):
that we use, you know, up in the mid single
digits on the year for the short duration And just
to kind of you know, as we summarize both stocks
and bonds going into twenty twenty five, we've talked a
lot about stocks, but on the fixed income side of things,
we kind of had a little bit of a change
in the last week with the FED meeting, and they're

(10:09):
hawkish cut as they call it, where they did cut rates,
but they indicated that they're not going to cut rates
as much as expected in twenty twenty five. What's your
outlook on fixed income going into twenty twenty five. Both
opportunities but then also risks. Well, I think you're a
first half, second half year. I think you're going to
continue to see the ye'l curve steep and where you

(10:29):
have ten twenty thirty year interest rates going up, shorter
duration coming down, maybe maybe getting to the point where
it will hold for a while once the Fed gets
its final cut or two out of the way, and
I think they'll be done by maybe June, So maybe
they do, maybe they skip a meeting and do a cut,
Maybe they skip two or three meetings and do a
second cut, and then they're going to be done. And

(10:51):
at that point, I think you can look to go
longer duration a little bit. And so you still want
those managers, whether they two different things, either gonna have
short to intermediate in their title. That's what you really
want because the risk is that the tenure treasury, which
is long okay, goes even higher above five percent, and

(11:12):
that would mean a loss to your principle if you
don't have short to intermedia in the title. You need
an advisor or somebody to do the digging, do the research.
And the reason I bring this up is we have
several portfolios that have the flexibility to go short or long,
and I'm thinking of one we use right now which
only has about a three year duration, but there are

(11:32):
times where it's had six or seven year duration. So
if you're not gonna see it right in the title,
you need to have a manager that has the flexibility
to go short and make sure you check the numbers
and see that they are short currently. And that'd be
the other thing to take a look at. So you know,
I don't think that's gonna change. But the one thing
that is sort of the rule of thumb, okay, and

(11:54):
I hate I don't like rules of thumb for the market,
but people do it, so I think you have to
talk about it. But the one rule of thumb is
inverted yeld curve. Okay, it didn't work, Okay, Well, well,
I guess we did have a down year in twenty
twenty two. Yeah, when did. The definition of recession is
up for debate, because if the if the market had

(12:15):
a if the economy had a saw with the inverted
yeld curve, is it says recession within a certain amount
of time. Sure, sure, But we had an inverted yield curve,
meaning when it stayed where well, depending on what you're
looking at, but one of the short rates over long,
shorter or higher than the long and so most times
it's two tens or on one year a treasury over tens.

(12:39):
And so it stayed inverted for I think it was
over two years. I think we went inverted in March
of twenty two and it stayed inverted until this year,
and maybe I think maybe even until the FED rate
cut in September of this year. Then it stayed inverted.
It's the longest one ever. And so the talk is
always that if you have been within twelve to eighteen months,

(12:59):
if you haven't invert deal curve, it doesn't always signal
a recession. But most recessions haven't inverted yeal curve at something.
So June of twenty two, June of twenty two was
when the yield curve inverted, and it uninverted in September
of this year. Okay, so corresponding with the first FED
rate right now, if inverted yield curve is bad the

(13:23):
opposite can't also be bad, And here we are uninverting
for the last three months and people continuing to steep end.
That's my point. Yeah, And what you're hearing is hell,
this is also bad. They can't both be bad. Okay.
Inverted yield curve historically is bad. Yeah. I mean about
what has to happen if you were allowed to happen
Prior to two thousand and eight, the financial crisis, the
yield curve inverted in twenty twenty. That was COVID. It

(13:46):
inverted very briefly. Yield curve invertive before two thousand and
the two thousand recession, inverted before the nineteen ninety one recession.
But keep in mind too, the yield curve inversion on
the two thousand. It first inverted in nineteen ninety seven. Yeah, okay,
so it was a long time before a recession actually

(14:07):
panned out. And then for much of the early to
mid nineteen eighties it was inverted the entire time. Yeah, okay,
the field curve was inverted for the entire time. We
did have a recession in eighty two, but after nineteen
eighty two the market just shot higher. So it's not
a perfect indicator. But many people have pointed out that
you can have a yield curve inversion and not have

(14:28):
a recession, which we did in twenty twenty two, But
very rarely do you have a recession without a yield
curve inversion. I know that's kind of a double way
of saying that, but you're typically when you have the recession,
which we didn't technically have in twenty twenty two, you're
gonna have that before it. But going back to your point, well,
if that's the economist one oh one where it's gonna

(14:52):
happen in twelve to eighteen months, then when it goes
the opposite way, that should be an indication of growth
in the next twelve to eighteen months, right, should it not.
I you can't have it both ways. You cannot have
it both ways. So to me, I like saying when
unemployment's going down, it's bad. When unemployment's going up, it's bad.

(15:12):
When the economy, when the GDP grows, it's bad, And
when the gd shrinks it's bad. You can't have it
both We can't have it both ways, So one's bad
going into twenty twenty five on fixed income. In my opinion,
Brad if we get a yield curve where the FED
cuts a couple of times, nothing extreme, and you have
those short bonds in the three percent range and you

(15:34):
have the long bonds in the five percent range. I
think that is a bullish, a positive indicator for the
stock market. Yeah. And I would also say most people
they don't think about the economy itself when they're thinking
about recessions. They think, what's it going to do to
the stock market. Well, we had an inverted deal curve.
We had in a market from high to logo down
twenty six percent. That is most people's definition. The market tanked,

(15:57):
it went, It happened over at ten month, but it
went down and gave me all the pain of a recession.
That's it. That's most people's definition. They don't need the
FOMC to come in and say, we deem that recession
to have started in March and to have ended in October.
For most people, it started in January twenty two and
ended in October of twenty two, because that's what the

(16:17):
market told you. Right. You've got a difference between bear
market and a recession. Bear market, yeah, exactly, versus a
recession where the actual economy and most people think of
them exactly the same, right exactly. People think, well, I
was in a bear market because I personally was in
a recession because I lost money. That's right, that's right.
So check out our our weekly market commentary talking about

(16:40):
interest rates and the expectations for next year on our
website kirstenwealth dot com. The title of the market commentary
is fed resets expectations specifically for interest rates next year.
Check that out on our website Kristen wealth dot com.
We're gonna take our first pause. You're listening to Money Cents.
Kevin and Brad Kurston will be right back and welcome back.
You're listening advisors of Curse and Wealth Management Group, Brad

(17:01):
and Kevin here with you this morning. Kevin, at the
start of last year, you and I did our consensus
of twenty twenty four to poke holes in people almost
of the economists, most of the outlooks, because the consensus
is usually wrong. And in twenty twenty three we did
six that we felt like were the consensus out there
to point out at the end of the year or
throughout the year how wrong everyone is. Now. Five out

(17:23):
of those six ended up being wrong. In twenty twenty three,
we couldn't even come up with a consensus that was
that long. In twenty twenty four we came up with
three and I have a fourth one where we couldn't
even decide what the consensus was, so I took it off.
It was basically, which sectors are going to lead? Is
it going to be a value catchup or a tech leadership.
We couldn't decide what the consensus was even telling us.

(17:44):
But the three that we had just to again laugh
at how sure everyone is and then talk about what's
everybody sure about right now? The three that we had
were it's Trump versus Biden in twenty twenty four. At
the start of twenty twenty four, there wasn't even why
bother with the primaries, right, it was just going to
be that Trump versus Biden. Well, that one proved to
be wrong. That's a good point. Yeah. Number two, the

(18:07):
FED will cut, and we put we the FED will
cut and the first cut will be And so we
decided our consensus was the FED will cut six times
and the first cut will be March. We decided that
was the consensus at the start of the year. Now
they ended up cutting three times the last three, and
the first cut was in September, so again half as

(18:31):
many cuts, and the first cut was six months after
everyone assumed that the cut was going to be and
then our final one. So both of those are both wrong.
At the start of the year, that was pretty much
the consensus, and they both proved to be kind of
dead wrong. The third one is with inflation, and this
one's probably pretty right. The consensus at the beginning of

(18:52):
the year, we decided was that everyone was saying inflation
will fall slowly and interest rates will remain high. Now
that one actually proved to be pretty true. Their interest
rates are a little lower than we started the year,
but they have remained high, and inflation was pretty were
hoping for those mortgage rates to come down more rapidly. Yeah,
I mean, if we remember the two selloffs this year,
the first one was in March, actually early February. Early

(19:15):
February bigger sell off. Actually are as big a sell
off as we got in August, but it was revolving
around the FED meeting and the FED saying no, we're
not close. Everyone was thinking that first cut was going
to be in March. So when the FED meeting came
and the FED changed their tune to basically say, we're
not close to the first cut. The market gave us
a pretty swift five percent sell off, and it was

(19:38):
revolving around the Fed pushing off this consensus of six cuts,
and the first one is in March, and so once
they pushed that off, the market saw that as a negative.
But they're pushing it off because the economy is strong,
and it's the same thing now they're pushing off further
cuts because the economy is strong. So that's the one
that pretty much was on point, and it kind of

(20:01):
brings us to what everyone's talking about with the Fed now.
I feel like the consensus is one or no more cuts.
To me, if the consensus is typically wrong, I think
you have to be thinking what would make the FED
have to cut more? Okay, it's not can they cut
more any more because they've already slowing economy or rapidly
drop inflation rapidly, so they don't need us here anymore.

(20:24):
So is inflation going to drop rapidly or is it
going to be that the FED needs to step in
because we have some shock to the system, And that's
typically why they're wanting to stop where they are, so
that they can have some impact. So we've talked a
little bit about how normal sell offs, especially after we've
had this mile two years of no sell offs, but
you could get a shock to the system for something

(20:46):
you can't plan on. Well. And here here's where my
shock to the system that I'm a little bit worried about.
And this is partially as a country, we've dug this hole.
And the whole to me is government spending. So and
Elon and Vivek are going to come in there, and
Trump's talking about it, and everyone talks about government spending

(21:09):
and listen, I want it to come down too. You
got to rip the band aid off at some point. Right,
everyone talks about government spending like like it doesn't affect them.
It's just the government. We can knock out that spending.
But let me let me throw you some numbers here. Okay, Apple,
one of the largest companies depending on the day, had
in twenty twenty four three hundred ninety one billion dollars

(21:31):
in revenue okay, three hundred and ninety one billion dollars
in revenue net profit ninety four billion okay, Meaning they
spent what roughly two hundred and ninety five billion Okay,
they spent two hundred ninety five billion three hundred ninety
one billion in revenue. This is not perfect math, but

(21:53):
they spent roughly two hundred ninety five billion. They spent that. Now,
if we had a headline tomorrow that Apple was cutting
their spend, their spend by twenty thirty forty, you'd look
to say, where are they spending money that's going to
slow down? What company is going to get a hit? Well,
company's gonna get a hit, correct, the federal government. You

(22:16):
talk about the largest market cap. Yeah, okay, if the
federal government was a stock, it would be the largest
market cap. It's not even close. Apple, a four trillion
dollar company, okay, spends about two hundred and ninety billion
dollars a year. The federal government spends six point eight trillion,

(22:40):
and we're hoping to cut a trillion dollar the revenue.
The revenue is about five trillion. The revenue the tax receipts,
that's revenue five trillion. They spend six point eight trillion. Okay,
you're talking about cutting ten apples out of the government's now.

(23:01):
A lot of it's waste, I get it. But it's
still going somewhere into the GDP into the economy. And
so when you talk about something to worry about which
is actually a long term positive, okay, versus a short
term negative, and I al would you know this is
it's a very different country. But you look at what

(23:21):
that Argentinian president did. Trump talks a lot about this guy. Ye,
Trump talks a lot about this guy. But the stock
market of Argentina had a huge drop in his first year. Yeah,
and it did recover and when it's in a goal
market now went on to make new all time highs. Yep.
But in that first a shock, there's a shot because yeah,
you're gonna stop spending. Okay, now where are you wasting?

(23:42):
We mentioned some of the real estate that is just
abandoned building. They're paying the rent, right, they're paying the utilities,
they're putting furniture in them. You know, a person or
a company owns that real estate. Now, can they release
it to someone? Yes, But as you don't new leases,
as you take government employees and figure out where the

(24:03):
redundancies are and make your cuts, there's gonna be a
shock to the system. Is it come with quarterly earnings
of various sectors saying hey, we got to write down
some stuff, and our anticipation is for future quarters we're
gonna have some weakness for a while. Yeah, that could
definitely happen. That's going to be maybe the kind of

(24:23):
the obvious for what might happen over the course of
the back half of twenty twenty five once they decide
where they're gonna cut right, right, I mean that's a lot.
You take two trillion out of the economy. I'm not
saying they shouldn't do it. I'm just saying there's a
there's a component to that, and we've dug this hole
where the federal government has become a larger and larger

(24:46):
piece of the economic pie. Were you gonna never cut
it because all we can't cut it because it would
hurt the economy, well, then the problem is only gonna
get worse. I'm not saying that. I'm just saying in
the short term in twenty twenty twenty five, that could
be a surprise that people aren't looking. So let's talky
about this. Let's okay, I want to get more conservative

(25:08):
at some point in the year, or I have new
money and I want to at least have dry powder
to buy a dip one of the options traditionally would
be bonds. Right now that bond world is shrinking. For
what you can invest in, right, I have to stay short.
I have to keep it in a money market. It's okay,
I'm earning something on it. But what if I don't
know when the sell offf's going to happen. I don't
know when the slowan's going to come, and I don't

(25:30):
know if it's going to come at all. And I
want to have upside exposure to this growing economy. What's
an investor to do? What are some new options for
how I can get exposure? And then if the selloff comes,
I want to have the flexibility to buy that dip. Right.
Because we talked about the market's been on a two
year bull run. We think it probably will continue into

(25:51):
twenty twenty five. But there's some stuff to look out for.
Plus it's not as easy as it was in twenty
twenty three, twenty twenty three. I know people don't think
it's easy. To me, that's easy, Okay, the S and
P drop twenty seven percent, buy it all. Yeah, it's easy.
But as the market goes into its bull run and
continues into its bull run, the winners get more narrow,

(26:14):
The winners get more narrow, the per the sell offs
get bigger, and the performance is not could you have
double digit performance? Yes, but do you feel as good
you're twenty twenty three off the low, or you're gonna
make another forty percent? No, of course not. No, okay,
so your your upsides not as good. But then you
flip around and you look at a FED that's not

(26:35):
cutting as much, you look at a ten year treasury
that's been rising. You don't want to lose money if
you buy a bunch of bonds. So what's an investor
to do? And the beautiful thing about technology is technology
has changed a lot of things in our lives. But
technology has also changed how we invest and new products
and new advancements in technology. So we're gonna take our

(26:57):
next pause when we come back from the break, we're
gonna talk about what's mostly categorized as a buffered investment
in the overall market, sometimes hedged or a hedged in
the word edged in the overall market. Where all right,
I don't want to have to worry about interest rates
rising and me losing money on my fixed income. I
still feel okay about the market. How do I get

(27:17):
some exposure but also having some downside protection. You're listening
to Money Sense Kevin and Brad Kurston will be right back,
Welcome back to the show. You're listening to the advisors
of Kirsten Wealth Management Group, Kevin Kirsten and Brad Kirsten.
As a reminder, we are professional financial advisors and our
offices are in Perrysburg. Give us a call throughout the
week if you have any questions or you want to
set up a consultation or review your financial plan. Four

(27:38):
one nine eight seven to two zero zero sixty seven.
You may have some questions about what we're going to
talk about in this particular segment as well, give us
a call for one nine eight seven to two zero
zero sixty seven. Brad. We were mentioning sort of the
things to be hopeful for in twenty twenty five, the
things to be nervous about, and the things to look
out for. And one of the things are that we

(27:58):
were talking about is a two year bull run in
the stock market. People want to rebalance, have some protection.
Who knows what's going to happen with fixed income markets
with the ten year treasury rising that could be have
some risk someone might want to start incorporating some downside
protection other than just traditional stocks in bonds. Yeah. I

(28:19):
think how people would describe it too, as they'd say, well,
if the market falls, I want to fall half as much,
but I don't know when it's going to fall, so
I want to participate on the way up until it does.
And the traditional way of doing that would have been
I'm gonna buy some treasuries and I'm going to buy stocks.
But in twenty twenty two, if you had bought the
ten year treasury and put out the other half of

(28:39):
your money in the stock market, by the end of
the year, both lost double digits. So what's another way
to give yourself that protection as you get further along,
and that is either hedged investments or buffered investments. Now
I don't mean a hedge fund, Okay, these are hedged
or buffered investments. Now, these have been around quite a

(29:01):
long time in the insurance and annuity industry, We've never
really been big proponents of that because not necessarily the strategy,
which is fine, it's the way they're marketed, the way
they're sold, and also when you add the annuity wrapper,
you're stuck. Yeah, you're stuck with no choice. The cost
is higher. They'll say it's no cost, but the cost

(29:22):
is obviously higher because when you look at the same
thing in an annuity or an insurance company, or you
look at it outside of that, the upside potential is
much less, is much less inside, sometimes half as much
in inside the annuity. So you're telling me there's no cost,
but outside of the annuity I can get the next year,
I can get fifteen percent. Inside the new I can

(29:43):
get eight. Well, there's your cost, I would argue, given
the advent of some of these new products, Brad, there
is absolutely no reason to do a buffered type investment
in an annuity or life insurance or life insurance right now. None.
There's no reason. If someone's showing that to you, where
they're saying you're going to get a certain amount of
the SMP up and a certain amount down, a certain

(30:05):
amount of protection down. The same thing exists outside the annuity,
So there's no reason to do it because you can
do it for cheaper. And don't forget about your liquidity. Yeah,
your liquidity is so important, not liquidity to buy the
liquidity to make a move to take advantage of what
you just did you wanted to buffer the downside? Great,
you did it. Let's say you caught the top day.
The twenty twenty two is an example. Twenty twenty two

(30:27):
is the most typical sell off that will occur in
a bear market. It took ten months. The thing that
was up the most tech sold off for a little
bit more than a year. That is that is typical.
Now we've had some quicker ones. COVID twenty eighteen were
a little more than a month and three months, But
in general, you don't want to be around for six

(30:49):
years of a sell off. Okay, by the time is
six I've seen these duty. By the time, by the
time you go down and back up, okay, what was
the point of even having the buffer? If you can,
if you put a buffer on, or you put a
hedge on, you're doing it because you think the market's
going to sell off in When it does, you want
to be able to take advantage of it and buy
in it lower process. But if you're an annuity, you're stuck.

(31:12):
So what was the point of having it at all?
You already rode the whole ride, that's right, that's right.
So these are available in ETF form in mutual fun
form liquid you can get in and out. You don't
have to pay any fees to do that, whereas the
annuity that you're stuck. And let's just talk about some
of the differences. Let's start with the buffered version. The

(31:35):
buffered version which is out there on the S and
P five hundred or the Nasdaq, but talk about the
S and P five hundred, which is you're going to
decide how much protection you have over what period of time, Okay,
whether it be one year, fifteen months, two years, whatever
it might be. And you're going to say, I want
ten hypothetically, I want ten, twenty or thirty percent downside. Okay, Now,

(31:56):
this is in something that is liquid, you can get
in and out of, and over that set period of
time you get that exact buffer on the downside. So
on the buffer, if it goes down, the first ten
twenty thirty is absorbed by the product that you're in
because they have sold the upside potential to pay for
the buffer on the downside, so you don't. Through technology

(32:18):
and option strategies is the way that the companies do this.
So if over that period of time, let's say it's
one year, just for ease of the thought process. Use
twenty twenty two as an example, where the S and
P five hundred drop roughly twenty percent rad for the
calendar year. Okay, if you had a ten percent buffer,
you would have lost ten instead of twenty instead of twenty.

(32:39):
If you had a twenty percent buffer, you would have
lost nothing. You had a thirty percent buffer, you would
have lost nothing. Now what you should do, what we
would do is for ok what we already are doing.
If you had one a year ago and you got
the max upside cap and you had a ten percent buffer,
you were doing it either for one of two reasons
we had. Some people wanted to get past the election.

(33:00):
We got past the election. So how do you feel
about it now? Do you want protection or not? If
you were doing it because you felt like a year
ago the market was overvalued and you got the full
upside of of what of what whatever buffer product you
were in gave you, you should actually probably do more protection.
You were nervous a year ago. It didn't go down.

(33:21):
Now you should go from ten to twenty, and if
it goes up again, you should go from twenty to thirty.
At some point, the further it goes the more protection
you need. So for some clients, bred if they want
specific event protection like the election, you can look at
it like that. If if the market shoots up, of course,
if you have ten percent buffer on the downside, you

(33:42):
get more upside. If you have a thirty percent buffer
on the on the downside, you have less upside. Okay
in that example, but everything still tied to the S
and P five hundred and you still have full liquidity
to make changes to make adjustments. Now. Also, I would
say some people that we utilize it for it's just
a sleeve of their overall plant. Yeah, whereas we're not

(34:04):
really looking at a specific event. This is just a
sleeve we're carving out and using it as a piece
of the overall pie. Yeah, now you're describing ones we're
in order to get, say the downside, we have to
get to the end of the term, so they're priced right,
unlike an annuity or an insurance company, where we have
to get to the end of maybe maybe you can
roll it after the end of a year, but the

(34:25):
product itself is around for six years, seven years, ten years,
so you're kind of in there and you have to
choose one of those buffer investments with a limited upside.
You can't just turn the faucet on and say give
me all the S and P five hundred. And that's
the problem exactly. That's the problem with most of these annuities,
brad Is is if you use your buffer and the
S ANDP drops twenty percent and you didn't lose a

(34:46):
dime in the annuity, you say, well, it already dropped
twenty percent. I'd like to just go into the market.
At this point in the annuity. You cannot do that, okay,
whereas outside of an annuity, with liquid investments, you can
do that at almost any time. Now let's talk about
daily though. What if I just want to make sure
that if I get any kind of five percent last year,

(35:06):
we got an eight and a half in August sell off,
I can just buy that dip. Well, then the more
appropriate is probably not a buffer. It's probably just using
one of the mutual funds or ETFs that are hedged
products that are hedging off that volatility of the market.
They're doing it also with option strategies that they roll
monthly or quarterly, and they're doing the same thing internally,

(35:27):
but it's giving you not just daily liquidity. In the
ETF form, you have minutes to minute liquidity where you
can sell that to hopefully dial up your risks, not
sell it and be moving out. And the reason we
change the terminology a little bit is in a buffer,
in a buffered investment, when the market goes down, you
get all your money back. Any hedged investment, it is degrees.

(35:48):
So if the market dropped ten percent, you would only
drop five, whereas in a buffer, if the market drops
ten percent you get all your money back. Yeah, okay,
and you're saying five, I mean that's what history would
tell you. That's not guaranteed. No, that's just the goal
of what they're doing. That's the historical Yes, exactly going

(36:08):
to be that you're you know, half the down and
half to two thirds of the up. But the goal
should not be maybe for a sleeve, you could just
have this as a permanent part of your portfolio, but
the goal should be I'm starting to get nervous about
the market. I'm starting to put more hedge hedged equity
into the portfolio so that when the dip happens, I
can buy that dip. Yep. And so you're doing the

(36:30):
hedged investment in an exchange traded fund ETF or mutual
fund wrapper with complete liquidity at any time. If at
any time you use that hedge, you can switch over
to the broad market without a hedge. If you have
a twenty twenty two type year, you can do that.
And so with these strategies, you can get a portfolio that,

(36:52):
like you said, has roughly a fifty percent downside of
the market and roughly two thirds of the upside of
the market. And we've seen that pan out. The largest
hedged version of this around, yeah, has done that for
the last decade almost so the mutual phone refering too,
and I need to mentioned that it has almost thirty

(37:15):
billion dollars in it, almost thirty billion. The ETFs is
is about half of that. But year to date it's
it's up twenty one percent. And this is this is
one that historically is hedged about half of the downside off.
So what what's the SMP year to date here, you
got it right there in front of you. Twenty eight,
So it's twenty eight. This is up twenty one year
to date. So that's that's what it is giving you.
It's giving you two thirds of the up and in

(37:37):
the down year was down about half, and so that's
one where if it's the mutual fund, you're getting end
of day liquidity, if it's the ETF, you're getting minute
to minute liquidity minus eight percent in twenty twenty two. Yeah,
so not even half correct. Yeah. So this is another
sleeve that you can carve out of your equity and
bond portfolio to give you some protection. And I think

(38:01):
that it can serve a purpose. You know, I often
say people say, well, is this right for me? Well,
the best portfolio is the one you stick with, and
whether that's a broadly diversified portfolio of stocks, bonds and
maybe a hedged investment in addition to it, or if
people are doing this as a standalone, people say, is
this right for me? Well, if you'd rather have some

(38:22):
downside protection but also participate in the market when it
goes up, great, But do not get roped into some
annuity sales pitch on this, because you will be stuck
with zero options if we go through a bear market
and you want to make a shift. Or conversely, the
market just keeps shooting higher and you want to do

(38:42):
more protection, Yeah, just keep adding to it. You just
add you're going to dollar cost average into it, and
when the selloff happens, you're going to come out a
little quicker. That's what the market tells you to do.
It tells you that the bull markets go longer than
the bear markets, so you should be going in slowly
over time and coming out quickly when the sell off happens.
Who should be thinking about it? If if in twenty
twenty two you said to yourself that was that was

(39:03):
too painful? Okay, Mark gets back to all the time high,
I'm I'm going to take some risk off the table.
Well that was that was a year ago. Did you
take any risk off the table or did you like
how things were going? Well? If you were uncomfortable in
twenty two, and I'm not saying nobody was comfortable, but
I'm just saying if you were to the point where
you were ready to pull the trigger and get everything out,
that to me, if you have not taken risk off

(39:25):
the table, this is one way for you to be
doing it right and also not losing that much if
the market does. You're not just putting it on the
sideline again. Yeah, you're not going to a money market,
which probably the thing that's going to get hurt the
worst though, excuse me, the most with what the Fed's doing,
it was would be money market rates by the end
of next year are going to continue to come down.

(39:45):
And also be careful of those long dated treasuries, those
ten year plus treasury portfolios. This is something else that
you can add to the mix that will buffer or
heade your downside as much as maybe even treasuries in
some situations where interest rates are rising, because that's the worry,

(40:08):
just like twenty twenty two, and I don't think it's
gonna be a long time before we see something that extreme.
But that was the tough thing for a lot of
investors in twenty twenty two, Brad, was the fact that
stocks and bonds both lost money. So incorporating other things
like hedged or buffer strategies can probably reduce your overall

(40:30):
risk of your portfolio while still giving you some upside potential.
Taking our next pause, you're listening to Money Cents, Kevin
and Brad. Kurston will be right back and welcome back.
You're listening to advisors of Kristen Wealth Management. Brad and
Kevin with you here this morning. Kevin, I give you
some stats here. We got the election, We got a
full year for the market. Let's talk about a few
things that would make you feel maybe good and bad
about next year. One of those would be the first

(40:52):
year of a new term. Been pretty good lately. First
year for Biden for the S and P five hundred
was twenty six point nine. First year for Trump was
nineteen point four. Obama's two first years were twenty nine
point six and twenty three point five, pretty good lately.
George Bush's first two first years of his terms not

(41:14):
so great three percent and negative thirteen, but the ones
before that even pretty good thirty one seven, twenty seven,
and twenty six. So first years are usually pretty good. Well.
I even mentioned those cuts with the Department of Government Efficiency.
Even if that is a risk, it's the cuts aren't
happening in January. No, No, even if that is, the

(41:36):
earliest would be the back half of the year, and
more than likely maybe even fourth quarter for people, for
sectors and companies guiding down for twenty twenty six. So
you have some time, right, you have some time there.
Let's look at something that might be a negative the
market this year. This has happened more often than you
would think. Has been above it's two hundred day moving
average four one hundred percent of the days, and it's

(41:58):
it's gonna end at one hundred percent of the days.
Last time it happened was twenty twenty one. Time before
that twenty seventeen, thirteen, ninety seven, ninety five not a
very good track record recently here for the following year.
So this year above it's two hundred day moving average.
We don't know what next year is going to bring,
but the last time was twenty twenty one, and twenty
twenty two, as we know, is a negative year, a

(42:19):
fifth worst calendar year of all time, you know, roughly
a nineteen percent downturn for the year. Twenty seventeen was
the year before that, and the S and P five
hundred gave us a negative year. Prior to that, we've got,
you know, twenty and thirteen fourteen was slightly positive, two
and nineteen ninety seven, ninety eight was positive, ninety five

(42:40):
ninety six was positive. So but recent history would tell
you it's not a very good market year. After you
have this kind of steady, long, prolonged up market like
we've had roughly two hundred trading days in a year,
So this gives you a we are in a upward
trend that has not really given us any kind of
buying opportunity because of a cello. The sellers were very

(43:03):
quick in August and in early February of this year.
And then let me give you one more positive one.
It is the first year of a second term. I
mentioned those years, so that is Brock was the last one,
his first year of his second turn twenty nine point six,
Bush was three, Clinton was thirty one, Reagan was twenty six.

(43:24):
So when you have your first year of a second
term a little bit more consistently big years in the market,
the market likes to see it, and it's not your
traditional second term. You'd have to go back to Grover Clevelan.
Let me see if I have that on the list.
I actually don't go back to nineteen oh one, and
that was McKinley's second term, so I don't have Grover

(43:45):
Cleveland's the S and P five hundred. Even around then. No,
you had Dow Jones, which wasn't even the Dow thirty.
I think it was yeah, no, right, it was that
Dow ten originally, and geez, that first year it's just
before the turn of the century. I think on the dow. Yeah,
what about you have the year to year Brad, what
about back to back twenty percent years? We mentioned that

(44:07):
in a couple shows previously. You would have the good
ones being nineteen ninety seven, I believe where the back
to back twenty percent years. Nineteen ninety five nineteen ninety
six were twenty percent years. Nineteen ninety seven was also
a good year, but then you had a fifty three

(44:28):
and fifty four. It was a modest single digit year
in fifty five, and then the bad one I believe
was in the seventies sometime for negatives. Yeah, after back
to back twenty percent oh, after back to back, well,
seventy three and four were bad, but you had seventy
one was fourteen, seventy two was nineteen, so you had
two pretty big years. I think it was after that,

(44:49):
if I remember it correctly as it is, it five
and seventy five, seventy six and then seventy seven was bad.
Somewhere in the late seventies, I think there were back
to back twenty percent years. Nineteen seventy five was thirty seven,
and then seventy six. Are you gonna find it? Seventy
six was twenty four. So you got two really big
years coming off of a down Bombers nineteen seventy seven
and then seventy seven probably, yeah, so negative seven, negative seven,

(45:13):
and so that was you know, you had a forty
percent sell off in the middle part of the seventies.
You had two twenty percent years back to back, not
as extreme or more extreme excuse me, than the twenty
twenty two year that we had, but that one wasn't
so good. Whereas the back to back twenty percent years
we had in the nineties. Okay, very different environment. There's
a lot of similarities to everything. But in the mid seventies, there, Brad,

(45:38):
the inflation story was just ramping up, just beginning. Yeah,
in the nineties, we had a little bit of an
inflation scare, which the Fed raise rates and then came
back down. Okay, and that's why the nineties, in my opinion,
that inflation scare didn't pan out, and it was a
tech driven rally. It's a FED that moved up and
didn't have to come down very far. And kept thinks

(45:58):
there's so many similarities to the nine But keep in mind,
when you had your nineteen percent sell off in nineteen
ninety eight, the year was a positive year, right, you're
up twenty seven, but we didn't finish at the high. Okay,
that sellof gave us a downturn that we didn't recover
from before the end of the year. And pretty close

(46:21):
to that in nineteen ninety seven, you had eleven percent
sell off at ninety seven. We barely got back to
to eclipse that before the end of the year, even
though nineteen ninety seven was a thirty one percent positive year.
So keep that in mind. We get to the early
part of the year, we get some big gains, it's
okay to take a little bit off the table. It'll
be our third year of having some above average performance. Well,

(46:45):
and I would also just close with this, Brad. In
nineteen ninety four, the S and P five hundred bottomed
out at four hundred and forty. It did not peak
to where we had a full blown bear market in
recession until it was over fifteen one hundred. Okay, four
forty to fifteen hundred. The low was thirty five seventy

(47:07):
three for our market in twenty twenty two, twenty twenty two, Okay,
to be anywhere near that, the S and P would
have to be over ten thousand plus or more to
be anything like the nineteen nineties rally. So the folks
that say the last couple of years makes this like
the nineteen nineties rally, I would push back a little bit.
It it has started that way, but if it was

(47:29):
like the nineteen nineties, it would go on much futer.
It would go on for two and a half, three
more years and another one hundred percent, So you know it.
There's always similarities, but nothing's ever perfectly lined up. But
if we really want to use the nineteen nineties analogy,
like many people are doing, that would just tell you
that there's more deans to guess, right, So thanks for

(47:50):
listening everyone, we'll talk to you next week. You've been
listening to Money since brought to you each week by
Kirsten Wealth Management Group. To contact Dennis Brad or Kevin professionally,
call four one nine eight seven two zero zero six
seven or eight hundred eight seven five seventeen eighty six.
Their email address is Kirstenwealth at LPL dot com and

(48:13):
their website is Kirstenwealth dot com. Opinions voiced in this
show are for general information only and are not intended
to provide specific advice or recommendations for any individual. To
determine which investments may be appropriate for you, consult with
your financial advisor prior to investing. Securities are offered through
LPL Financial member FINRA SIPC