Kersten Wealth Management Group - Money Sense 10-18-25

Episode Transcript

Speaker 1 (00:00):
Hello, and welcome to Money CENTCE. You're listening to the
advisors of Kirsten Wealth Management Group, Kevin Kirsten and Brad Kirstin.
Happy to be with you today, Brad. As the market
continues halfway through the month of October, can't seem to
find a not only a reason to correct, but also
can't seem to find the market going down much more
than about two and a half percent from high to low.

(00:21):
We did have the market get a little bit spooked
a week ago Friday and then only to turn around
early Monday, up on Tuesday, up on Wednesday, and that
that intermediate term or short to intermediate term correction we've
been calling for has been hard to come by. And
that's certainly that's encouraging. I mean, certainly maybe a lack

(00:44):
of bad news is out there, but we keep getting
push and pull on the economy as well. The Fed
came out this week. Jome Pole came out this week
and said that he's a little bit more concerned about jobs,
and that led the market to believe, okay, they're more
likely to have more cut to the Fed funds rates.
So then that produced a market rally midday. Yeah, and

(01:05):
we are in this period of time with the government shutdown.
I think the longer it goes, it may weigh on
the stock market too. But we're in this period of
time with the government shutdown or we're not getting any numbers,
and so good it was even but it was even
more impactful what pau was saying, because he clearly is
seeing the numbers, they're just not reporting them. And so
if he's he's hinting that they are going to cut,

(01:27):
then it means that inflation's a little bit more under control.
If he's seeing those numbers, that jobs maybe are a
little bit weak and they need the stimulus. So it's
probably likely that we're going to get definitely one, but
maybe two more cuts before the end of the year.
And I think the market wants to see that. But
I want to get back to I think market doesn't
care about government shutdown at no. I don't think it

(01:47):
ever no, And I don't even care how long it goes.
I don't think it matters one bit. If if something
like you have TSA, you know, workers not getting paid
and they're going to go on strike, Basically they're going
to get paid. Everyone's going to get paid back paid
plus interest no, I know. But if you're not getting
your current paycheck, and you decide, okay, everybody at Detroit

(02:09):
Airport is not going to show up today, you're gonna
your government shutdown is gonna end in one day. So
I know the back pay comes, but if you're not
gonna get your paycheck, and now we're beyond the two
week and if you're gonna not get a second paycheck,
you're gonna have some disruption. You're gonna have some You're
gonna have some government workers that put up a little
bit of fight for continuing to come in. And so

(02:30):
I think you're I think you can't go much further
here on this or well, thirty days has been the
maximum called the line in the stands to two rounds
of paychecks, right, really, right. I do want to talk, though,
and I want to spend some time on maybe a
couple different segments here talking about we've been talking about
corrections in the market, and I think that there's a

(02:50):
lot of people that don't realize we have had disruptions
in the market. I mean, we had one this year
for the overall market to go down twenty percent, but
a lot of people missed that that happened because if
they were looking month to month or quarterly and their
account wasn't down very much, they didn't they didn't feel
like a correction happened, but it did. If you were

(03:13):
well diversified or had a moderate amount of risk, you
didn't feel like it was a correction, but it happened.
And we've also had it here in the last week
and in the last month in certain parts of the market.
You and I were warning people about not needing private
equity and private credit in their portfolio, and those disruptions
are happening already. It just so happens that we were

(03:34):
just talking about it two shows ago and about a
month ago, because four to one k's we're talking about
putting both of those into portfolios as an option, and
we were saying it's not necessary. They're very levered and
it's probably something that the volatility is not something people
are prepared for. And now this week we're having a
couple big blow ups in private credit now and I

(03:54):
ironically enough, Brad, because the private credit story or the
private equity story, sorry, private credit's a little bit different,
but the private equity story has has been around. This
is where all of your old small caps lie. And
it's sort of ironic that in the last two weeks
small caps the liquid index that you can buy are

(04:15):
ripping higher, making an all time hide, while the private
stuff that you can't get your hands on is tanking. Yeah.
So the private stuff that would have given you hyper
growth two years ago, it now had so much money
paper on paper, Yeah, hyper growth. People say, well, wait
a minute, if I buy the S and P five
hundred and it moves high or that's on paper too, No,
that is a buy the second value. Yeah, you can

(04:39):
sell that right away if you want. That is by
the second. That is the value by the second. The
private equity alts things that were you know, your money
is tied up. That is not a current value. So
let's talk about this just in the last week because
and and there's a couple of different things we've had
big blow ups. And if you weren't invested there, it

(05:00):
doesn't mean that it didn't happen. And the reason I'm
mentioning it is I'm having calls from clients that saying
I'm hearing a lot about bubble bursting, and I have
to tell him it did. It did in April and
you were only down x had somebody today worried about
a twenty percent correction, and when I told him that
one already happened this year, he didn't know when he

(05:21):
was down six point eight eight percent from his highest
day to his lowest day. Pretty conservative portfolio, but he's
worried about a twenty percent correction on his account. For
his account to go down twenty the market probably have
to go down forty. But also he was hearing about
a crash happening with something with debt, and I had
to explain to him that it's this private these private

(05:43):
credit blow ups that are happening over the last week.
And so there's likely going to be a couple of
these that go to zero. That are investments that people
can make in publicly traded stocks that go in this
direction or private investments that go in this direction. And
there's a few that are going to go to zero,
and there's gonna be some spillover for large publicly traded
private credit and private equity companies that also invested in these.

(06:07):
And so what you're seeing is you're seeing the stocks
of these companies down twenty percent in the last month,
down three percent today, actually twenty percent in the last month,
and from high to low the biggest of these names
that you would know are down forty percent. These are
the companies that put these private credit private equity deals together,

(06:27):
and these are the stocks of those comp of those companies,
not the actual private equity or private credit. But it
is a sign of what's going on underneath the hood.
And so I mean, I'm looking up the three biggest
of these are all they're all S and P five
hundred components. From highest to lowest, they're down forty percent.
And so these are the crashes that you're hearing about.

(06:48):
This is the bubble bursting that people are talking about.
It's already happening, and you're not in it. If you're
if you're in a properly diversified portfolio, or even if
even if you have the right if you're in the
right sectors. This year, you wouldn't have had these sub
sectors of financials and all gear. For our clients, we've

(07:09):
been overweight to the growth area of the market. It
wouldn't have this in it. All we've been talking about
is how it's not necessary. So the bubble that is
brewing and bursting that you're hearing about is here, but
it's also happening in a couple other areas. And just
because you're not invested there doesn't mean those bubbles aren't bursting.

(07:30):
You're just invested correctly and you don't have to participate
in every bubble bursting well. And this is why being
liquid with your investments is so important, because if something
changes in the marketplace, like what has happened with private
equity and private debt, you need to be able to
move on. We pride ourselves in being tactical in our
portfolios making adjustments consistently. You can't make an adjustment on

(07:53):
something that is going through a tough time if it's
I liquid. Yeah, and even though it's in a sector
like financials, so like this where a lot of these
would fall into the financial sector, the financial sector over
the last week is up one percent. If we count
Wednesday through Wednesday here or Thursday Wednesday's close through Wednesday's close,
it's up one percent. The index that is only these

(08:17):
private credit and private equity is down ten over the
same period. So even though it's in the financials index,
it's a small component of it. The rest of the
market is doing well. And so just because this one
little thing. It's it's not a large part of the
of the market, and neither is the other bubble that
burst on Friday, which is the crypto market. You know,

(08:38):
the stock market was down close to three percent two
point eight eight was the SMP, and tech was down
just a little bit more. But it recovered more than
that in the first two days of this week. So,
like you said, it's pretty healthy for a market to
One of the things we've been worried about is is
crypto so tied into our markets now and there's so

(09:00):
much crypto talk that a blow up, if we were
to get one would would cause would be a little
bit more systemic. The losses from FTX, the FTX blow
up or one point eight billion, sam bankman free, sam
bangmfreed fraud was one point eight billion. The amount of
accounts that went to zero on over the weekend, so

(09:23):
it was Friday. The crypto Marcus never close. The amount
of accounts that were levered that went to zero, and
maybe we come back to the first break we'll explain
how this happened was nineteen billion, So more than ten
times as much was lost over the weekend in crypto
as was lost in all t FTX accounts one point
eight versus one point nine or nineteen billion, and so

(09:46):
these are levered accounts that get a margin margin call
and get sold out at zero. So you you could
have a million dollar levered account that goes to zero
basically overnight, and that happened over the weekend kind of
for a reason that everyone's blaming Trump and tweets and
China and tariffs and things like that. I mean, I

(10:08):
don't understand how the two are correlated. It's really a
backfill of the story. Oh, Trump tweets nothing about crypto
by the way, Trump treats about China trade war, and
crypto goes down, Well, how are the two related. It
makes no sense to me whatsoever. When you're levered ten
to one, okay, when it goes down ten percent, you
lose all your equity, well, pretty easy. And crypto most
of these exchanges let them be levered forty to one,

(10:30):
but ten to one's an easy example, right, A ten
percent drop has your your account go to zero. So
you can have a million, you have ten million of crypto,
and your ten million of crypto goes down by ten percent.
Now it's only worth nine million, and your equity is zero,
So are they going to keep you on the hook
for that, No, they're gonna sell you out and now

(10:51):
you have zero and you have no crypto left. And
that happened nineteen billion over over the weekend. And part
of the reason is the market ever closed in the
big crypto names, but they did have a lot of
volatility Bitcoin, Ethereum and the like, So not a recommendation
to buy or sell those, but those did have a
pretty big draw down as well, and of course those

(11:12):
in certain brokerage firms can be margined and borrowed against
as well. Yeah, so just so the Friday, the Friday
return only for Bitcoin was twenty percent, Ether was twenty five,
Solana was thirty and down down negative negative twenty and
one day. So when the sm is down two point
seventy to one, Bitcoin is down twenty, Ethereum is down

(11:35):
twenty five, Solana is down thirty, and all the crap
coins were down somewhere between fifty and eighty. Now here's
the point. Twenty is fine, you can recover, but not
if they give you a margin call and sell you out,
you have nothing left. And that's what happened. So Bitcoin
down twenty even if you were levered five to one,
you're zero, And that happened. Nineteen billion dollars worth went

(11:56):
to zero over the weekend. So it doesn't take a
lot when you're lever And I think people are learning
their lessons about leverage. And there's all this talk about
margin debt out there that has nothing to do with
what's going on in crypto. That's not part of it. Well,
this is why we're always big proponents of the simpler,
the better when it comes to portfolio management. You don't

(12:16):
need it, you don't need the private credit. You don't
have to participate in every single investment craze out there. Okay,
you can if you want, if you I guess, if
you keep it a reasonable size as a percentage of
your portfolio. But you also can do very well just
doing what you've done for the last thirty or forty
years too, And you don't have to be in every

(12:39):
investment craze. Yeah, it's like us looking at the presidential
cycles and you look at the various makeups and the
worst of those is over an eight percent return and
the best one is like eleven. Well, I think most
people would say, well, even that worst one's fine for me. Well,
if you can get by on eight percent average in
your return, why would you go and do all these

(13:01):
exotic things where the chance of a zero is out there?
And we're talking about two different things that happened over
this last week where investors, if positioned improperly went to zero.
So why would you need any of that? It's just
pure gambling. And these are the things that you're going
to turn on the TV over the last the next
week and even this week, and people are going to

(13:21):
talk about bubbles bursting. Well, they did. And if you're
still doing fine, you're you're invested correctly. And I still
think even if we go through a larger correction in
the broader market, I think this is much more similar
to the two thousands, where if you stay diversified, if
you keep international exposure with the dollar weakening, if you
keep small caps, if you keep value, a lot of

(13:43):
people have given up on value. Even if we have
a spillover into something like large cap growth in tech,
you will not experience the crash that the rest of
those areas will go through. And so now more than
ever ever, it pays to be diversified. And like you said,
you don't need to be in everything. If you look

(14:05):
at the average in your return of a diversified portfolio,
and that works for you, and that's lower risk, that's fine.
I've learned this in skiing over the years as I've
gone skiing. Brad, first go out, you're younger, you want
every fast black diamond hill. But the risk is you're
going to break something, okay, and your day is gonna end,

(14:25):
and your day and maybe worse. Okay. But I have
learned over the years that I get just as much,
if not more, enjoyment on the green hills, on the
hills that aren't very risky, and I'm having just as
much fun. And if I'm having just as much fun,
why am I gonna risk breaking my leg or it
takes you longer to get down though, doesn't it? It might,

(14:47):
and it might take you longer to get to your
goals at eight percent, but you're not risking breaking your
leg or neck or whatever. Portfolio. So you know, And
I think some of it comes as you mature and
you get older. I mean, I think a lot of
these people that are losing a lot of this money
are learning how to lose money. You need you need

(15:08):
to learn how to lose money at a young age
so you don't do it later when you have more. Yeah,
that's definitely true, and make those mistakes early, because I
do think that when you I don't have any evidence
of this, but I think if you go under the
hood and you look at the most people that lost
money in especially in crypto. I'm not sure about private
debt and private equity. I think there's a lot of
financial advisors that are pushing that on older clients, but

(15:30):
on crypto especially, I think the average is going to
be pretty young, and so you need to learn that
lesson at some point. A lot of people learned it
with tech stocks in the nineties and then never made
the mistake. Again. Tech stocks have done great, but low
quality tech stocks that don't make any money is where
people learn their lessons. We leverage on those tech stocks
track then too. And I think we're gonna hear a
lot in the next month about leverage, and I want

(15:52):
to when we come back from the first break here,
I want to talk about how to read the chart
that is going to get thrown at you over the
next month about margin, debt, and leverage in the market.
Because there's a few things that that we always see
and I just shake my heat at and then maybe
one that doesn't get talked about enough, and so let's

(16:14):
let's let's just talk about a little bit of a
as those warnings go out, this is what's gonna take
the market down. You really need to know how to
read between the lines at the graph that you're being
shown about margin debt, because it is not what everyone
is making it out to be. So let's take our
first pause, come back, we'll explore that a little bit.
You're listening to the advisors of Kirsten Wealth Management Group.

(16:34):
We'll be right back. Welcome back to the show. You're
listening to the advisors of Kristen 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 want to discuss
your financial plan, whether you're just getting started, well on
your way to retirement, or already in retirement, we'd be
happy to sit down four one nine eight seven to

(16:55):
two zero zero sixty seven or check us out online
at Kirstenwealth dot com. Our weekly market commentary is updated
this week. For the anniversary of the bear market ending
the bowl market starting in twenty twenty two, three year anniversary.
I went back and listened to some of our shows
Brad in October of twenty two, just to kind of
get an idea, because I know that we're often contrarian,

(17:17):
so I knew it was going to be good. But
what I would say is the low of the market
was October twelfth, twenty twenty two. Okay, okay, and really
pretty much all the way from June until October, we
were talking about how the market was a bye and
if you looked at that market, it it had a

(17:38):
bottom in June, and that's when most stocks bottom. If
you look at at two things, you can look at
the ultimate bottom of the price. But how many stocks
were making More stocks made a bottom in the middle
of June than made a bottom in the end of October.
So if you had bought in the middle of June
twenty twenty two, you did just fine. You've had great
performance since if you were just buying the S and
P five hundred, you just did a little bit better

(17:59):
by in October. But fewer stocks made lows in that
October twelfth low. So what I was struck by and
listening to it is we don't know when the bottom happens.
You know, you want to listen to a show and
say we called the bottom. We didn't. We didn't. What
did we say October twelfth, We did a show on

(18:19):
October fifteenth, We said it was a buye October eighth,
we said it was a bye. October first, we said
it was a bye. And if you bought anywhere along
that way, you didn't just fine. You know, whether or
not the market was down twenty seven percent when you bought,
which was the low twenty five twenty two twenty, it
didn't matter. Well. I remember doing shows where we discussed

(18:41):
our buys during COVID, and one of them was when
the market was down twelve point eight, one was that
when the mark was down eighteen, and the last one
was when the market was down twenty three. But it
ended up going down thirty five. And any one of them,
it doesn't matter. The S and P five hundred was
under three thousand at that point, any one of those
buys would have been just five. So were big on

(19:02):
the stats we were going through. You know, if you
buy here, your average return is this. If you buy
any other time, your average return is a little bit less.
We often talk on this show about how when you
buy anytime, your average return is pretty good, but at
these inflection points where the market is down twenty or
twenty five or even thirty, you do a little bit better.
And of course that low whenever you bought, if you

(19:23):
bought in June, July, August, September, or even October, you
made an excellent return over the next three years, And
so we were saying to buy. And even when you're
trying to lighten up at the top, which we're discussing
a little bit right now, we're talking about maybe a
short to intermediate term correction followed by probably another rally
and then we'll have to reassess. But even the top,

(19:47):
same thing. You're never going to sell it the top
and buy at the bottom. What you're looking at is probabilities.
And over the last three years, the S and P
five hundred is almost a double. The S and P
five hundred closed at three thousand, five hundred seventy seven
on October twelfth of twenty twenty two. That marks an
eighty nine percent return on the S and P since

(20:07):
that date, that's three years ago. Is it more or
less likely that the next three years will give you
an eighty nine percent return? I think it's pretty likely
that you'll get a good return. But is it probably
less likely that you'll get an eighty nine percent return? Probably? Yeah, Well,
the only time I would have said yes in the
last year is on the lows from the April eighth

(20:31):
sell off. Okay, and years three years out from that,
you're probably gonna be similar to what the three years
out was from October of twenty two. But here we
are a V shaped recovery since then and now up
fourteen on the year after being down. I think we
were up four going into that, So being down sixteen
versus being up fourteen, I'll take my chances on the

(20:53):
prior one that it's gonna outperform where we sit today.
So once you get back to all time highs and
beyond like we are, you can still have positive returns,
but the expectations need to be rained in a little bit.
That's absolutely right. So if you look at the month
of October twenty twenty two, it was a rally on
bad news, and that typically is a great sign of
a major inflection point. You fast forward three years, the

(21:15):
bull market is still going strong, and you have to
ask yourself will it continues. So let's take a look.
How does this current bull market from three years compared
to prior bulls. After a bit of a slow start,
the s and P rows twenty one point four percent
during the first year of the Bowl. The average gains
actually forty percent, So the first year of this three
year run was a little bit mild mild. I mean,

(21:37):
twenty one versus forty on average. Year two was a
catch up thirty two percent versus twelve on average. So
certainly you put those two together and you're right where
you're supposed. You're talking about one years off the bottom,
not calendar years. If any of anyone's astute enough to
know what the twenty three to twenty four returns were,
they wouldn't have been that. You're talking about October to

(21:57):
October in both instances. So we're in year three. The
average in year three is only five point one uh
and we're at sixteen point one in our current year three.
So just recently in the last six months have we
gotten above the average three year Bowl market. You can
even see it on a chart. Go to our website
Kristen Wealth dot com. You see, when we were at

(22:18):
month thirty, we were at month thirty, we were right
on the average. That was kind of right in the
middle of the tariff, you know, March April May of
this year, we were at month thirty. We were right
on the long term average. And we're a little bit
above the average three year run of a bowl market
is right around sixty percent and we're at eighty nine percent. Certainly,
the driver has been tech stocks if you look at

(22:40):
the three year one run we've had. The if you
look at half of the advance is from these stocks.
Not a recommendation or buy er sell, but it is.
We've gotten fifteen percent from Nvidia, eight point six percent
from Microsoft, six point two percent from Apple, four point
seven percent from Meta, four point five percent from Broadcom,

(23:04):
Amazon's three point five percent, Google's five point three percent,
and the S and P five hundred has produced the
other fifty two So the the S and P four
ninety three, because that's seven stocks, has produced the other
fifty two point four percent of the advance. Well mark,
that's that's all large cap growth. Actually, it's not all
large gap growth. You see some of those names in
large cap value as well. Yeah, well that's because of

(23:28):
the waiting as well. It's not because they are the
best performers and they became the biggest stocks. But when
you're a seven and a half percent waiting versus another
company that's a one percent waiting, you're you're you have
a better chance of producing more return for the overall market.
Some of the best performers this year in the SP
five hundred are not those largest stocks. I actually have

(23:49):
it through yesterday right now, the three let's do the
five best performers two hundred and fifty five percents. Robinhood
not a recognition by herself, any of these Western Digitals
one hundred and eighty three, CG Technologies one sixty seven,
Neumont Mining one sixty one, and Micron Technologies one thirty eight.
So none of those are ones you mentioned, but they're
such a small component of the S and P five

(24:10):
hundred it's hard for them to contribute. And so that's
that's you know, when we're looking at stats like that,
don't think that it's a concentrated rally. Different parts have participated,
but you do have a market now as you get
into year three, where off the bottom you have a
lot of things up and now in year three you don't.
I think it'd be surprising to people that right now

(24:33):
through last night's closed, forty three percent of the S
and P five hundred is negative. On the year, you
have a negative return once you get to two the
number two hundred and eighty four on down. So negative
returns for forty three percent of the S and P
five hundred. That means, you know, that's a that's a
case for being diversified. You don't pick your winners and losers.

(24:54):
And if you do your gut, your your chances of
underperforming and outperforming are gonna go up. But we we
need consistency and so we see this a lot of times.
I just had somebody inherit a portfolio of two stocks.
The whole all the inheritance is two stocks, and because
they've done okay over the last few years, we have,

(25:14):
you know, people wanting to keep these two stocks. This
is an insane amount of risk. Any stock can go
to zero, I don't care how large it is, and
any stock can underperform and be negative. And here you
have forty three percent of the market negative this year
in a very positive year. So where we go from
here on stocks, Brad will we get to year four
on the bull market run, and there's there's some cross

(25:37):
currents here. I mean, certainly, the midterm election year historically
is the most volatile year. Our last two midterm election
years were significantly negative twenty twenty two minus twenty percent
twenty eighteen, or almost minus ten percent. Three out of
the last six midterm election years. Because you're gonna throw
two thousand and two in there, now you have six

(25:57):
midterm election years. Three out of six have been negative,
and every one of them had to sell off larger
than the average selloff. Only one was a double digit year,
and that was twenty ten. But even twenty ten had
a twenty percent downturn that ended in the middle of June.
So in the middle of that year you were sharply
negative in that year. And so the volatility, you should

(26:20):
almost expect it, and you gotta have to prepare for
it by just tapping the brakes a little bit when
we get to the early part of next year. That's
the one negative I see going into next year is
just the seasonality and that midterm year not having a
great track record. But if you look at other previous
bear markets that turned into bulls. That's twenty percent down
or more turning into a bowl. The track record's pretty

(26:41):
good to get to year four. In fact, only one
year four was negative and that was nineteen forty nine,
so pretty far back at minus two point three percent.
But then if you go to the next six or seven,
you have nineteen fifty seven plus twenty eight point four
nineteen seventy four plus six point three nineteen eighty two,
nine point seven nineteen ninety only plus one point one

(27:04):
o two when it got to year four. This is
when I say, oh two, that's the start of the
bull So year four would have been twelve point nine
and the two thousand and nine bear market when it
got to year four. Uh, it was up thirteen point
two percent in twenty twelve, so we'll see where we are.
The average is about a twelve point eight percent return,
but track records pretty good when you string three years together.

(27:27):
So what do we need to see next year, Brad
to make sure that this continues? And I think these
are some pretty good bullet points. You need economic and
earnings growth. Obviously, no recession recessions will will kill a
bull market, and really not seeing much of that indicated
on the horizon. Well, I think the tax plan is
a big contributor to that. Businesses are increasing their spending

(27:51):
off of what they planned at the beginning of the year,
and a lot of them in their conference calls are
mentioning the one hundred percent expensing that they're allowed to
do for any any improvements, any expenses, any expanding of
their of their businesses, and tech is the biggest contributor
to that, spending a ton of money on AI data

(28:11):
centers and expansion of their AI efforts. It's only gonna
be for the next three and a half years, and
so there's no reason to think that next year it
will slow down at all. The FED can also kill
a bull market if you look. Obviously, the FED is
starting a rate cutting cycle, but there's been many examples
where the FED has killed the bull market by having

(28:31):
two hike rates. So if we look at what the
Fed is going to do, they're in the middle of
a rate cutting cycle, although indicating that it's going to
be a pretty mild rate cutting cycle until Jerome Pile's
out of office, So we'll have to wait and see
if that gets more aggressive when Trump gets to pick
his guy starting next May, and certainly he's indicating he's
gonna pick somebody that's gonna cut rates. Yeah. So yeah,

(28:53):
if we get those two rate cuts this year, or
maybe one at the end of this year and early
part of next year, it's not all for the rate
cutting cycle, because Trump's going to put somebody in that
will cut probably right away and then maybe a few
more before the end of the year. So we're going
to have rates lower twelve months from now. So bull
markets that ended right around this time would be you

(29:14):
look at nineteen eighty seven. That bull market ended in
nineteen ninety one, so it didn't make it past year four.
Nineteen seventy ended in nineteen seventy three, nineteen sixty six
ended in nineteen sixty nine. Of course, the ones that
lasted much longer, the two bear market lasted till seven
when that crash occurred. Nineteen eighty two's bull market lasted

(29:35):
a full five years. That's certainly a little bit more
recent memory. Nineteen seventy fours bull market lasted for six
years until nineteen eighty one. Of course, the two biggest ones,
the two longest ones, would be the nineteen ninety bull
market that went all the way to the year two
thousand and nine, which went all the way until COVID.

(29:55):
You could probably argue that the nine who knows, would
the O nine bowl market still be going on if
we because here's the thing, one thing causes the next. COVID,
which you can argue argue wasn't even a natural bear
market because we caused it ourselves, and then COVID led
to the money printing, which led to the inflation, which

(30:16):
led to the twenty and twenty two sellof and the
worst sell off for bonds ever. So it just it
cod on. I wonder neither one would exist and we'd
still be in that two thousand and nine bowl. We
could be, We could be, but we did hit the
reset button on official bowl to bear markets excuse me,
bear to bowl markets twice or twice during COVID, and
then twenty twenty two, when we got pretty comfortably south

(30:40):
of twenty percent, twenty twenty two got all the way
to twenty seven percent, and COVID got to thirty nearly
thirty six percent on the downside. So but we if
we're looking at the numbers and we're trying to keep
true to that, you have to hit the reset button,
and so certainly October of twenty two we hit the
reset button. We're at three years, and it's a little
bit of a it's a little bit of a split
decision on getting four years and beyond. It's pretty good

(31:03):
on year four. After year four gets a little it
gets a little bit iffy if you haven't had any
sort of correction. And we're not saying the market has
to completely fall out of bed. I mean, for example,
the nineteen ninety one recession only included a minus twenty
one percent on the stock market and finished the year
just barely down. Yeah, so it doesn't have to be

(31:24):
a two thousand and eight style minus fifty that everyone's
worried about. And I understand if you live through it,
it was painful, but it doesn't always end that way.
On Bold of Bears, even twenty twenty two, no fun
took about. It took ten months to go down, it
took it took a year and a half to come back. Yeah,
but most people live through that and would say, Okay,

(31:44):
that wasn't the end of the world, because now on
the other side you're even better off. Yeah, And so
you could get the same thing next year. And even
if it's a quick V shape orcovery doesn't mean it
didn't exist. We were talking about this earlier in the show.
Those sell offs occur. Just because they go away quickly
doesn't mean it didn't happen, doesn't mean and it's not
the thing that people are talking about. And so I
mentioned in the last break. I'll just touch on it

(32:06):
here to right now. For the end of this break.
You're gonna hear a lot of talk about margin debt.
And I just saw a chart today and they're showing
this margin debt chart going straight up. But it's dollars.
You know what else goes up straight The market cap
of the market goes up, Your income goes up, the
value your home goes up. You have to do it
as a percentage of something. You can't just do it
in raw dollars because everything goes up. Credit card debt

(32:29):
goes up, Everything goes up. If you do credit card
debt as a percentage of income, it's a flat line
or a lower line. If you look long enough thirty year,
it's a line that goes in a straight line down. Well, actually,
all household debt is that of If you can combine
credit card, credit card, auto home as a percentage of
income or a percentage or low. And the same thing

(32:51):
with margin debt if you do it as a percentage
of the market cap of the S and P five
hundred and instead of just looking at the raw numbers,
it is a flat low it has it is insignificant,
and the little spikes that you see come right back down.
And here's the other point nobody makes. There's a lot
of short selling that's happening right now. Everybody thinks they're smart,
they're going to short sell on you know, you have

(33:12):
individual investors on Robinhood doing options and doing short selling
thinking they're smart. Short Sellers are having their worst year
in forty years. Okay, so I saw the chart that
said worst year since COVID, Well this and COVID, and
then you got to go back another forty years to
find out worse time for short sellers. How do short
sellers put that trade on? They do it with margin debt.

(33:35):
So when short selling spikes, so does margin debt. You
take the short selling out of that margin, you would
be at almost an all time low for margin debt
in this economy. So don't find a reason to backfill
your reason to be out of this market. Margin debt
is a terrible reason for you to be out of
the market because there's no margin calls coming. For the
average investor. If there's any margin calls coming, it'll be

(33:57):
a short, it'll be a short squeeze, and it'll be
the short sellers having to bail on the market that
they thought was going to go down, and that would
be a spike up in the market. If you know
how shortage and your typical investor, the people that we
help Brad marginett is is a completely irrelevant factor. But
it is. But they're telling the story as if this
is the reason, this will be the catalyst for the
market to go down, and it is a false story

(34:18):
because margindet is a percentage of the overall economy in
a tiny, tiny fraction. What no one wants to admit
is whatever the next catalyst is for the market to correct,
nobody knows and and people are terrified at the prospect
that nobody knows that because here's the thing, if everyone
knew it, it wouldn't happen. It's already priced in. Yeah,

(34:39):
everything that everyone's talking about is the next catalyst is
not the next Every correction, bear market that happened nobody predicted.
Now CNBC will dig through the bottom of the barrel
and find one person out of one hundred that mentioned it,
and they said, you had it right. How'd you call that?
The mass is, whether it's financial advisors, financial analysts, you

(35:03):
name it. Never ever, ever will predict when a downturn
would happen and mass because if they did, or if
they could, that thing that caused it would never have happened.
If they could have predicted the dot com bubble bursting,
the dot com bubble itself would have never occurred. If

(35:25):
they could have predicted the real estate and banking crisis
that happened in eight banks would have never lent money
the way they did because people would have been talking
about it. And I know it's a scary private agory
in private credit today. Everyone was saying six months ago,
how great this market is because it's so it's not

(35:46):
very volatile, and we were saying it's not valuable because
you're not pricing it. And all of them were going
on CNBC championing this new market. We need to put
it in four to one case and so then the
opposite is happening that bubble is bursting because everyone thought
it was great, not because everyone thought it was bad.
If they thought it was bad, we would have never
had this bubble, the crash of nineteen eighty seven, which
was really we improved the systems of the NYSE after that,

(36:10):
but had investors predicted that and known it, it would
have never happened. And I know that's a scary prospect
of the unknown of well, my advisor doesn't know, these
experts don't know. No it that's actually comforting because then
you can say, how can we focus on the things
we do know and use that to our advantage. And

(36:32):
that's whether it be our own time horizon, our own
risk tolerance, our own spending and saving. We can control
all those things, but we cannot control when the next
correction will occur. And it goes to this is what
the reason was, and it goes to this three year
anniversary discussion. Three years ago, the probabilities were more in
our favor. Three years after where we are today, the

(36:53):
probabilities start to come down that you're going to outperform,
so so should your risk level. Let's take our next ball.
As we come back, talk about a few other things
that maybe deal with portfolio construction and things that you
should know that maybe we don't talk about enough as
things that we're putting together in portfolios. You're listening to
advisors of Kirsten Wealth Management Group. We'll be right back,

(37:13):
Welcome back to the show. You're listening to the advisors
of Kirsten Wealth Management Group, Kevin Kursten and Brad Kirsten.
Brad want to have a quick discussion. We always like
to have a planning topic talking about active management passive management.
What does that even mean? What's the difference between active
and passive? What is a mutual fund? What is an

(37:34):
exchange traded FUNDR ETF? And there's a lot of overlap
there too. There are active mutual funds, there are passive
mutual funds, there's active ETFs, there's passive ETFs. And when
do you want to deploy one or the other. And
so let's start with just the two different categories, actually
four categories, active passive mutual fund ETF. What is a

(37:57):
mutual fund? What is an ETF? What? What are the main
difference is that people need to look out for. So
I think that because you can have an active mutual
fund and an active ETF, The main differences on those
two are how the taxes work. So when an ETF
and in a non retirement account and a non retirement

(38:19):
account an IRA, it wouldn't matter at all. So if
you have two that are essentially the same, even the
same management team, you want to go with the less
expensive and that generally is going to be the ETF,
but a in an IRA it wouldn't matter for taxes.
But in a non retirement account, the ETF is not
going to split off capital gains when they're buying and
selling and rebalancing the portfolio. And it can happen where

(38:41):
you have quarterly rebalancing and an actively managed ETF and
they still do it as exchanges of shares and not
as buys and sells like a mutual fund would. Mutual
fund each year, you're going to get the capital gains
each year for what they're buying and selling throughout the year.
And so if you're looking at a portfolio that has
a high turnover, it's an actively actively managed fund. One

(39:04):
that doesn't track the index very closely is going to
be an actively managed fund. One maybe in the large
cap space that has under fifty holdings is going to
be an actively managed fund. Let's just stick with mutual
fund versus ETF, and then we'll get to active versus
passive in a second. So the mutual fund spits off
capital gains, the ETF does not. So if you're in
a non retirement account, the ETF is going to win.

(39:27):
Typically the ETF's going to be cheaper, there's no question
about that. So the ETF is going to win there
as well. In fact, I would argue, even though there's
a place for mutual funds, and until most of these
companies come up with a exchange traded fund ETF equivalent,
there's going to be a place for him, because that's
the only way to get access to certain managers. But

(39:50):
let's talk about the cost though, because I think, and
I fault say as Susie Orman for something like this,
because I used to always hear her say this, the
cost is already out of the performance. The cost like
hold on the cost part though, and I get the
cost of anything one versus the other. But if you
have two a fund and an ETF, same manager, same company,

(40:15):
same everything, the ETF is gonna be cheaper. The ets
is gonna be cheaper. So there are situations where you
would pick solely based on costs. Okay, there are other
are situations, that's the situation. But if you're looking at
a mutual fund that is half a percent on an
institutional and another one that's an ETF that's half a percent, okay,

(40:38):
you don't have to you don't have to take that
half a percent off of performance. And I constantly have
people that ask me, now, what is it after the
fun fees? Well, I'd have to add it back in
and tell you what it is, because they wouldn't post
it on a daily they wouldn't post it anywhere on
a statement anywhere without that already out. So it goes

(40:59):
to the line of why performance can be better if
you have the underlying cost down. And it's one of
the reasons why if there is a choice to use
an ETF instead of a mutual fund, we're doing so.
We're already doing it, and good financial advisors should be.
There's very rarely a place in a portfolio for all
mutual funds anymore. There's just two. There's been too much

(41:20):
advancement in ETF replacements. There's a couple places where you
have an advantage to use a mutual fund and not
an ETF and I think Bond World is one of those.
But you're even starting to see these bond managers create
ETFs for their bond portfolios as well. And there's a
big advantage in cost if it's an apples to apples comparison.

(41:42):
I mean, I think the biggest thing when you're talking
about cost is the most difficult thing for investors is
to find a true apples to apples comparison. Okay, you
can't compare the s and P five hundred at three
basis points to a low cost active manager at a
half a percent cost, which is pretty low for an

(42:04):
active manager, but they're out there. But the only apples
to apples there is the actual performance. What is their
performance none of that fee versus the SMP's performance and
that of any fee. And also are they in the
same asset class. SMP five hundred is large cap blend
with a growth tilt. You can't compare that to a
active manager who invests solely in large value or divid

(42:25):
in paying stocks or whatever it might be, or small cap,
so you have to it's very difficult. You have to
make a apples to apples comparison. But another advantage ETFs
have over mutual funds. Is mutual funds, when they get redemptions,
have to hold cash, and the ETF does not have
to hold cash for those redemptions because it trades like
a stock. So it's just issuing more shares and retiring
shares when redemptions come, and so it doesn't need to

(42:48):
liquidate the portfolio. Yeah, so they can keep more of
your money invested. Now, let's shift we talked in the
middle of that a little bit, active versus passive. Passive
is you buy the index. There is no manager or
management team doing any kind of stock selection. So SMP
five hundred is the most widely used example. It is
the five hundred largest companies in the US stock market,

(43:13):
waited by size, waited by market cap. So the bigger
companies get more of your money, more of your waiting.
But there is no management. There's no management. You are
simply owning all five hundred stocks. Some passive portfolios own
it market cap weighted, some passive portfolios own it equally weighted,
where it's just one five hundred. But when we say passive,

(43:35):
it means passively managed. No one is in there buying
and selling based on earnings or market conditions. They're not
making a call, they're just they have a mandate and
they're just going to continue to do that. Now, you
could have some closet indexers where they're charging more like
an active manager, but they own three hundred stocks instead
of five hundred, and they look a lot like the
SMP five hundred, and the chances of them outperforming over

(43:57):
time are not very good. And and so that goes
to the discussion of of managers that beat. And you
always hear this that that X percent of mutual funds
don't beat. Well, it is true, but nobody invests in
those the ones that beat consistently. If it's a manager
or a management team or a fun family that beats consistently,

(44:20):
that's where all the money is. And so if you
look at the percentage of dollars that beats, it's pretty high.
It's more like sixty percent instead of the numbers that
they post, which is only twenty percent beat. Well, the
twenty percent that beat are the only twenty with any
significant amount of dollars in them in the first place. Well,
it's actually worse than that, but I'll get to those
numbers in a second. But the conclusion here ETF exchange

(44:46):
traded fund. If all things are equal, that's gonna win.
It's gonna be cheaper, it's gonna keep more of your
money invested, and it's gonna win out. Especially when you're
looking at passive where it's just a commodity, it's you know,
it's this cheaper than that one. If I'm buying an IND,
I should just buy the absolute cheapest one. On the
active management side, the ETF wins if there's if they're

(45:08):
the same. I don't care if it's fixed income because
typically it's going to be cheaper. If it's not cheaper
by the mutual fund, but typically it's going to be cheaper.
It's going to keep more of your money invested because
there's no cash needed for redemptions, and so it's going
to win if there's an equivalent. If you have situations
where you don't have access to a specific manager who
has an outstanding track record, you may still be minding

(45:30):
the mutual fund, which we do. But if you look
at just active active mutual funds in all the different
spaces that they are. The hardest place is US large
cap to outperform. It always has been for many, many years,
and so if you were going to index a portfolio,
that certainly would be the first place to start. Only

(45:52):
thirteen percent of US large cap portfolios outperform their benchmark.
But I'm reading a study here before or the show
and looking at Okay, what are some things that we
can look at that would increase our probability of out
performance on some active managers? How can we put some
active managers in the portfolio that might outperform? And three

(46:12):
different screens increase your odds dramatically, Brad. Number one downside capture.
When the market has a down year, do you outperform?
So that takes the number of funds that outperform and
increases it greatly. The second one is lower than average
fees compared to your peers. Okay, that increases the odds
of outperformance. And the third screen is the manager himself

(46:38):
or her has a large percentage of their net worth
invested in that fun kind of a novel idea are
you investing alongside of me? Well? I would think that
alone would improve the downside capture performance because they'll do
a better job if their own money is invested in
making sure that the down years are not as severe.
So I want to go through some of those numbers
on active versus passive and how you can increase your

(46:59):
odes of outperformance. We have to take our last pause.
You're listening to Money Sents Kevin and Brad Churriston. We'll
be right back. Welcome back to the show. We only
have about a minute left here. We got a little
bit ahead of ourselves there on our timing, but we're
talking about active and passive. I just want to close
it out with this. There were three screens in this
study that I looked at that improve your possibility of outperformance.
Outperforming in a down market lower than your peers on

(47:23):
fees and the manager themselves have a high percentage of ownership,
and you do take some of these categories into a
significantly high percentage of outperformance. Large caps still not great,
only fifty eight percent outperform when you put those three
screens on. But if you look at foreign large cap,
eighty seven percent outperform when you put those three screens on.
Global stock, which includes the US and the rest of

(47:45):
the world, ninety three percent outperform when you put those
three screens on. So emerging markets is over seventy percent
outperform when you put those screens on. So those three screens,
it's not just oh, passive is terrible. You know, no
one can outperform. There are certain spots of your portfolio
where it makes some sense to own some active management,

(48:05):
I think. And as time goes along, Brad, You're you're
gonna see more and more of these active managers go
the ETF route to keep costs low, and that's just
gonna benefit the individual investor as well. So if you
have any questions about your portfolio or when to own
ETFs and when to own mutual funds active versus passive,
give us a call throughout the week. Four nine eight
seven two zero zero sixty seven. Thanks for listening. We'll

(48:28):
talk to you next week. You've been listening to Money
since brought to you each week by Kristen Wealth Management Group.
To contact Dennis Brad or Kevin professionally called four one
nine eight seven two zero zero six seven or eight
hundred eight seven five seventeen eighty six. Their email address
is Kristenwealth at LPO dot com and their website is

(48:51):
Kristenwealth 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