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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your retirement questions. My name is Mike Decker along with David Franson over here, and we're gonna be taking your questions. Just text them right now to (913) 363-1234, and we'll take them one at a time. Again, that number, (913) 363-1234. Let's begin.
David:Hey, Mike. Why did the market go up after Iran was bombed? I thought even the potential for war would crash the market.
Mike:So this is a common idea, common belief, and it really stems with markets don't like uncertainty. But uncertainty of what? So let me just kind of build a little premise here, and then I'll go through a history of wars and how they've affected the markets. K? If there's an issue with Iran and Israel and The United States, and there's a war, and it's kinda like the the Afghan war and all of that, these forever wars that seem to be happening over and over again, how does that affect Facebook?
David:Yeah. Good question.
Mike:How does it affect Costco's ability to ship goods? Now you might say, well, oil could affect it, and that's true. Oil could affect energy as a source of energy infrastructure of traveling, shipping things out, and all of that. There's that argument, but that's not everything. So how does a conflict affect the market is really the quantitative approach to understanding what could happen.
Mike:How does the Iran and Israel conflict affect ChatGPT and its growth, and how NVIDIA is producing chips over in Taiwan? Do you see how sometimes we take fear generally speaking, pull it out of context, overgeneralize it, and then say the markets are gonna crash because of that that one thing? It has to be a significant war where countries are involved. And think of like a world war situation where we're sending over troops, we're losing our workforce. That's maybe when it might be more applicable.
Mike:But we associate all fear as in all reasons to hurt the market. It's not as clear as is that David, is that making sense? The cause versus the potential effect in the market?
David:Yeah. Sure. I think so. And talk a little bit more about uncertainty. Like, what are some examples of things that can cause uncertainty in the market?
Mike:Yeah. So different versions of uncertainty, you might think political risk. So if there's a significant new law that's gonna disrupt the industry, that might create an effect. If there's a new politician with a new agenda going with there with certain tax regulations or legal regulations, If the FTC is overhauled in certain things in the insurance world, if there's a significant update to how insurance products are allowed to be constructed, those are things that can infect specific industries. From a economic standpoint, so as large as possible, you've really got the four cornerstones.
Mike:I just wanna do a couple of them, but you've you've got free speech. K? Free speech is essential for the capitalistic society that anyone can essentially rebel and create their own company and kind of go against the status quo. We have to have that innovative, rebellious heart, which is what's fostered a lot of the American innovation and grown our economy. We have to have cheap energy.
Mike:If you don't have cheap energy, it's more expensive to keep the lights on the building, to transport goods, to drive to work, I mean, to heat our homes, all that. Energy affects everything that we do, and that could have been something that the Iranian and Israeli conflict created a market crash. But as of right now, Iran hasn't had a significant strike back. They haven't cut off the straight of I forget the name, but it's there's this passage where 40% or so of the global oil supply comes through, and if they cut that off, that would then have a legitimate reason to create concern in the markets, but they haven't done that. And so it doesn't matter until it matters.
Mike:The markets say it doesn't matter because they don't seem to want to do that. You have to create all these other considerations of this very complicated situation. So you've got first free speech. You've got then second, the understanding of cheap energy. The cheaper the energy is, the more money can go into the creation.
Mike:The more expensive it is, the less money you have to invest in creation or business and so on. Then you have to have effective money or money supply. When you think about the cost of money, there's a very delicate balance between inflation and affordable lending. The American economy is built on debt. Businesses borrow money to grow.
Mike:That's what it is. That's why the bond market is the largest market. The bond market is bigger than the stock market, the real estate market, the insurance market, or any other market. We are built on debt. Now despite what some would say, for business, these are calculated.
Mike:You borrow against it at a reasonable rate, not credit card rates, but at a reasonable rate from an institution like a big bank, and then your endeavors to take that money and be industrious with it and grow it at a better rate. That's called positive arbitrage. That's another pillar of an established growing economy. So if the Fed increases interest rates too much, that makes money more expensive, which makes it more difficult to borrow. Now that's kind of a simple explanation because you've got the Fed's interest rates.
Mike:So the Fed, when they increase interest rates, affects overnight lending, which affects banks and what banks will do. It's not the only metric that would affect the debt or bond market. You've also got, like, the ten year treasury, for example, and the Fed has no control over that. That is based on the market sentiment. What is the market willing to give for United States debt, for example?
Mike:So if the treasury comes out and says, we're gonna issue ten year treasuries today at 2%, the market would probably say, nope. We'll pass. And so then the treasury would say, okay. Well, how about 3%? Nope.
Mike:We'll pass. How about 4%? The market would say, can you do like four and a half? Okay. We need the money, so we're gonna issue this debt, so that has to be the rate.
Mike:So that's there's multiple components on here. But when you have a healthy inflation, so it's not too much, not too little, You have a healthy Fed rate, so banks can borrow money, which then bleeds into small business and the other parts of the economy, and you have a stable debt rating system, so that the ten year treasury and all that, that financial system has to be stable for the economy to grow. When it doesn't, it hurts. Look at the seventies. This is one of the biggest case studies for what we need to reflect on right now with the potential oil problem.
Mike:If Iran clogs up the oil, that could be an issue. It's not necessarily an issue. It could be an issue because there are other ways to generate oil or energy. But the point being is in the seventies, we had the oil embargo. Oil dried up from the Arab countries.
Mike:They were playing hard to get, and it created hyperinflation. That then hurt the economy, hyperinflation, then interest rates had to go up, and it was a very difficult situation. When you look at 1965 to 1975, there was no growth in the market. But even after 1975, we kinda limped along until 1990. So we need to understand that it doesn't matter until it matters.
Mike:We wanna be aware that it could matter, but we don't wanna try and time the market because when we try to time the market, we might miss those moments where there's incredible growth.
David:And we've had some good growth in the days after this the bombing. Right?
Mike:Well, yeah, the Monday after Iran was bombed, there was incredible growth in the market. The next day, there was incredible growth. The day after, there was incredible growth. So what is your system? And here's a great expression for everyone listening, whether you're managing on your own, whether you work with a financial adviser, whatever it is, put it as close to your heart as possible.
Mike:Investing is when you buy an investment, so think of a stock or an ETF or a mutual fund, and you forget about it for ten years. Trading is when you're concerned about the little changes, the ups and the downs in between. If you're not trading, you're you're investing. You're buying and holding for an extended period of time, then you should breeze past all of these conflicts. If you're trading, then, yeah, that should probably be your full time job.
Mike:Hopefully, you have a research team behind you, and you have a calculated principle based system that's gonna help you make decisions so you're not winging it.
David:That's really interesting. Trading versus investing. I like that.
Mike:I mean, how hard is it to buy a couple of stocks and then say, well, I don't really care until ten years from today? There's a good chance if you buy good quality companies that the price will be higher in the future. Nothing guaranteed to the market, but I have a list right here because I knew the question was coming. Here are different wars that are broken out and how they affected the market. Okay.
Mike:K. So first off, when Germany invaded France, 05/10/1940, that was a big deal. Mhmm. So we had a 26% drop in the market, and that drop roughly lasted two weeks. So even though there was a world war happening, we were still industrious as a country, and the, in this example, SPX or the S and P five hundred still was able to recover even though it was a time of war.
Mike:Now there are plenty of ups and downs along the way. There was a panic over the Axis expansion, but the sell off was really, two weeks. That's a big deal. Later on, Pearl Harbor happened. That was a 17% drop in the market, and the drop extended about five months or so, bottoming out in April 1942.
Mike:But that was five months, and then it started to recover. This wasn't a multiyear market drop. This was a moment in time. When North Korea invaded South Korea on 06/25/1950, the market impact is around 11% drop, and it lasted two to three weeks. David, if the market dropped two to three weeks and then it started to recover, would you be okay with that?
David:I think so.
Mike:Yeah. Hopefully, this is putting some context from market historical behavior and how it can help people. When the Suez crisis happened, 10/23/1956, there wasn't a significant impact in the market. It was a very big deal, the geopolitical ramifications of this, but the market, there was no significant impact. The Cuba missile crisis, that was a a big deal in 10/16/1962.
Mike:The market lost around 22 or so percent. That was from August to October of nineteen sixty two, eight weeks or so, peak to trough, top to bottom, but then it started to recover. Could you say, yeah. I've lost some money, but I'm willing to hold out until it recovers? Is your retirement plan, when you do need to take money out from your assets to generate income, could your long term investments, the stuff that's in the market, could you let it be for a long enough period of time to let it recover?
Mike:The Kennedy assassination, that was a two and a half, 3% drop intraday, as in during the day, but it recovered the next day.
David:Oh, wow.
Mike:That was a horrible moment in our history. Yeah. Very scary time.
David:I think it's one of those touch points that some people are like, I remember where I was on x date x date. That's one of those Yeah. Days they remember.
Mike:You would think that the assassination of a president Yeah. Would create a lot more panic than one day in the market.
David:I'm surprised.
Mike:But you have to understand, okay. We have systems if that happens. I hope it never happens.
David:Right.
Mike:I don't care what political party you are. That's not something that I think anyone really wants. No. But we have the system where the vice president steps in, congress is still intact. Like, the government still functions.
Mike:It's a horrible moment, but the government still functions, and the companies in the American economy are still operating. They're still having their doors open. So we need to have fear given context. The Gulf of Tonkin incident in 08/02/1964, no major impact in the market. The six day war that started in 06/05/1967, no significant market impact.
Mike:Global tensions were high, but there wasn't much of a financial contagion here. The Tet Offensive, 01/30/1968, markets declined moderately, you know, about 8% or so, lasted two months, and then it came back. The Penn Central bankruptcy, this is more of a geopolitical event, but that was a 30% crash, massive railroad bankruptcies. When you think about your safe stocks, isn't a railroad company supposed to be the most boring stock you buy?
David:It would seem so. Yeah.
Mike:So when a railroad company goes bankrupt, that can create panic. 30% in the market, seven months, but then it's able to recover. The Munich Olympic Terrorist Attacks. For those that remember this, 09/05/1972, no significant drop in the market, though that was a terror moment. Not ideal.
Mike:The Yom Kippur war or the oil crisis, 10/06/1973, that was a 45% drop in the market. Now consider the oil crisis. You know, earlier we were talking about how if Iran shuts off oil, that's when it could trigger a market sell off, because that affects energy. One of the four pillars of any great capitalistic growth economy. We have to have cheap energy.
Mike:So that's why, in my opinion, that was a 45% top to bottom around there or so, and twenty three months of difficulty. Wow. So we don't know what's gonna happen with Israel and Iran. We don't know what's gonna happen in this geopolitically very tense moment, but it doesn't matter until it matters. So going to cash may not be your best interest.
Mike:It's saying, hey. If the markets were gonna go down I talk about this in my book. Everyone that hasn't read my book, go on retireontime.com and download my book. I talk about how to handle these situations. You need to have a reservoir, some assets that are principal protected so that if the markets do go down 45% for twenty three months, you're able to bridge that gap by taking income out of a principal protected source so your other accounts have time to recover.
Mike:That's why we talk about the reservoir so much, is because we don't know, but we don't need to know. We just need to have a strategy for moment a and a strategy for moment b. Plan a, plan b. They're both focused on growth, but you can alternate between the two freely. The invasion of Panama, there's the Gulf War, the nine eleven terrorist attack, Iraq war begins February.
Mike:A lot of these, they happened, but they didn't lead to maybe as big of a market drop as you would expect and last as long as you would expect. When we talk about fear in the market, when we talk about, oh, I I was sure. Why are you sure? Take a step back and say, how does it actually affect the business that you're invested in? Many people are invested in Apple and Microsoft in one way or the other, whether it's in your ETF, whether it's in your mutual fund, whether it's you just bought the stock.
Mike:That's why they're some of the biggest companies in the world is because most people seem to have some exposure to them. How does this war or potential war or potential peace, and I hope it's peaceful from this point on, how does that affect their business, really? This is where you have to take a step back, remove emotions, and start measuring the impact from an inflationary standpoint. Is the government still intact? And does the business still have the ability to operate with free speech?
Mike:As in, they can still say what they want. They can still rebel against the status quo. They can still innovate. They can still challenge things. They can still be industrious in that sense.
Mike:So as we enter into a very politically tense moment, not just with Iran and Israel, but also with Russia and Ukraine. That's still a conflict. And other conflicts maybe aren't as big of a deal. I shouldn't say that. That aren't as common on the headlines.
Mike:They're still a big deal. There are many conflicts in Africa. There are many conflicts all over the world that are a big deal, but they're not getting the headlines that we see today. You have to ask yourself and remove that emotion. How does it affect the companies that you're invested in in your portfolio?
Mike:And hopefully, allows people to have a little bit more stability emotionally as we go through these difficult times. There will always be difficult times. Evil always exists. There's always conflict. That's just how the world is, unfortunately.
Mike:So we have to keep that straight head on our shoulders and understand how to proceed. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles if you're missing tax minimization opportunities that you may not even know exist.
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