After some great audience response to last week's show, we brought CFP Lynn Habrowski, of Great Lakes Wealth Planning, back today to take a deeper dive into different terms we often hear with regard to investing.
We start with the current market volatility we've seen in 2022 - what do the terms "bear market" and "bull market" mean? Lynn also explains why our current bear market environment correlates to the stimulus money the government printed to get us through COVID. Our current inflation is something we could see coming, and Lynn coached her clients to be prepared for it.
Lynn and Paula also explain index (and indices), asset allocation, and diversification. What do they all mean, and what's the difference between investing as a 20 year old and a 65 year old?
When it comes to investing, there are all kinds of different types of stocks to look at - growth stocks and value stocks. Small, mid, and large cap - and more. Lynn breaks these down.
We finish with a speed round, covering terms like portfolio, rate of return, interest, dividends, dollar cost averaging, capital gains, and capital losses.
It's good to have an understanding of these different financial terms, but it's more important to know why you're investing, and why you are using your current strategy.
To reach Lynn, give her a call at (586) 773-6800, or find her online at https://www.glwealthplanning.com/
For more info on the course or working with Paula, visit https://www.paulachristine.com/
Or send Paula an email: paula@paulachristine.com.
Lynn Habrowski is a certified financial planner with LPL Securities. Advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA SIPC
Paula: Welcome to Beyond the Paycheck. I'm Paula Christine. Living paycheck to paycheck and struggling to get ahead really sucks, but you can take control of your money and live the life that you dream about with know and commitment. I'll provide you with the knowledge. It's up to you to make the commitment. So last week we talked about basic investing with Lynn Habrowski,
I've asked her to join me again, to explain some of the terms you hear when you're discussing investing. So what the heck do they mean? And which ones should you commit to memory? Welcome back, Lynn.
Lynn: Well, Thanks for having me again. I really appreciate it. This was fun.
Paula: We got a lot of great response from our last episode.
And so we're gonna just dive deeper into maybe the terms.
Lynn: We can do that.
Paula: Okay. So I know we are currently experiencing a very volatile market. So we keep hearing the term bear market. So what does bear market really mean?
Lynn: Well, a bear market. It simply means that we're in a period of time in which the stock market has experienced a prolonged period of decline.
A bear market is typically described as a market that's dropped 20% or more. And during this period of time, investors tend to be pretty pessimistic. So we experienced a bear market just recently in the March of 2020, which was a direct result of the start of COVID. And this was one of the shortest bear markets that we've ever had on record.
Other bear markets that I can think of are the housing crisis during 2007 and 2008. And the dot com bubble of 2000.
Paula: Yeah. That one lasted, what, about three years?
Lynn: That was about three years. That was a tough one. That was all internet or technology related. And things got really, really expensive. The NASDAQ went from 1000 up to 5,000 and came right back down to 1000. It was, it was a crazy time.
Paula: Yeah, it was a really crazy time. On the opposite side, we have what is called a.
Lynn: It's called a bull market. This is a period in which assets and securities in general rise. So the last bull market that we had was just recently in 2021, just last year. And actually that was a direct result of the stimulus that was injected into the system to offset the effects of the shutting down of the economy during COVID.
Paula: So do you think that because of the stimulus that we are now in a bear market because of that?
Lynn: Yes. Long story short. Yes. And that's a story I've been conveying to our clients for the better part of the year. Now, we actually had the opportunity to warn our clients back in April of 2021. We saw what was coming, the federal reserve and the government made it very clear that they were gonna create this stimulus and basically stimulus is printing money and putting it into the economy. And we printed and put into the economy $4.5 trillion. And at the same time, we lowered interest rates virtually to zero, basically 0.25%. And that was to get the economy back on its feet. Well, when you do that, the implications down the road are worse. And so we knew we were gonna have a nice big run up there in 2021, but we'd have to pay the piper sooner or later.
So that basically gave us eight, ten, twelve months to call our clients, tell 'em what was going on, but then also to prepare them for what's going on right now in 2022 with inflation. And inflation is what's causing the markets to go down. We were ready for that.
Paula: Great. I'll have to become a client.
Lynn: Absolutely. I love to have you.
Paula: A few minutes ago, you said the S&P 500 index. So what is an index?
Lynn: Well, there are several indexes and they're also referred to as indices. They're often considered a benchmark that other investments are compared against. So an index is basically a collection that in general has something in common.
For example, the Dow is an index that contains 30 of the most traded stocks on the New York Stock Exchange. The S&P is an index containing 500 of the largest us companies. And the NASDAQ holds the tech stocks that did so well in 2021. So at last count there were approximately 5,000 indexes in the US and over 3 million stock indexes around the world.
Paula: Really? I didn't know that.
Lynn: Yeah. It's a bunch of different combinations of things. And so think about it, you know, there are so many stocks, there are so many bonds, but you can package those together in so many different ways. That's what creates these indexes.
Paula: Hmm. Interesting. Okay. So we'll talk about packaging, different stocks. So let's talk about that term asset allocation. What does that mean?
Lynn: So asset allocation is one of the most common aspects of finance and it simply refers to how well diversified an investor is. So does the investor have a nicely diversified portfolio that contains stocks, bonds, cash real estate?
And is that portfolio in line with their risk tolerance? And will that help the investors stay invested during the market ups and downs? Or does the investor have all of their money invested in one type of investment? Such as high risk tech stocks or cryptocurrency or at the other end of the spectrum, which is just as bad. Are they too conservative? Do they have too much cash or bonds. So proper asset allocations really important to letting and helping someone get through the ups and downs of the market.
Paula: So if you're looking at, 20 year old, my belief is always, if they can handle it, they should be invested pretty aggressively.
And the majority of their holdings being in stocks or mutual funds, versus somebody who's maybe 65. They should be a little bit more on the conservative side, cuz their objective has changed.
Lynn: It's kind of ironic because of inflation ,without going into a lot of detail, interest rates going up is bad for bonds and bond funds.
That's a long conversation. We'll save that for another day. Because interest rates are going up. It's all the more important, ironically, for young investors to just focus on the equity side, because if interest rates rise 2%, 3%, a bond portfolio, a long, dated bond portfolio, could be down double digits.
So that's where things are a little bit different than it was when you and I were just starting and investing. So it's a strange new world out there and inflation is causing that.
Paula: Since we just talked about inflation several times already. What is inflation?
Lynn: The official term. The correct term is the increase in the M2 money supply.
That's the technical term. Nobody uses that one. If you turn on television and listen to the talking heads or you listen to politicians, they'll tell you that inflation is the increase in the cost of goods. You know, the gas you pay, the food that you buy. That's the things that people feel in their pockets and in their day to day living.
The inflation that we're feeling right now is a direct result of the stimulus that we talked about because of COVID. The money printing that was done while the economy was shut down. And on top of that, simultaneously, inflation is also worse because of the supply chain issue. So it's sort of a double whammy right there.
Paula: So how does someone offset the risk of inflation?
Lynn: So there are ways to do it. Over the past 40 years, essentially interest rates have been going down. This is the world that we've been living in since the 1980s. Interest rates went from 15%, basically all the way down to the single digits, you know, 1%. And so the way we invested for those 40 years truly is completely different than the way that we need to be investing, going forward.
And so what we've been telling our clients in general is shift over from your growth stocks, to your value stocks. We can talk more about that. Shorten up your bonds, get down to the shorter end of the curve. One to three year bonds. If you can get out of bond funds altogether and invest in individual bonds. And also commodities outperform during inflation and a commodity is simply
the stuff you get out of the ground, you know, corn, wheat, oil, rubber, you name a thing that comes out of the ground and that's a commodity. So commodities for the past 40 years have not been a good investment. During deflation commodities don't perform well, but we are now transitioning into inflation.
And so now we're talking to our clients about commodities, something I've not done in the past, or it's not something that was beneficial to the clients, but things have changed.
Paula: You did say something that I wanna go back to about the growth versus value. What is that? And what is the difference?
Lynn: Okay. So a growth company tends to be a younger company, focused on growing their business. So when you're a growth investor, you're hoping to find that next Apple or Amazon, DocuSign, whatever it happens to be. These companies tend to pay little if any dividends, because they're using the cash to build their businesses, right?
They're hiring people. They're building factories. On the other hand, value companies are those big stalwart companies that are more established. They have solid fundamentals and solid earnings. They often pay a dividend and their value can be calculated based upon their price to earnings. I think of companies like JP Morgan, Exxon, Johnson and Johnson, Coca-Cola, you know, those big old, boring companies that nobody was interested in, in 2021.
Paula: There's the ones we should be looking at now should be value because of the inflation.
Lynn: Yeah. Essentially. So think of it this way. Young growing companies, companies that are trying to start out right now, need to borrow. They don't have a bunch of money coming in. They're starting out. They might be the greatest tech stock that's popular right now, Peloton or whatever it happens to be, but they have to borrow money.
And if you're gonna borrow money, you're gonna have to pay it at a higher interest rate and if you have to pay a higher interest rate, maybe you can't open up another factory or maybe you can't hire more people. So that's why when interest rates go up, growth companies go down. It's very important. So that's why you're gonna see this transition to value companies.
Companies that are already established. They don't need to borrow money. They got all kinds of money coming in.
Paula: Hmm. Interesting. Like you just overwhelm me with your knowledge. Seriously. I'm like, dumbfound it.
Lynn: My husband always says I'm a lot of fun at a cocktail
Paula: party. Yes, you are. I've been to a cocktail party with you. You are a lot of fun.
Lynn: Well, thank you.
Paula: And the two of us together are trouble. So I'm gonna throw out some quick terms for you. And so we're just gonna do, um, a speed round, just a quick definition on what these terms mean. Ready?
Lynn: I am ready.
Paula: Okay. Portfolio,
Lynn: I would call that a range of investments held by an individual.
Paula: Rate of return.
Lynn: So that would be the not gain or loss at an investment over a period of time. And it's usually a year.
Paula: Interest and dividends. Are they the same?
Lynn: You can think of them as the same thing, but interest is what you might get from your bank account. Dividend is a dividend that would be paid on a security, such as a stock.
And that's basically the money that investors paid for the use of their money.
Paula: Dollar cost averaging,
Lynn: Systematically investing money over an extended period of time.
Paula: So that's what most of us do in our 401k.
Lynn: That's exactly right. Yes.
Paula: Okay. Capital gain and capital loss.
Lynn: That would be the increase or the loss of the value of the asset when it is sold.
Paula: We did compounding last time. Do we wanna do it again?
Lynn: Yeah. Compounding is simply taking the interest that you earned, on an investment and reinvesting it. So it continues to grow.
Paula: Any other terms that you think we should know, Lynn?
Lynn: There are so many terms. It's not so much about terms right now.
That's important, really, but it's really about just understanding what you're doing, understanding your risk tolerance, understanding the new market that we're in. These are things that you really have to understand. And so we're here to help. If you need help with the definition of a term or, what's going on in the market or what's going on in your portfolio, then that's why we're here.
That's our sole focus is to help people get through and reach their goals.
Paula: Yeah. I encourage young people to talk to financial planners. Even if you don't have a lot of money, it's just getting the knowledge from an expert and helping them put you in the right direction from the beginning. So if anybody wants to reach out to you and how can they get ahold of you?
Lynn: They can call our office, (586) 773-6800. They can also search GL wealthplanning.com. That's our website or Google me, but we're happy to answer any questions.
Paula: You know what? You want people to Google you? Why don't you spell your last name for everybody?
Lynn: Oh, good. Thank you. H A B R O W S K I. First name's Lynn, L Y N N.
Paula: Thank you so much, Lynn. I've always enjoyed talking with you.
Lynn: Thank you.
Paula: Lynn has a disclosure that I need to say. So Lynn is a certified financial planner with LPL financial and the disclosure reads securities and advisory services offered through LPL financial, a registered investment advisor member FINRA, S I P C. Thanks again, Lynn.
Lynn: Thanks for having me. I really appreciate it. Great talking to you.
Paula: We'll have all of Lynn's contact information in the show notes. So thanks again, Lynn, for being here. So if anybody wants to reach out to me, you can email me at Paula@Paulachristine.com or check out my website, PaulaChristine.com.