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Winners and Losers Are Temporary | Series 7.5
Episode 54th April 2022 • Enjoy More 30s: Family Finance • Joseph P. Okaly
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Just how "every dog has its day", every area of the market has its time in the lead, and how to emotionally deal.

  • So one thing to remember is that most returns are due to what area of the market, what box, so to speak, your fund may be in. (06:10)
  • Rebalancing is basically taking the areas that did well, and selling them, and putting those funds into other areas that did not do well and buying them. (06:59)
  • I would again not recommend somebody trying to manage individual pieces and do this rebalancing because you have to be again completely emotionless about it, you have to have the ranges set and as soon as it hits the ranges, boom, you're rebalancing. (08:57)

Quote for the episode: "Goal statement: I better understand how to view my winners and how to view my losers." (01:37)

Securities offered through TFS Securities, Inc., and Advisory Services through TFS Advisory Services, an SEC Registered Investment Advisor Member FINRA/SIPC. TFS Securities, Inc., is located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Transcripts

Voiceover Audio:

Welcome to the Enjoy More 30s Family Finance

Voiceover Audio:

podcast. The only podcast dedicated to making life more

Voiceover Audio:

enjoyable for young families by hitting on the financial topics

Voiceover Audio:

that tend to weigh on us, stress us out, and distract our focus

Voiceover Audio:

from simply enjoying life.

Joseph Okaly:

Hello, and welcome here to the next episode of this

Joseph Okaly:

Raising Your Investment Mindset series. This series we're

Joseph Okaly:

wanting to help you to reframe how you may view the scary

Joseph Okaly:

unknown, that is investments, therefore be able to you know,

Joseph Okaly:

utilize them in a more constructive way to better reach

Joseph Okaly:

your goals and therefore make life more enjoyable. That would

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be great, right?

Joseph Okaly:

So, as always, if you like what you're hearing, please make sure

Joseph Okaly:

to subscribe or follow us on Apple podcasts or wherever you

Joseph Okaly:

listen. Clicking the stars, leaving the reviews, it really

Joseph Okaly:

really helps us reach the quite literally millions of other

Joseph Okaly:

young families out there that are just like you.

Joseph Okaly:

Last week, we discussed how our perceptions are based on what we

Joseph Okaly:

hear and what we see. And when it comes to investments,

Joseph Okaly:

Hollywood tends to only put out very negative ones, which can

Joseph Okaly:

increase our uneasiness, decrease our likelihood of

Joseph Okaly:

taking the steps we need to through investments or advice.

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So if you haven't checked out that episode, yet, you

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definitely want to do that soon.

Joseph Okaly:

Today's episode is titled Winners and Losers Are

Joseph Okaly:

Temporary, where we're going to cover just how like "every dog

Joseph Okaly:

has its day", every area of the market tends to have its time in

Joseph Okaly:

the lead, and how to emotionally make the most of that fact. The

Joseph Okaly:

goal for today's episode, so what we've been saying is the if

Joseph Okaly:

you can say this at the end of the episode, then you have

Joseph Okaly:

succeeded statement is "I better understand how to view my

Joseph Okaly:

winners and how to view my losers. So I better understand

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how to view my winners and to view my losers."

Joseph Okaly:

Now horse racing is something that a lot of people enjoy. It

Joseph Okaly:

is not at all my thing. Gambling in general is not something that

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I really partake in something that I find enjoyment in. That's

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just me, which I mean, as a financial advisor, that's

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probably a good thing. You don't probably want a financial

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advisor that loves gambling. But when it comes to the horse

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racing Triple Crown event, I always find myself somehow or

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another, you know, at least in front of a television for one or

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two of the races because I'm the weird one and most people like

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to actually watch this stuff. So let's say that I'm watching the,

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you know, second or third race in the Triple Crown series. I

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don't know what they're called but yeah, I know there's three

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of them. More times than not a horse that is the one that you

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know, won the prior round is most likely going to be the one

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that's the favorite for the next race. Right? You know, I mean,

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if they were faster than everybody last time, why

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wouldn't they be the fastest this time around, right? So it's

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logical for our minds to go in that way. If something worked

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for me last time, it's probably going to work for me the next

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time around, right? While logical, while very common

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sense, when it comes to investing this prebuilt human

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tendency winds up hurting us long term, many more times than

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it helps us. And as we've talked about before, there are all

Joseph Okaly:

different areas of the market. There are large companies, small

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companies, US companies, foreign companies, growth companies,

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value companies, government bonds, high yield bonds, real

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estate. So each one of these areas tends to have times where

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it does really well and other times where it does poorly

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compared to the other areas of the market. Real estate is the

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most recent example of this that we just went through. In 2021

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the index went up over 45%. In 2020, it went down over 11%. So

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our human tendency would be after 2020 let's sell this, it

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went down 11%. Get me out of there, it went down, lost money.

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Let's try you know something else. That would be the normal

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logical human reaction, right? In 2021, though, it would have

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produced the exact opposite action, hey, this is the best

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area ever let me please put more money into real estate funds. So

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far this year, as of January 31, 2022, the real estate index is

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down around 6.5 percent. So as you can see, our pre built human

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tendency would have had us pull money out after it went down 12%

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or so in 2020. So what we would have missed out on going up 45%.

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But then that same tendency would have said oh wow, real

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estate's great again, let me put money back into it after 2021

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after it went up 45%, after we missed it, only to see it then

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decrease so far this year through the end of January in

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2022 by 6.5 percent.

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So we see the problem, right? It's pretty easy. It's pretty

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apparent. People tend to do the wrong thing because they're

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following what just happened thinking that what just happened

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is an indicator of what is going to happen next. Now, what's the

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solution, right? The first part of this is, in my opinion, and

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most opinions I've seen, is to try not to guess what's going to

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do well or not. So this is called market timing, trying to

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guess what areas we think are going to do well. There is no

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study that I've ever heard of or found that says, "This is anyhow

Joseph Okaly:

plausible in the long term." I mean, if there was someone out

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there who guessed right every single time, every single year,

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I'm pretty sure that everybody's money would be with them by now,

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right? They are knowing what they're doing, if they guess,

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right, every single year. And the last one I've ever heard

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that said they could do this, I think was Bernie Madoff. And

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that didn't exactly work out too well. So I would be very, very

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skeptical about anybody out there who is saying that they

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can do that kind of thing.

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Winners and losers, when it comes to different areas of the

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market have been temporary when you look back at history.

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Emotionally though, selling something that just went up a

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bunch is not easy. So one thing to remember is that most returns

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are due to what area of the market, what box, so to speak,

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your fund may be in. So ABC large growth fund and DEF large

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growth fund will likely have similar returns very similar

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returns, just because they are in the same box, the same area

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of the market. This can sometimes help us remove that

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emotional attachment because it's not that we stumbled upon

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some magical mythical fund, it's we happen to be in the right

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broad area, the right box of the market, which probably just

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happened to do well in that particular year.

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So in our practical application of this, we do something called

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rebalancing. Rebalancing is basically taking the areas that

Joseph Okaly:

did well, and selling them, and putting those funds into other

Joseph Okaly:

areas that did not do well and buying them. This can be done on

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an annual basis, quarterly, monthly, even weekly, depending

Joseph Okaly:

on the program. So for an example to kind of help us

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understand what this means, if large growth, that box, is

Joseph Okaly:

supposed to be 10% of our portfolio, but it does so well

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compared to everything else that it goes up to 15% now, there's

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too much now in that piece. Rebalancing says, I sell that

Joseph Okaly:

extra 5%, when it's high, and invest it into another area of

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the portfolio that is below where it is supposed to be when

Joseph Okaly:

it's lower. Now, for most ordinary investors, this is not

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something I would recommend doing on your own, as you need

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to build out those ranges of how far different areas can stray

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and may be very, you know, difficult, and you have to be

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diligent about it. And you have to be emotionless about it when

Joseph Okaly:

this is going on. And that's a tall task for anyone. If you saw

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in that same example, large growth did so well that now it's

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15% of the portfolio, human tendency says "Well, maybe it's

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going to go a little bit higher. Maybe it's going to go all the

Joseph Okaly:

way up to 20% of the portfolio, I don't want to get out of it

Joseph Okaly:

now." But that's the mentality where you know, you're not going

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to pull out of it until it starts going down. And that is

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when you kind of missed the high more times than not. So this

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rebalancing is what helps us do a diversified approach.

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So when we use an advisor who uses rebalancing, you know, they

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can help us with this. And obviously, that's my first

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choice, because I'm biased, I am an advisor, but if you're doing

Joseph Okaly:

on your own, or through a work plan, or you're using an

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allocation or target date fund, you know, these are things that

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are built in when it's an allocation or target date fund.

Joseph Okaly:

I would again not recommend somebody trying to manage

Joseph Okaly:

individual pieces and do this rebalancing because you have to

Joseph Okaly:

be again completely emotionless about it, you have to have the

Joseph Okaly:

ranges set and as soon as it hits the ranges, boom, you're

Joseph Okaly:

rebalancing. Or some plans allow you to do it automatically on an

Joseph Okaly:

annual or quarter quarterly basis. So it needs to be

Joseph Okaly:

something that's automated and if you're looking at it, and

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you're saying, "Oh, I'll remember to do it", you're not

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going to remember to do it. If you're going to say "I'm going

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to just wait for it to go a little bit higher", you're going

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to wind up missing those kinds of opportunities when it is

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high, and it's going to at some point start going down because

Joseph Okaly:

most people won't want to sell it until they see it go down

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significantly. It's just it's just the truth of it. That's

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human nature. That's the emotional part. So when we have

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an advisor, where we have funds, like I said, the target date or

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the allocation funds where that manager is built in internally,

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now we're taking our emotions out of the equation. As we get

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to the end of this episode let's circle back around to the goal

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statement for today if you can now say "I better understand how

Joseph Okaly:

to view my winners and my losers", then you have succeeded

Joseph Okaly:

in the main takeaway from today.

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So thank you for tuning in today and join us for next week's

Joseph Okaly:

episode called, We Can All Save Another $100 where we're going

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to cover just how powerful a little bit more, just a little

Joseph Okaly:

bit more can be when we're young. Overall, if you're able

Joseph Okaly:

to implement what we cover today, then that's fantastic.

Joseph Okaly:

You have less to worry about that before and you can focus

Joseph Okaly:

more just an enjoying life. That's the whole goal. If you're

Joseph Okaly:

wanting help with these things, though, where you have questions

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you need help in clarifying, check out the ASK JOE section on

Joseph Okaly:

the show's website EnjoyMore30s, that's EnjoyMore30s.com. You can

Joseph Okaly:

also connect with me directly by visiting my wealth management

Joseph Okaly:

firm New Horizons Wealth Management at nhwmllc.com. Until

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next week, thanks for joining me today and I look forward to

Joseph Okaly:

connecting with you all again soon.

Voiceover Audio:

The conversations on this show are

Voiceover Audio:

Joe's opinions and provided for general information purposes

Voiceover Audio:

only. They do not constitute accounting, legal, tax, or other

Voiceover Audio:

professional advice for your specific situation. You should

Voiceover Audio:

always seek appropriate advice from a financial advisor,

Voiceover Audio:

accountant, lawyer, or other professional before acting upon

Voiceover Audio:

any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS Securities, Inc., and TFS Advisory Services an SEC

Voiceover Audio:

Registered Investment Advisor Member FINRA/SIPC.

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