If we learn about normal fluctuations ahead of time, then we'll be better prepared to cope with those inevitable market downs.

• Goal statement: "I now better understand how much up and down is normal for investments so I'm better prepared to not freak out when it does." (01:50)
• ...he [Dr. Markowitz] could now mathematically mix together what should produce the most return for the level of risk someone was willing to take, which is fantastic, right? (06:14)
• So when you get to a year with this portfolio goes down 12%, you could say that is actually normal. This should happen once roughly out of every 10 to 11 years. (08:47)

Quote for the episode: "And as the time period gets shorter, that range of possible returns increases. So the range for what can happen in any one month is much more than what can happen over say a 15 year period of time." (09:19)

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.

Welcome to the Enjoy More 30s Family Finance

podcast. The only podcast dedicated to making life more

enjoyable for young families by hitting on the financial topics

Hello, and welcome once again to the next episode

of this Raising Your Investment Mindset series. This series

we're trying to help you reframe how you may view the scary word

that is investments, and therefore be able to utilize

them in a more constructive way, a better way to reach your goals

and make life more enjoyable. That is the point of all this.

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

to subscribe, follow us on Apple podcasts, wherever you may

listen. The stars, the reviews, they help us reach many, many,

many more young families out there that are just like you.

Last week, we discussed how you probably don't just own "the

market". Going through how what they talk about on TV really

only represents the 500 largest US companies, not any bonds, not

any foreign stocks, not small companies, not real estate, all

those things that you would have as a part of a diversified

portfolio. So don't get too worked up either way, because

what they say on TV is probably not what you actually have. So

if you haven't checked out that episode yet, definitely do that

soon.

Today's episode is titled Emotionally Abnormal,

Statistically Normal and Healthy Cookies, where we're going to

cover just how much investments can go up or down over the short

term, and still haven't be normal from a statistical point

of view despite, you know, honestly, it feeling very

abnormal from an emotional point of view. The goal for today's

episode then, so the if you can say this at the end of the

episode, then you have succeeded statement is "I now better

understand how much up and down is normal for investments so I'm

better prepared to not freak out when it does." Again, "I now

better understand how much up and down is normal for

investments so I'm better prepared to not freak out when

it does."

When I was on my honeymoon, one of the things I tried was scuba

diving. I didn't go out, you know, into the ocean but the

hotel that we stayed at had this cool trial class included where

you could just go into the pool to see if you wanted to expand

it to a paid excursion. I thought I would just completely

love it. I love the ocean. I love the sea, swimming

underwater and not needing to come up for air and seeing all

this cool stuff that's going on down there. That seemed like it

would be right up my alley. I quickly found out though, that

it is not the easiest thing to do. You don't just jump right

into it. The equipment, it's big, it's heavy. And most of

all, when you go under the water, you can't swim like

normal. You know, I thought that I could just like swim around

like I was holding my breath. And then it'd be all kind of the

same thing just with oxygen attached to me. But you don't

get a supply of air like you do above the water. You need to

move slowly, breathe slowly, be more intentional with your

movements under there. I felt like I was being suffocated like

someone was trying to kill me under the water. So as you could

guess I did not pursue the excursion. But what I did learn

what normal was in this case when it came to scuba diving.

And in speaking with very experienced divers since then,

there is a ton of training that goes into it because

encountering difficulties or obstacles that is normal. When

it comes to scuba diving, there is a reason scuba diving is a

question on a life insurance application. You need to know

what normal is and what to do under the water when there is a

problem ahead of time, so that you're not going to panic,

you're not going to get emotional, and you're not going

to quickly run out of air as a result, when you almost

inevitably come across some kind of problem in your entire scuba

diving career.

When it comes to investments, it is hard to learn what normal is.

Every movement in the market makes the evening news, right?

They provide apparent reasoning at least for why it did what it

did. And every time it goes down, they talk about it a

little louder, a little louder, a little longer. And it makes it

feel you know, abnormal. So what is normal then when it comes to

your investments? If you're using a diversified so again,

fancy way of saying spread out statistical or mathematical

based portfolio, you can actually use math to say what is

normal. You know, aka what should happen the majority of

the time. The fancy intimidating word for this is Modern

Portfolio Theory and it was developed by a guy named Dr.

Harry Markowitz. And he basically just said we can use

statistics to build an investment portfolio. Stocks,

for example, they go up more long term than bonds, but they

also have a lot more ups and downs in the short term. So risk

along the way. So ups and downs are volatility, that's just a

way of saying risk. They also have a certain amount of

correlation, which is a fancy way of saying how they move

compared to each other. So the majority of the time when stocks

go down, bonds, they go up.

So like for my kids that Avery and Noah are very highly

correlated, anything that he does know within also wants to

do, there's a high degree of correlation there. They want to

do the same thing. Whereas stocks and bonds have a negative

correlation. When stocks go up, bonds tend to go down. He then

broke it down into all these different segments, or what they

call asset classes. So small companies would be a segment an

asset class, large companies would be a segment an asset

class, foreign companies, real estate, US bonds, foreign bonds,

so you can go out to 20 different little segments or

asset classes, and each one of these different boxes,

statistically moves a little bit different. Their long term

return is a little different. Their ups and downs in the short

term are a little different. How they move compared to the other

boxes is a little bit different. But with all this information,

he could now mathematically mix together what should produce the

most return for the level of risk someone was willing to

take, which is fantastic, right?

So you know how people are always trying to make healthy

food that also tastes great, you know, new, no fat, no

preservative, no sugar, all organic cookies, which always

tastes like garbage, of course. But they are basically trying to

maximize the return, so in this case, the return is the

enjoyment of eating the cookie, that pleasure is the return,

while taking on the least amount of risk. So in this case, the

least amount of unhealthy ingredients. We want the most

delicious flavor with the least amount of unhealthy ingredients.

So the same kind of thing is true here. If someone is a

moderate risk tolerance, we want to try and get the most return

for that level of risk that they are willing to take. So let's

just say a portfolio that's mixed together has a 10% long

term expected return. That's what the math says. And a risk

number, which is called standard deviation, of 12%. Now this

second number you may have seen on sheets before, and it's the

number that normally gets ignored. Because you know,

"what's standard deviation, why do I care, I want to look at the

return." But this second piece is actually what allows us to

determine what normal is. Normal means that in any one year, the

range of possible returns that should happen the majority of

the time should be anywhere from positive 22% in this example. So

10% long term return plus the 12%, standard deviation, and

negative 2%. So 10% positive return minus the 12% standard

deviation. So basically, two out of every three years should fall

within this range, meaning falling outside of this range

once every three years is also normal. So that range is two out

of three years, it should happen one out of three years, it does

not happen, right? That would be normal. Now, if you extend this

out to two standard deviations, so we do 10 plus 24, and 10

minus 24. Now this range, which is positive 34% and negative

14%, this is what should happen 95% of the time statistically.

Again, this is what normal is so nine and a half out of 10 years,

it should fall within this range.

So when you get to a year with this portfolio goes down 12%,

you could say that is actually normal. This should happen once

roughly out of every 10 to 11 years. Now do you want your

account to go down 12%? Of course not. Nobody wants that.

But if we look at what normal is ahead of time, then we can be

better prepared to cope with those downs emotionally, when

they do eventually happen. We don't want to freak out

underwater like the scuba diver and run out of air. And as the

time period gets shorter, that range of possible returns

increases. So the range for what can happen in any one month is

much more than what can happen over say a 15 year period of

time. If we go all the way back to 1970 and we look at that

period of time from 1970 to today, March of 2022, the

largest single monthly decline in the market was over 21%. It

went down over 21% in just one month. The worst 15 year period,

though ever over that same time period was positive 3.7%.

So circling back around to that goal statement for today, you

could see how much how important the time element is and how

important is to feel like I understand now what normal is.

So that goal statement is "I now better understand how much up

and down is normal for investments, whether that be

short term or long term, so I'm better prepared to not freak

out" when it does, then if you can say that you have succeeded

in the goal for today.

Thanks, as always, for tuning in today and join us for next

week's episode called Advice Should Trump Fees, The 3% Study

where we're going to review in my opinion, how advice should be

viewed compared to the fees for that advice and what studies

have supported in our growingly you know, fee focused society.

Overall, if you are able to implement what we covered today,

fantastic. You're better off than you were before. You can

focus more on enjoying life. If you are wanting help though with

these things, have questions you want help in clarifying all you

have to do is head on over to our website. EnjoyMore30s.com,

EnjoyMore30s.com. Click on that Ask Joe and you can click

connect with me excuse me, then. You can also connect with me

directly if it's easier through my wealth management firm New

Horizons Wealth Management at nhwmllc.com. Until next week,

thanks for joining me today and I look forward to connecting

with you again soon.

The conversations on this show are

Joe's opinions and provided for general information purposes

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

professional advice for your specific situation. You should

always seek appropriate advice from a financial advisor,

accountant, lawyer, or other professional before acting upon

any content or information found here first. Joe is affiliated

with New Horizons Wealth Management LLC, a branch office

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

Registered Investment Advisor Member FINRA/SIPC.