Market Volatility and Investor Behavior with John Chidwick

If you could have a candid conversation with financial advisors who have decades of experience helping professionals, business owners, and families just like yours plan for their financial future, what questions would you ask? I'm Chip Munn, financial advisor, author, host, and CEO of Signature Wealth Group. For decades, my partners and advisory teams have had the opportunity to answer the tough questions for hundreds of our clients. Now we want to do the same for you. On the Signature Life Show, you'll hear answers to your burning and most perplexing finance, investing, and retirement questions from our Chief Investment Officer, Senior Wealth Advisors, Certified Financial Planners, and more. We aren't just financial advisors. We're parents, children, community leaders, and entrepreneurs with a passion for helping empower our clients to live life intentionally, what we call a Signature Life. John Tate, what's up, man?

Chip Munn, it's another Friday, and it is a great Friday because we have a special guest on today.

We don't just have a special guest, we have the special guest, our most listened to episode, uh, repeat offender, John Chidwick. John, welcome to the show.

Thank you, thank you, thank you for having me here, and look forward to another good conversation with you and John.

Well, me too. And John is one of our partners in Charlotte, North Carolina, and comes and brings us some big city knowledge. So we're excited to have John. And for the purposes of today's show, I'm just going to call you Chadwick, if that's okay. That'll be fine. Yeah. Just so that too many Johns in one place. Whoa, whoa.

Don't call me Chadwick. And I'm okay. I'm okay with Chadwick. Chadwick.

I would never dream of that.

But it would be fun. I'm going to save that one for some time we're in public.

I was thinking of referring to him as JC, but that might get confusing with another deity, so we'll just keep it Chidwick.

We'll just go with Chidwick. Chidwick's safe. So Chidwick and I are sharing a similar experience. We've recently gone through lots of graduations, and so it's one of those things that we're kind of limping into these summertime episodes just from the exhaustion of travel and John, I gotta ask, at your recent daughter's graduation, did you cry a little bit?

I absolutely did cry a little bit, and I wasn't just the only one. I would say that it was a stadium— we were in the basketball arena, Thompson Arena in Tennessee— and most everyone was doing about the same thing. But it was a fantastic celebration and a great day, so all good here.

Well, truth be told, I may have teared up a little bit too. So I completely understand. And again, it was your daughter graduating. I don't have any of those, but fathers and daughters, it's a special thing. And you weren't nearly as embarrassed about that as I might have hoped.

So I'm not embarrassed about it one bit.

Well, one of the things that I found in going through my 3 graduations is that, quite frankly, my emotions could be an absolute wreck.. And from one day to another, because we're beginning to face the concept of empty nesting and some of those things, and maybe someday we'll do an episode on that. But what I noticed was that my emotions were being kind of whipsawed one day or another. Sometimes you were really excited and happy, and other times you were kind of sad and kind of wondering what things were going to be like. And it reminds me a lot, John, of kind of what we've seen in the market over the last few months. There's been a lot of volatility.

Chip Munn: There has been a lot of volatility. One of the most frequent phrases I hear quoted around times of volatility is that there's the Chinese or the Japanese language has one word that means both crisis and opportunity. I looked this up, and I'd used it before in some settings, so I had to look it up and see where it originated. It turns out this was a speech delivered by President John F. Kennedy in Indianapolis in 1959. He basically said the Chinese used Two brush strokes write the word crisis. One stroke stands for danger, the other for opportunity. That's where that came from. It's actually false though. It's not actually true. The language written in Chinese does not mean that. So I've actually used that before. It is a real saying. It's just not a true one. But volatility, when we look at it, it does offer opportunity to those who are patient. You have to wade through the volatility. You have to look through it to the other side and have faith that what you are doing is either backed up by research, and I know Chidwick's got that in spades, and based in reality and a reality that can carry forward through the times of rapid ups, rapid downs, unpredictability. And usually people view the word volatility with a negative connotation, meaning more down than up, especially the worst kind of down.

Well, Chip Munn, I was going to ask you, what's your take on volatility in general? And maybe even take it a little step further into more specifically what we've seen over the last few months in the market.

I was just going to comment on John's original comment, but I'm looking at a Warren Buffett quote, which is up on my screen, which says, "The true investor welcomes volatility and wildly fluctuating markets mean that irrationally low prices will periodically be attached to solid businesses." And at the end of the day, we're seeing that right now in a big way. Just from last Friday, I was sitting again, waiting for graduation and looking at the market and we're up 7% just since last Friday. And so the markets are really, you know, moving up and down, but it's totally normal. My take, one of the best slides comes from a JP Morgan presentation, but it shows the 10% pullbacks in any given year. And it goes back and it shows 32 out of the last 42 years. You know, you've had big down moves of 5% or 10%. And I really went back and just charted like the last 5 years. And you, you've had, you know, a 19% pullback this year. COVID, you had a 34% pullback. 2018, you had 20% pullback. So it's very common. And 10% pullbacks happen usually one time a year if you go back the last 50 years. So again, just gives you a good buying opportunity to go in and look at great companies like JP Morgan, like Bank of America, like Lowe's, like Home Depot, like Amazon being down 40% or 33%. As of yesterday, a 10% move back in the last 2 days. It just creates opportunity, again, to look at some of the best companies in our world. And so without it, you wouldn't have that opportunity. And that's what the returns of stocks of 10% or 12%, whatever timeframe you want to look at, the cost of that return is dealing with the volatility of the ups and downs.

Yeah. And I think that, of course, important to note, while we may talk about individual stocks or something, companies, On the show, these aren't recommendations. These are for educational purposes only. I'll put on my compliance hat for just a minute.

I always get snagged for compliance.

Hey, listen, you're saying great things. I just want to make sure we don't go to jail. So I think what you said, John, is absolutely true. In that Buffett quote, the volatility is the reason why every now and then you get a really good price on something. And so, John, I think that your comment about volatility not being only in one direction is also important. I mean, the reason that we have greater than risk-free returns is because there's volatility. Upside volatility is what we want. The price we pay, to Chidwick's point, is the fact that it also comes with downside volatility sometimes. So, Tate, what's your perspective in terms of when you think about why some stocks are more volatile.

Some stocks can be more volatile. We usually look at small-cap stocks as the part of equities that are the most volatile. If you think about those, and they're still relatively large companies, there are obviously small business owners that aren't counted in this analysis, but small-cap stocks are the smallest part of publicly traded companies. They usually don't pay dividends. They usually have to borrow money in order to expand and grow. And while they're in growth mode, obviously when things are good, the stock price will go up. But when you think about interest rates rising and the cost of capital for them increasing over time, it becomes more difficult for them to deploy capital and grow in the same way as they could when interest rates are low. So right now you're seeing that sliver of the equity market being more volatile than, say, a large-cap company that is well-capitalized, that has much slower growth. It's been around a long time. Established business. They probably don't need to borrow all that much money. If they do, they can usually get a good rate because they have a solid debt rating, a good balance sheet. So the stocks that are the least volatile in times like this are the ones that pay dividends and that we don't really have to worry about whether the economic ups and downs will cause them to go out of business. And so if you're looking to reduce volatility in the portfolio, then usually we look to large-cap stocks to do that.

Chip, what are some of the things you think are really kind of causing some of the volatility these days? I know that one of the things that John put in our pre-show research was an interesting fact. If you look at back years ago when the Dow was at 10,000, a 1% swing was 100 points. But when the Dow hits 30,000, just a 1% swing is 300 points. And some of those numbers can kind of throw you off if all you're doing is looking at the raw kind of absolute number. What are some of the things though, Chidwick, that you think are kind of causing some of the volatility?

You got a whole bunch of different things going on. You got Ukraine and the war and uncertainty there. You got gas prices spiking, you got inflation in all different areas that are, that are going up, which is going to slow down growth a little bit. You got the Fed raising interest rates and you had a really, really, really great 10-year run. And you got to go back to 1990 to 2000 to rival the returns that we just saw in the last 10 years. And a lot of that was in very few names as well. You look at the top stocks in the NASDAQ, 6 names make up 40% of the entire NASDAQ. You look at those 5 names of those 6 that make up the top 22% of the S&P 500 have gotten hit for the first time in quite some time. I don't remember any of them that all at once getting hit to the tune of 15+ percent, which is causing the indexes to break a little bit. And then people are looking at their statements and they're looking at what's going on around the world right now, and they're just a little uneasy. But over that same timeframe of 2002 to 2021, the average investor can't handle the ups and downs of the market and doing it themselves. The average investor has only performed at 3.6% when stocks have performed at roughly 10%. And again, I'm throwing out numbers here, but the reality is I'm looking at the slide and JP Morgan is 3.6% average investor and a diversified portfolio has done 7.4%. So So you just need to be patient and you need to be diversified and stick with it and look at the surroundings of these great companies and look at how well structured they are today.

Well, and one of the conversations I had recently with a client involved the fact that on one day we're down 800 points on the Dow and the next day we're up 650. And in terms of percentages, and I can't do the math, 2.5% down and 1.5% up, and nothing changed with the broad market. Over 24 hours. And a lot of it just has to do with what you're kind of referring to, which is emotion. And part of the differential in that slide that you're referring to between average investor returns— and I think that's kind of more of a do-it-yourself statistic— but average investor returns versus a balanced portfolio held over time is the fact that it's very easy when you're kind of doing this thing by yourself to let your emotion get the best of you, get out, try to get back in and deal with that. And it can be really tough. And historically speaking, you know, I know that, Tate, we talk a good bit about the emotional roller coaster. We've had that conversation with Mitchell on here before. And when you're riding the roller coaster by yourself, it's easy just to want to get off. If you can get off, even if it's at a low point, you just want out. And I think that we do From time to time, we have to have that conversation with clients. Thankfully, over the years, it hadn't been as much, but yeah, again, volatility brings that about. Tate, what do you see as some of the main factors these days?

There's a couple things. You hear a lot about the VIX and how it measures fear, and the VIX is a measure of the stock market's expectation of volatility based on S&P 500 index options. And so usually a reading of 40 or above signals a high amount of fear in the market. And so usually that coincides with high volatility, high frequency of ups and downs in the market. And we haven't really had to talk about it before this year, but I didn't realize there was also a measure of bond volatility out there. Here's a did you know question for the day. Do either of you know what that is called? So we've got the stock volatility as the VIX. Do we know what the bond volatility measure is?

I don't. All right. Yeah. You got to—

It's a teaching moment.

So it's called MOVE, M-O-V-E. And what that stands for is the Merrill Lynch Option Volatility Estimate. That is an index, and it's a yield curve weighted index of normalized implied volatility on treasury options. And so if you look at that, a measure of high bond volatility is any reading over 130. And we actually had two readings over 130 so far this year. We had a reading of 140, I think, back in February, and another one at 135 just a few months ago. And so it's not something we've had to talk about before, but bonds have been extremely volatile this year as well. And usually, That's where a financial advisor will go in the portfolio's asset allocation to reduce volatility. So we certainly didn't get as much of that this year out of bonds as we would like, but those are two kind of indicators that you can use and go to look for either on Yahoo Finance or wherever you get your stock news, and you can pull up a chart, and sometimes pictures are better than words. And so the other way to explain volatility is to use standard deviation, which I remember my CFP teacher telling me it's something you either get or you don't. And if you don't get it, you just pick B on your multiple choice, the CFP exam, and take your chances because trying to calculate standard deviation, it takes like 10 minutes to do it with a calculator. And if you get it wrong, you've just wasted 10 minutes on the test. But going back to time horizon, I think time horizon is really something when you think about that feel of, "I need to get out. I need to do something with the portfolio." It's interesting to remember that time horizon in the short term, it's virtually impossible to predict exactly either the top or the bottom of the market, what the market's going to do in a day, a week, a month. I mean, we try, certainly we try, but it's impossible. It's like flip of a coin or worse. And bad timing can further exacerbate losses during volatile times. And so what you want to remind everybody of is that if you simply just hold onto what you've got and you have a financial advisor, You have a plan that you trust. You have a Signature Life plan that you trust. Holding your position for 1 year, just for 12 months without making any kind of take money out of the market and hold it in cash kind of moves, 76% of the time, or almost 3 out of 4 times, you're going to end the year up versus where you started. And so if you do that over a 5-year period, you end that 5-year period up 9 times out of 10. So sometimes just sticking it out, closing your eyes. I mean, I wish we could almost send our statements out with either a smiley face, which means you can open it, or a frowny face, which means don't open it and just sit tight. I think just taking that time horizon, a more long-term approach to investing can certainly help people avoid some of the pitfalls of trying to think they need to do something with the money in the portfolio.

Well, and sometimes you have to do something with the money in the portfolio, right? Because sometimes you're going to have to take distributions. And one of the things— and I've had this conversation a fair amount lately— is the one thing about a balanced portfolio is that not everything has done as poorly. It could be that something's done real poorly and something has held its own. And so you have options as to where you take the money from. And so I think it's important to look for a well-balanced portfolio in a lot of cases. The average person that I work with has greater than 5 years of their income in either cash or fixed income investments. And so you have other places. You don't have to always sell a stock that's down. You can sell something that actually has done well. When we rebalance portfolios, and we do that regularly, that's why we do it. We want to sell higher and buy lower. And so I think that because everything hasn't done well doesn't mean that nothing has. So it's not always a scenario of, I'm going to have to sell something that's a loser and I don't like to sell when it's down. And so I do think that it's important to point that out. Chip Munn, when you're having these conversations, what are some of the things that you've been saying these days?

Similar to what you were just saying on having to sell things, one of the things about volatility that's actually helpful is that it gives you the ability to sell things at a loss and offset some of your gains in the portfolio, which again, if people are taking income, you've got to sell something. So Sometimes selling something that's down and taking that loss actually is a little bit helpful on that side. But sometimes doing nothing at all, as long as your portfolio and you know everything that's in there, sometimes doing nothing is doing something and just sitting tight. I mean, there's many times where you're sitting and you're watching CNBC or watching the markets, and even us advisors will call each other. John, I call you from time to time, or I call Scott. I called him last week. I was like, "Oh man." And we were actually texting back and forth too. Some customers were finally starting to call in, which means that we're getting closer and closer to the bottom. You know, one conversation I had today was someone came into some new money and wanted to know what to do with it. And this is a good time or a bad time. And the market is less risky today than it was on January 1st. The bottom line, I mean, we're down where we are, which makes stocks cheaper, price-to-earnings ratios much lower. We haven't seen these levels on many good quality names in a long time. I mean, some of them, I can't even remember them being in a spot where I could buy them since COVID So it gave us an opportunity to go back into some of those companies that we love. And that's the conversation that I'm having on a daily basis is this is creating great opportunity on the equity side. And even more so, I think on the fixed income side, you pull up CD rates now and you can buy 'em again. You can get 2%, 2.5%. You can get good bonds. The inventory lists the other day I looked at for a good hour because it was 80 pages long. I mean, when's the last time we've seen an inventory like we have now of good quality companies at good rates. So higher interest rates are going to help us rebalance portfolios in a way where I was afraid to use fixed income for the last couple of years, or you had to be very selective. You couldn't just ladder out short, medium, and long bonds when interest rates are going to go up. Obviously, that's been as volatile, if not more than the stock market for the first time in my career as a money manager for families. So that created me more headache in the last 5 years, 6 years, than stocks. Stocks have been really easy to purchase. And now again, I think that just gives us an opportunity on both sides, cheaper stocks and better fixed income. Do you agree with that, John?

Yeah. And when you're thinking about the stocks that you do choose to own, again, the things that we're looking to carry us through the majority of the year, when you look at the S&P 500 since the beginning of its existence, 40% of its overall total return came from dividends. And so I always speak to dividends because they're almost kind of that forgotten item in a portfolio. As they get paid in, you can either use that cash to send to your clients so that you don't always have to sell something at the moment that they need cash. Sometimes the dividends can come in and replenish some of that for you, but it is an actual item that you can either put in cash or you can use to reinvest at some of these low prices like you're talking about. So I think I agree with everything you just said. Making it now easier to look at different sectors of bonds gives us more choices, not just in the stock market, which I think could have led to some of the volatility up to this point in the stock market as portfolio managers are looking at what they're doing and seeing these additional bond options out there. It just makes for a more full portfolio when you can include all the different facets of the investing world.

Well, and I knew an advisor one time, a long time ago, who would say, over the course of— you can expect a 12% return on your investments. And he would do a basically an Excel spreadsheet, and it would say if you've put in this much money, grown by 12% each year. And in reality, that's not how it works. It doesn't work 12, 12, 12. It works 15, 3, 9, 20 minus, you know, it's very random. And in fact, from 1979 to 2020. So over that period of time, the S&P 500 averaged 12.35% a year. So you'd expect that again, this guy's kind of hypothetical of 12, 12, 12, you'd expect, okay, well, that seems reasonable, except for that there were only 3 years during that period of time that the index actually returned between 9 and 12%. So out of, from '79 to 2020, 41 years, only 3 times did it land between 9 and 12. And so the average might be that, but it's going to vary from one year to another.

I think the average up year actually averages like 22% over that same timeframe. And the average down is like 15. So, you know, again, not a straight line, obviously it's up into the right, but it's not a straight line.

No. And I think Tate, you quoted earlier, might've been you, Chadwick, 32 out of the last 42. So it's one of those things where from time to time I've equated this recently to an airplane where sometimes the phone call is, this is your pilot calling, please put on your seatbelt. We're in for a little bit of turbulence and please make some adjustments. Tate, anything else from you?

These plans play out over decades. Our portfolios are built for that. Our plans and portfolios are not built for a one-year return. Because very few of our retirement plans are for that short a period of time. So it's kind of one of those trust the process, trust your advisor, communicate with them often, as we always say, and you should be right as rain.

Right? Well, I think you hit it. Every now and then it's going to be yucky. It's going to feel yucky. And if you're listening to this and you feel yucky, it's okay. It's normal. Our job is to be relatively unemotional or as unemotional as possible. We used to have a coworker who called Scott Mitchell, our Chief Investment Officer, the Vulcan, because it was like Dr. Spock. It's like he just doesn't feel anything. But that's important in times like this. It's the reason that I don't watch the news, because quite frankly, nothing that could come on the news, I don't need those inputs for a long-term plan. And so I just don't want to be— it's like Chidwick's joke about that's when you wish you'd had the headset in. I mean, when you have the headset in and you're on the plane, you're controlling your inputs as to what you can hear while things are going on. So for me, that's a big deal, but it's important to know if you're a listener, like we talked about earlier, the reason why the return difference between doing it yourself— and I think that came from a 401 case study that Chidwick referenced earlier— the reason that it's different when you take into actual experience of the individual in the plan versus if you had just held on to the investment, the reason it's different is because of emotions. And emotions are a terrible way for any of us to make decisions. Most of the emotional decisions that I know people who have made, you usually look back on that and wish maybe you'd have done something at least a little bit different. But it's okay to feel that way. And if you're a client of ours, call us. That's what we're here for. We're here to be the voice on the other end, the pilot telling you to buckle up and that everything's going to be okay and that we have visibility past kind of this current storm. If you're not a client of ours, just know that whether it's you, a friend, a family member, colleague, coworker, we're here to be a sounding board. Any of our advisors will give you 30 minutes, we'll jump on a phone call, and no questions asked, no obligation. We're here to help, and we understand that sometimes the environment's choppy and you need somebody to talk to, and that's what we're here for. Chidwick, great to have you back, and looking forward to having you again next time.

Thank you, sir.

Thank you, John. Thank you, Chip.

Tate, I'll see you again next week.

Next Friday.

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