transcript

Speech-to-text transcription can look a little quirky. Please excuse any grammar or spelling errors.

Episode #589 - Process Over Panic - Why to Resist the Urge to Think It's Different This Time

Roger: The narratives that you consume and ultimately create for yourself define your reality, and right now the public narrative is “this time is different”. When it comes to the political, the economic, the world structure, it sure feels different this time. I've given this a lot of thought and I've determined that yeah, it is.

Welcome to the show dedicated to helping you not just survive retirement, but to rock retirement because you have the confidence, because you're doing the right work to create a great life. 

We're going to finish up our basics theme this month and we're going to talk about the basics of structured notes today as the second part of this show. But I changed the theme or the title of the show to talk about this. Is this time different as well as process over panic? Mainly because I'm having this discussion a lot. I'm having it with individuals, I'm having it in the club. I'm responding to emails that I'm receiving from people like you that listen to. So that means this is worth discussion. We got to talk about this. So, we're going to do that today. 

We're also going to finish up the basics on the basics of structured notes. Now, looking forward to next month, May, we're going to focus on perspective. We're going to start with an episode on Social Security. We're going to bring an expert on to sus out facts versus fiction in terms of how secure it is for us. Then we're going to have Meyer Statement talking about beyond behavioral finance and creating a great life. Third week of the month we're going to have the legendary Charles Ellis, author of one of my favorite books, Winning the Losers Game. Many of you might not have heard of this. This is like one of the OG books of passive investing and how to be successful. He's going to share some thoughts on that. He's going to share some thoughts on the economy and whether or not this time is different. But also, this dude's like 87 years old, one of the most awesome guys I've ever chatted with. He is an exemplar of rocking retirement. 

Now on June 5th, 5th we are going to have a live event on process over panic to delve deeper on how we navigate the crazy, crazy world that we live in. So that's going to be on June 5th. That's also when we're going to launch the Rock Retirement Club cohort. So, we're going to invite new members in. We do that a few times a year. We'll have information on that at livewithroger.com it's not up yet, but it will be in the next few weeks. If you want to stay in the know about resources that we share and summary of the show, sign up for the Noodle, which is our weekly recap of the show where we share links to resources. You can do that at thenoodle.com. That's where we're going over the next three or four weeks. But for now, let's talk about the phrase “this time is different”. 

Tariffs are blowing up the global world order in international trade. Nobody knows what the rules are anymore. DOGE is trying, in a very ham handed way, to be more efficient within the government. Nobody knows whether they have a job or not, whether they have funding or not. It's changing the rules and it's freaking people out, rightly so. Areas of human rights people are crazy. They're afraid of where we're going. The rule of law, the freedom of the press, the general feeling of what the heck are they doing now. This has nothing to do with politics here. This is just where we're at and politics is out of it. We'll leave that to other discussions. But this sure feels different now. The natural reaction we talk about whether this time is different, is to go look at the past to convince ourselves that, no, it's not different, this is normal. We can go back to 2007 and 2009. We almost had the global economy literally blow up. It was that close, and it sort of did in many ways. We had institutions in the private sector literally go bankrupt that we thought never could. We had General Motors and Merrill lynch that had to be saved. We had AIG. Without the backstop of the government, all these companies would have been gone. 9/11. I can remember the human tragedy, obviously, and the human tragedy on us, even if we weren't there. You remember going through that? I can remember driving home that day after watching it in the office about an hour away. I just had this urge to be with my family. It was scary. Now we have had a global pandemic and shut down. Anybody remember that? Literally people were dying in the millions across the globe. We shut everything down. We thought that was the big one. It was Bay of Pigs before my time, and then the Cuban Missile Crisis with us on the precipice of nuclear war, and then the oil embargo. 

Generally, when we have this feeling like this time is different, we go back to those to try to remind ourselves, no, this isn't different. This is just always the same song with a different rhythm. I don't think that logic and going through that history helps enough about whether this time is different to help convince us, because what's going on right now is unique and the humanness is how we respond to it. When we go through this, we either read an article or our advisor or somebody explains to us all these different things and that it's not really different, the reaction, whether it's verbal or not, is, yes, yes, yes, yes, but this time. That is a natural reaction because we're humans, we are wired to protect ourselves, and logic doesn't play a role in how we react to all the things that we feel are a threat to us going to feel it. In behavioral finance, we'll call this recency bias. Whatever is happening in the moment is elevated. Whatever happened in the past is discounted. People say yeah, but this is happening right now. This is different. They call it historical amnesia. We forget the pain or the emotions that we had in the moment. I see that, like in doing endurance races I've done, you know, the Iron Man and other adventure races. Tn the moment, I'm like, this is the worst thing. I'm never going to do this again. It's horrible. This is different. Then as time goes by, I romanticize it and I forget and I'm like, oh, I got to do one of those again. It was so cool. Historical amnesia and the feeling of this threat triggers chemicals that trigger fight, flight, or freeze. This is all a natural reaction. The sign shows when we feel threatened by DOGE. It's just like in the past and we would feel threatened by a now extinct predator. Our body's reacting the same way. This is how we are wired. The point of discussing this is not to convince you that, no, no, no, no, no, this time isn't different. The point of providing a little bit of this perspective is logic isn't going to get us over this. The point is to help identify this is what's happening, and this is how I'm responding to it. That's the point. Just to acknowledge and see it, see the stimulus and see the response.

Now, let's talk about the phrase people always use. This time is different. In our weekly chainsaw chat, which is our planning study group within my firm, we talk about these things. Scott on our team, who has an amazing perspective from his role in the military over decades, pointed out an important distinction in talking about this because we were getting those questions in emails and basically said, you know what? I don't think that that's the right question. Is this time different? Yes. Well, the answer is yes, this time it is different. It is different than 2008. It is different than the global pandemic. It is different than 9/11. A better question when it comes to planning is, is this time permanent? Is this time permanent? Overwhelmingly, the answer is no. What is happening now is a season. It will change; it will go in the opposite direction at some point. This is part of the push and pull of humanity which over time improves the quality of life of everyone. Not discounting that it is messy. DOGE is an impacting individual lives in a very traumatic way. Just like when General Motors was moved. I remember Detroit in the 80s, all the plants were closing in Michigan and moving to Texas and in Mexico and now Flint was a zombie city for a long period of time as a result. There is a human toll, I’m not negating that. But it is not permanent. It ebbs and flows. I was just reading a Wall Street article on a zombie building in Chicago. A zombie building is a building that has been vacated by a business and now sits empty. This huge building in Chicago was in development right before the pandemic and then was abandoned by its developer. I think it was Blackstone. When the pandemic hit, the deal fell apart and the creditors have been fighting over who's going to take it over. It's mostly vacant or very vacant. It has had a huge impact on its micro community around that building. The restaurants and service industry around it have struggled mightily because this building is still empty. So, these things have ripples that have human impact.

Now we talk about markets. I don't think we're really worried about markets at the moment. I mean, we worry about it because we see our accounts going up and down and the narrative that's created. I had this, aha moment the other day. We logged into our account and I noticed that they conveniently tell you how much money you've made or lost right on the front page. So, the feeling that you lost a ton of money today gets right in the head. But the markets really aren't different at all. I mean, as of 4/28, the S&P 500 is down 10.1% from the all-time high, which was last year at its worst. A few weeks ago, it was down 18.9%. That's not even bear market territory. Now the NASDAQ, the technology stock, more of a technology focused index, is down 14.1% as of the 28th. At its low, relative to a tie, it was down 24.4%, you could say that's in a bear market territory, pulling back and forth. Is it permanent? Are they always going to be bad now because of the political realm? No, I'm going to tell you they're not going to be. I feel comfortable in saying that. 

If we think about bear markets, and maybe we're just spoiled. Since 1908, we've had 26 to 28 bear markets, depending on your definition. They've on average lasted 9.6 months. The average downturn during a bear market in stocks was about 35%. I just got this from some JP Morgan data. So, I don't think the bad markets are any different. I don't think they're going to be permanent. Since 1945, there have been 15 bear markets, basically, they happen about every five years. Let's gain some perspective there. If you are going to enter retirement, let's say you are in retirement for 25 years, that means you're likely to experience five bear markets where stocks, if you own any, are going to go down, they're going to lose money and maybe up to 35% if the average holds out. So, saddle up, buttercup. That's just part of the journey. If you own equities, what about presidential elections, which have been wild, right? We've had very conservative administrations and we've had very liberal administrations. We've been bouncing back and forth. Well, the reality is they happen every four years. So, if you're going to be retired for 25 years, you're going to go through five or six presidential elections, and likely we're going to have swings as to what the new administration has as their agenda. Some of them you're going to cheer, and some of them you're going to cringe. Saddle up, buttercup. What about warfare with the Fed? This has been the most recent one, in terms of the battle between the president and the Federal Reserve and its independents and trying to dictate interest rates, et cetera. If you do some basic research, a number of presidents have done this. Nixon, Kennedy, Truman. Go back in history. The Fed has been a punching bag for the president many times in history, but they're never permanent. Whatever the theme is, it's not permanent. These things are going to happen. This is part of reality. This is humanity in modern retirement. We have got to just deal with this and saddle up. 

The key point here. Yes. Each event is different, but they're not permanent. We need to keep that perspective just to acknowledge. Okay, okay, I'm feeling this. What do I do with this? When it comes to your planning to create a great life, because you're not going to avoid any of this stuff. It's never going to go away. As I was thinking about the show and navigating with clients, it's process over panic. As these things show up in whatever flavor, they show up in their own idiosyncratic, unique way, it's process over panic. That's where we have to live. That is honestly the difference between an amateur and a professional. We have a lot of professionals that act like amateurs and a lot of amateurs that act like professionals.

Let's define panic. Panic is the sudden uncontrollable fear or anxiety, often causing wild, unthinking behavior. I'm freaked out, I'm selling. Or let's talk about systems related to panic. This is really an elevated danger now that is different because of the narratives, the 2/47 media and social media, and the number of voices, some with perspective, some with not, some with nefarious agendas, some with not. We can be overwhelmed by the stimulus of the narrative that this time is different, that can cause us to panic. 

Now let's define process. What is process? Process is a series of actions or steps in order to achieve a particular end. That makes sense, right? Panic is uncontrollable anxiety that causes us to do things without thinking. Process is a way of understanding what we want to accomplish in building out the steps in order to position ourselves to accomplish it. One important thing that I'm sure you have. You've experienced, if you've read a lot of articles or maybe work with an advisor, process is different than a plan, right? A plan, like your retirement plan, is an output from a process. Some advice that people like to give is stick to the plan. Stick to the plan. That's what it's about. But really, it's not about sticking to the plan. Then they say, let me show you all my charts. The history, et cetera. Trust the history, trust plans, or trust us. We're really smart people. We have all these brainiacs doing this research and papers and presentations. We're so smart. You just need to trust us and stick to the plan, or stick Trust me. Trust me and the plan that we created. That is where this usually falls apart. 

I do not believe in sticking to a plan. Your plan is not an anchor tied to your leg in a boat that might be sinking. It can just destroy you if you stick to a plan. A plan is actually an output from a process. So, I would say stick to your process. Process over panic. Because a process is dynamic, it can evolve, it should evolve. It is an organized way of thinking to help you make better decisions. So don't stick to your plan but stick to your process. That's the key distinction that I think we need to understand here.

Sometimes we get very much the wrong messages here. So, the point of one, point of having a good process, I think of Viktor Frankl who said, “Between stimulus and response, there is space, and in that space is our power to choose our response.” That is the key here. We have all sorts of stimuli popping up all the time. These stimuli are going to create feelings of excitement, fear, greed, anxiety, the whole spectrum. Sticking to a process helps us step in the middle of the stimulus and how we response. That's different than a plan. That's important. 

How do we step into the middle of it? We acknowledge. Yeah, I'm afraid, okay, let's think through this so we can navigate and have the plan evolve for ourselves. Because avoiding unforced errors at critical times is the most important thing. That's the most important thing. That's the difference between a pro and an amateur. An amateur is going to be reactionary and is not going to have the discipline to stick to a process, to step in the middle of stimulus and response. Understanding what the bigger goal is, which is create being safe and creating a great life, enduring times of stress, and that's fear, greed. In terms of finance, the process is critical. 

Now another quote we're going to talk about related to this from famed economist Thomas Sowell and he says, “There are no solutions. There are only tradeoffs”. So, if you're panicking from all the stimulus, the reaction is to try to take the pain away. That might mean selling all of your equities. Well, that might take the pain away in the moment, but that's not a solution to you creating a great retirement. Right? If you sell all of your equities, there is a tradeoff there, right? The tradeoff is you're taking on inflation risk. Now you have all these other decisions you need to make, you'll feel okay in the moment, but you've set yourself up and now you don't have a process, you're just winging it. Timing the market is not a solution, it's just a tradeoff. If you're trying to time the market, I'll get back in after it goes back up. Well, now you've set yourself up with all these other decisions that you have no framework around that are going to drive you mad. Buying more is not a solution, it's a tradeoff. To buy more, you're going to have to give up other things. This is a really important concept. 

A sound process helps you step between that stimulus and response and ground you so you can evaluate the tradeoffs of potential decisions. and it's like having a great day. You know what you're supposed to do every, every day for a great day, right. I'm going to read, I'm going to stretch, I'm going to go for a walk, I'm not going to have a drink, I'm going to eat. Well, when we're at our worst it is when we need those protocols most. But when we're at our worst, our process or protocols seem like the most uninteresting thing to do. They're the hardest thing to do. So, I'm not going to tell you to stick with your plan. I don't think you should stick with your plan. I think you should stick with a process to step between that stimulus and response so you can make better decisions for yourself. If you want to rock retirement. When it comes to retirement planning, that's what a pro does. Otherwise, you're just winging it.

Now it's time to talk about the basics of structured notes. Some things that come to mind when I think of structured notes are one, it's an investment product. So, it's choosing the ingredient to build a retirement portfolio from. It's an investment product. The second thing that comes to mind is the Thomas Sowell quote that we used recently, which is there are no solutions, there are only tradeoffs. Using a structured note over a more traditional investment involves tradeoffs and we need to sus out what kind of tradeoffs we are making. When I think of investments in general and structured notes, I equate it to food. I think that's a good way of organizing all the different types of options we have from an investment standpoint. When we think of food, we start at the organic end. So, way on the left hand side there is organic food. A stock is a fractional ownership of a company. It's an equity. You own a part of the company, that's pretty organic. A bond is a debt. You have lent money to someone or some entity, they are paying you interest. It's very clear when you're supposed to get your interest back. That is an organic investment. Now we can move up the complexity scale. Exchange traded funds are a group of stocks or bonds or a mix of those things where you're buying an instant portfolio. So, it adds a little bit of complexity. There's a little bit of friction in cost there, but it's still transparent in what you're getting. And then you can just keep moving up the complexity scale.

So where do structured notes fall on the scale from organic to the other extreme, I would call a Twinkie. Right. Let's talk about what a Twinkie does. A Twinkie is trying to simulate the taste and texture of flavors but they don't do it with organic products. They do it with chemicals and additives to simulate a taste, simulate a texture, and extend the shelf life of the product. Right. A Twinkie can last for whatever they said, decades. An apple goes bad in a week or two. So, if that's the scale that we're talking about, where do structured notes fall from organic to Twinkie? I am of the opinion that a structured note is very much on the Twinkie side of the scale when it comes to an investment ingredient for a portfolio. It's 100% manufactured. It's very difficult to understand what's in between. I will say that using things that are not found in nature doesn't mean they don’t have utility occasionally. I have eaten a Twinkie at times. You might say the reason why I don't do structured notes is because I don't want to eat Twinkies. I would rather have the tradeoffs associated with organic or things that I understand than buy the promises of a manufactured process that is using things that I don't understand. The second third order is the consequence of what they might do to me even if everything's listed and everybody tells me it's safe. So that's why I don't use structured notes. Now, structured notes are interesting because these are things that are sold, not sought. Generally, someone isn't, hey, I want to buy a structured note. These are things that are sold. They're put together by the massive brain power of investment firms. I would say as a Rule, unless you really want to go down the rabbit hole, don't use structured notes in your portfolio. If you are going to use them, it's your obligation to understand the tradeoffs that you're making and have a clear sense of what you're actually getting, even if you think it tastes good in the moment.

Okay, so what are structured notes? Well, a structured note, at their core is a debt. You're lending money, you're putting money into an investment and they're going. The issuer of the investment, generally this is an investment firm, in this case is going to give you a return based on a formula that they create within the structured note. So, in a bond, a traditional bond, it's very simple. I lend the money to the lender; they pay me interest. I know exactly when I'm getting my money back and what my interest will be throughout the period. That's the organic version. I give my money to the lender; they're going to give me my money back on a certain date. Then the return that I get, positive or negative, is going to be based on some formulas that's related to a lot of things and each one is going to be different. But, at its core it's a debt.

Now, are structured notes homogeneous? They aren't. Now I'm going to go back to food and beverage because this is how my mind works. I enjoy wine. So, let's compare structured notes to wine. Well, there are many different types of wine, right? There's Pinot Noir, my favorite. There's Chardonnay, there's Pinot Grigio, you can go on down the list. Each wine category will have its general flavor profile. But just like wine, a Pinot Noir from Oregon will taste different than a Pinot Noir from California, than one from France. This is a way of categorizing things. But let’s say that I tend to enjoy Pinot Noirs that are from Oregon. Great. If I have a vineyard or a manufacturer of Pinot Noir that I enjoy, then I understand what their profile is. Well, structured notes are very much this way. There are different types which we're going to go over. But even if you have a particular vineyard of a structured note or investment company that manufactures them, each individual structured note is different from the other. So, when we think of wine in those terms, even if I know the vineyard that I like my wine from, and I know the type of wine I like from them, each harvest will be different. Each one stands on its own, and that's the key concept I want you to get here when it comes to structured notes. Even if you have one type you like, different manufacturers will do it differently. Even if you like one manufacturer, each note stands on its own. 

What are some types of structured notes? Well, there's principal protected notes that guarantee a return of principal at maturity, regardless of what the underlying asset does. These typically are going to offer lower return potentials, and there's quirkiness about them. There's buffer or barrier notes, which will protect you from some losses, but not all of them. There are enhanced return notes. There's autocadable notes, there's range accrual notes, there's dual directional notes. There are lots of different flavors. So, when you're looking at a note, it's important you understand the specific note and what the deal is, because that's what the bond is giving you. Whatever the formula that the brainiacs created to try to simulate the taste and texture of an investment. 

What do you need to know when you use one? You need to know the issuer who is manufacturing this note and backing it, because that who's giving you the guarantee that they will pay you based on how the formula works out. So, we need to know the issue date. We want to know the start date. Generally, you buy these, they are auctioned or they're marketed, and then they're sold. That start date is what everything is based off of. You want to know the maturity date. You’re going to want to know what you are getting out of it. You want to know what the principal or par value is like in a bond. I put in $1,000 at par. They promised to pay me back at least my $1,000 at par. 

Next, you want to understand what assets determine the performance. Now we're getting a little bit away from organic land and more into Twinkie land. I do have an example that I'll go over in a video that I'll share in the Rock Retirement Club. I'm not going to share it publicly because it's a specific investment. I want to be careful about the disclaimers and all that I talk about in the podcast. But this particular structure note links its performance to how three different indexes perform. Russell 2000, Russell 1000 and I think a utility index is the one that I looked at. So based on how each one of those indexes perform at various times throughout the period of the note and how they interact in tandem, determines whether interest is paid or the guaranteed rate is paid, etc. So, we want to know what the underlying assets are that are used to determine performance. We want to understand the payoff structure that determines the returns. This gets a little complicated. Again, I'll create something for the club. I don't feel comfortable sharing it publicly, from a disclaimer standpoint. Then we want to understand the principal protection or the risk level in terms of whether those underlying assets, in this case the indexes don't perform well within the structure or the formula that determines the returns. How is my principal return in principal impacted? What's the worst case scenario? How if markets just blow up significantly over time? what's my downside? These are the things that we want to understand. 

Where you're going to go to look at and understand these is what's called the prospectus, because each individual structured note has a prospectus. A prospectus is a legal document that investment managers are required to create. They're supposed to inform you of everything about the investment that you are going to put money into. That's why they're required to give it to you before you invest so that you can understand everything. It's a legal requirement. Here's the hitch. Nobody can understand prospectuses. It's too much legalese and we're already dealing with Twinkies. So, when we're looking at ingredients we can't pronounce and have no concept of or perspective to understand what any of the words would mean anyway, that's a bad thing. What do you do about that? My suggestion would be, and this is what I did with the prospectus that I reviewed in working through this primer is if you receive a prospectus, you'll likely see receive the marketing materials along with it because these are sold, not sought. So, you're going to be interacting with an investment firm or advisor in some way and evaluating these. The marketing documents can definitely be helpful in having you conceptualize what's in the Twinkie. But my suggestion would be is take the perspective, upload it to an AI engine like Chat GPT. I use Claude because Claude has a very pleasant personality that I uploaded. In my example that I'll do in the Club. I uploaded it into Claude and asked Claude to summarize the prospectus for me. Then I had, I think an hour of conversation with Claude asking just normal, mundane questions so I could better understand what the upside might be, how things are determined, et cetera. So, if you're going to consider a structured note as an ingredient for your investment portfolio, I would highly recommend that you do that and have a conversation. Now, you still have to check the answers because AI is not perfect, but these things are difficult to read. I had a hard time reading by myself the prospectus for the structured note that I evaluated. What are my thoughts on this in terms of you? Well, the primary use of these structured notes, like any investment ingredient, is to be a building block for a portfolio that is done within the context of a process in order to support you rocking retirement and achieving your goals. So that's the frame or the funnel we want to go through within a retirement plan. These would likely be used in funding the income floor and buying these to try to enhance the yield that you get or to provide some downside protection as a potential benefit. That's the premise of a lot of these things. 

What's my bottom line on structure notes? As of today, I do not use them, nor do I consider them within my process and my practice. The reason is that I don't need the extra complication in order to build a plan that is resilient and are, feasible and resilient. I can build a plan to my level of satisfaction without the added complexity of putting in a Twinkie as part of an investment ingredient in a bigger portfolio. Does that mean I'm right? Time will tell. I don't know and this doesn't mean I won't change my thoughts on it, but I am very wary of adding complexity of things that are very difficult to understand and pronounce in terms of how they will actually work out. It just adds a layer of complexity that I think does. Doesn't add to our ability to rock retirement, but they could actually impair our ability in the worst case because they blow up in some way that I didn't understand or it complicates the situation and we end up spending too much time on something like this when we could be spending time on tax forecasting or creating a great life. So that's my primer. I am on a journey on this, but I would be very wary of adding them to a retirement portfolio. 

Now. Let's go set a smart sprint. 

TODAY’S SMART SPRINT SEGMENT

On your marks, get set, and we’re off to set a baby step you can take in the next seven days to not just rock retirement, but rock life!

All right, in the next seven days, I don't know where you are on this whole “time being different” thing. Whether you're totally cool and chill, whether you're worried and anxious. I don't know where you're at. But in the next seven days, get to a small quiet spot, take five or 10 minutes and write out your process. Just give it a high level. What is my process for my retirement planning? What is it? Can you define it? What is the system you use to create the steps to create a great retirement? If you can't articulate it, you don't have one. If you work with an advisor and you don't know what process they use, they likely don't have one or they haven't explained it to you and you have some research to do there. If you want to have an amazing retirement and rock retirement, you need a process. So, figure out what it is.

BONUS

All right, now it's time to read our next installment from my grandfather's journal from flying B17s in World War II. Where are we? Which one did we do last? Ah this installment is mission number 43. 

“September 5th. Ship number 321 sortie 29th, Genoa, Italy. Bombed submarine pens in Genoa Harbor. A good job, despite the unfortunate mishap to our bombardier who was hit in the face with flak. Flak was heavy and accurate. Had to feather number three engine as the oil cooler was hit by flack and the ship was getting a real oil cover. Had to land in France and take the bombardier to a hospital. Carried 12,500 pound bombs. Mission 6 hours, 10 minutes, 21,500ft.” 

Unfortunate incident. Sound like he survived. That's today's. Wow. I don't know what to think about these when I read them. Sometimes the way he wrote them is so matter of fact. But imagine you have a guy hit in the face with flak. You're in the middle of nowhere with more flak coming. You have an engine out, oil covering everything, limping your way back to a base to land and get him to a hospital. The human condition is real. It's good to remember that.

The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All, performance reference is historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions.