Moneybeat: When to invest | WORLD
MARY REICHARD, HOST: Coming up next on The World and Everything in It, the Monday Moneybeat.
NICK EICHER, HOST: It’s time now for our weekly conversation on business markets and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm, the Bahnson group. And he is here now, David, good morning to you.
DAVID BAHNSEN, GUEST: Well, good morning, Nick, good to be with you.
EICHER: All right. Well, let’s begin with the economic news of the week. Again, it could be any number of stories: the CPI fell once again, it’s still high, but it has been trending down since the summer; the October CPI Consumer Price Index dropped below eight to 7.7% versus last October ,yet a strong rally in the markets on Wall Street; the biggest gain for the Dow Jones Industrial Average and the Nasdaq indexes in two years. We also had an election. But, David, your pick on top story of the week?
BAHNSEN: Yeah, I think in the markets and the economy, the drubbing that the Republicans took in the election is not really much of a story. The fact that the CPI number came in lower than expected, that you had your fifth month in a row of goods inflation going down, that, even with energy and food prices going higher than the overall inflation rate, came down. It caused the bond market to have its biggest rally day I’ve ever seen, as yields dropped significantly in anticipation that, okay, that long awaited pivot may actually be here. What’s called the ‘terminal rate’ for Fed Funds dropped 20 points, and the terminal rate is that rate that people expect it to max out at. And so whether people are looking at what they expect the federal funds rate to be in December, or January, or March or June, all of those different levels all dropped together about 20 to 25 basis points, meaning about a quarter of a percentage point at once. And so that was the big economic story of the week. And then it caused an absolutely violent rally in stocks and bonds. And then that rally was extended, quite surprisingly, another day into Friday. So you just had really a big day for risk takers last week.
EICHER: Okay, well, let’s go straight to questions from our listeners.
JOSH: My name is Josh from Dallas, Texas. My question is about personal finance about investing in investment vehicles on a Roth IRA. Should I wait for the stock market to bottom out? Or should I invest in it now and take the losses in the near term? Thanks.
Okay. Question of timing, David, invest now or wait for an more advantageous time?
BAHNSEN: Well, yeah, the premise of the question, if one knew when the stock market was going to bottom, then of course, you should wait, that would be a wonderful thing. But I assume that this young man, like most of us, including myself, don’t have a crystal ball. So by definition, there is no way to ever wait for the bottom because one never knows when that is. Your job as investors to put money to work to start compounding for the future. And the up and down volatility should never be something that keeps one away from going into investments that have up and down volatility. And so it is the very unknowability of when the bottom is that requires one to develop an intelligent, thoughtful discipline plan that accounts for their tolerance of up and down volatility. And when people are worried about stocks going lower, it often makes sense to deploy part of the money at once and then average the rest in over time. But this notion of guessing when a bottom is coming, or when it’s been achieved is really very dangerous. And it opens up human emotion to the worst thing that can happen in investing, which is regret. Then one realizes, Oh, I missed the bottom. And now the markets up 1000s of points and then I’m gonna sit and wait for it to come again.
EICHER: Okay, our next question comes from Brian Stolarczyk. He is senior pastor at Lutheran Church of the cross in Port Charlotte, Florida. He has a question for you about exchange traded funds. ETFs. He writes, how his investing in ETFs economically and or theologically distinct from investing in mutual funds or the stock of individual companies? Investing in the stock of a company or a pool of company stock via mutual funds seems to be an investment in human productivity and creativity. But as I’m reading the fine print of ETFs, the individual investor does not actually own or invest in a share of the company or the stock. Therefore, economically and theologically, what is an ETF investor purchasing? Would he or she be investing in human productivity and creativity? Or merely speculating or gambling? David, what do you say about that?
BAHNSEN: Yeah, let me clear up some of the misunderstandings in the question. An ETF and a mutual fund in this case are identical. You are investing literally in a basket that is literally invested in the shares of the underlying companies. So you in a mutual fund, and in an ETF – it’s not fine print, it’s the actual definition – you own a basket that owns the shares, but you don’t own the shares. But it’s not speculation. It’s the human productivity of the underlying companies. But the controversy lately that I imagine is what he’s referring to is that people realize they don’t get to vote on those shares, because they don’t own the actual shares. They own a basket that owns them. But as far as the investment aspect, you do own the basket that owns the companies. And so it isn’t rank speculation. I just happen to believe from an investment standpoint, those who have enough money to achieve diversification by owning the individual stocks own a superior strategy. I prefer in our clients cases, we’re buying individual stocks, not an ETF or mutual fund. But the flaw of the ETF and mutual fund to me, is not the fact that you don’t own the individual shares. It is other structural components, you know, generally an ETF as a whole index. Generally, a mutual fund has higher fees, worse tax treatment, other things like that. But the issue about whether or not you actually are investing in human productivity, if you’re using a conduit to invest in it, like an ETF or mutual fund, where you’re buying individual shares, I don’t think there’s a difference on that category.
EICHER: And our last question today from Aaron Bradley Thompson.
THOMPSON: Hi, David, thank you so much for everything you do. I greatly enjoyed listening to you on The World and Everything in It. My question is a more practical one. What ideas do you think that we should adopt to improve the outcomes in the US economy? Thank you for your help.
Let me add David additional context around the question. He’s looking for economic policy ideas for our public policy makers.
BAHNSEN: Yeah, so if we’re talking about policies in the political sphere, that would be kind of the secondary realm of area that I most care about where I think the lowest hanging fruit to develop economic change is mostly non political. I think culturally, I’ve talked about, in recent episodes here with you on the podcast, my desire to see a greater theology of work, a greater understanding of human action and productivity. And those are the things I most care about us reengaging the diligence and morality of work ethic that we are losing in our society. But on the policy front, I don’t think that mayors or county leaders or states and certainly Washington DC, is primarily responsible for that. What they’re responsible for are things around tax policy and trade policy and, and so forth. And the biggest thing that they do to impede economic growth is spend money that requires them to take it from more productive parts of the economy. And that’s my, the lowest hanging fruit is the government needs to spend less money, because then that would leave more resources in the private economy, that would be more productively spent. But why does the government spend so much money? Because you have a large government? Why do we have a large government? Because we have poor self government? So the greatest thing we can do to improve government policy around economic administration is to have a more self governed responsible, morally virtuous population. And then that really leads to higher self government which leads to lower federal government, which leads to lower expenditures, which leads to more money in the economy being put to productive use. That’s the basic syllogism of how I approach government relationship to the economy.
EICHER: Okay, David, that is our time for today. Maybe you have a question for David Bahnsen, too. Just email us at feedback at World and everything.com. I will be happy to summarize your question for you or if you’d like to put it in your own words in your own voice. Just make a voice memo recording and email the file, same address: feedback at World and Everything.com David Bahnsen is founder, managing partner and Chief Investment Officer of the Bahnsen group. His personal website is Bahnsen.com. You spell David’s last name B-A-H-N-S-E-N, Bahnsen.com. Thank you to Joshua Felty, Brian Stolarczyk and Aaron Bradley Thompson for your questions. Give us your question. And you may hear David answer it in an upcoming episode of The World and Everything in It. David, talk to you next week. I am grateful for your time. Thank you.
BAHNSEN: It’s my pleasure. Thanks, Nick.
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