Money Rehab with Nicole Lapin - Who Broke the Stock Market?

Episode Date: March 17, 2022

The stock has gone haywire in recent weeks. Let’s just ask the obvious: Why??? Today, Nicole breaks it down with financial expert Dr. Richard Smith. See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. The stock market has gone haywire in recent weeks, as you've probably seen.

So let's just ask the obvious question. Why? It seems like a simple question, but of course, there is more to it. So to unpack this deviously complicated question, I'm bringing back financial expert, Dr. Richard Smith. Well, Dr. Smith, welcome back to Money Rehab. It's great to see you, Nicole. Great to be back. Well, you are an expert on so many things. You are a very special guest on our episode about Robin Hood and you broke down pay for order flow like a boss. I wanted to have you back on the show to talk about something that is your number one specialty.

Uncertainty. I can't say that about many folks. I'm not sure you can either. But this is why you are the expert in all of this. And there is a lot of it happening in the world these days. There sure is. So I remember, as I'm sure you do, during the 2020 election, financial experts were often asked which candidate, Biden or Trump, would be better for the stock market. And some experts would say any candidate would be better for the stock market. You know, the worst outcome for the stock market is not knowing who the president is. Can you talk to us about the relationship between generally uncertainty with events like an election or geopolitical strife and the stock

market? So these events, you know, like right now we've got Ukraine. Right. And we really don't know at this point which way the war is going to go. I read something, you know, right around the time the war started that the market rallied for a couple of days. Right. And I mean, I didn't read that. I saw that the market rallied once the invasion started. And that's not atypical, right? That's happened many times before. But the best explanation I heard of why the market was rallying is because it seemed pretty clear that Putin was going to get what he wanted. And this invasion was going to go pretty quickly, it would be over quickly. And, and that would be good for the markets, because this uncertainty would be removed. Right. But then the Ukrainian people resisted more vigorously

than was anticipated. And so now that has introduced new uncertainty because it's not so clear that this is going to be an easy victory for Russia and that this is all going to go away quickly. So that has introduced new uncertainty into the markets about what is the outcome here? How long is this going to go on? Is this going to turn into a bigger war where, you know, Putin goes after a NATO country? Right. Or, you know, NATO starts to get involved more directly, like if the civilian casualties get too intolerable. So whenever you have this uncertainty, this event uncertainty, it creates trouble in the markets, right? Because it creates more risk. Greater uncertainty, right, means a wider spectrum of possible outcomes. Can you give us any historical examples of a similar situation to what we're seeing right now?

I mean, I think back in when when the Iraq war started that that, you know, the market saw markets soared after the invasion. I think that happened a number of times in history. And but I think that the fact that the Ukrainian people have put up more of a fight than anybody really expected is what's caused the market to be a bit undecided still about which way it's going. Yeah. What do you think will have to happen or change before we can expect to see the market get a little bit more on solid or short footing? I personally think it's that we've got some more volatility ahead. I don't think this is going to resolve itself quickly. I think it's going to end up being much more of a get more bogged down, then it's likely to get more bogged down,

create more uncertainty than it is to get quickly resolved and have everybody go, phew, that's behind us. Let's get on with the rally. So I wouldn't be surprised to see more volatility ahead. And I think this is where when there's more volatility, Nicole, right. That, that is more risk, right. There is a risk that things could fall, you know, 20, 30% from here. Okay. Or, you know, small cap stocks could fall 50% from here. Right. So, you know, if you are a long-term investor, that doesn't really matter. That could actually be a buying opportunity. But most people don't really have a handle on their time horizon. All of the marketing that we hear around investing is get rich quick and don't miss out on this now.

I mean, we just went through the Super Bowl crypto commercials. And that was awful. It was all about fear of missing out. Don't be like Larry David. Or it was like, hey, you're in, are you in with Tom Brady and Giselle? And do you want to go to the moon with eToro? So all of this messaging is around this idea that there's no risk, that there's no risk. And so we get ourselves, especially retail investors, we get ourselves into these situations where we have just crazy expectations about what it means to be an investor, that it's all reward and no risk, right? But uncertainty creates risk. It creates, you know, the chance that it's a bigger chance that it's going to go down. I'm talking about nuclear war now, right? I read something from Goldman Sachs the other day. It

was like, we think there's a 1% chance of nuclear war. And if that happened, it would be totally catastrophic. You'd lose everything. It's like, really? 1%? That's not zero. That's not zero. So this uncertainty expands volatility. It creates more downside risk. And then if you are like aware of risk and you're using risk mathematically, right, then you have to start to adjust your bets. Hold on to your wallets, boys and girls. Money Rehab will be right back. Now for some more Money Rehab. Have you started to adjust your bets based on what's going on with Ukraine? Absolutely. How so? I started back in November to start to take profits from what I thought was an

excessive rally and likely to lead to some kind of correction. And then also, I started investing in commodities also. And it was just from really looking at... In this case, my philosophy is that we should... Ray Dalio famously said that a holy grail portfolio is 15 to 20. That's what I was just about to ask you about. Really? Okay. Yeah, I have it in my new book. Really? The holy grail portfolio? Yeah. Okay. Awesome. 15 to 20 good, uncorrelated investments, right? And so when I looked at what I was in, and I started to look at what would complement what I was in, because I was in technology and growth, a lot of what was coming up was commodities. They were starting to do well. And they weren't achieving big gains yet,

but they were going up. And they were minimally correlated to stuff I already helped. So what kind of commodities are we talking about? Oil, metals? Oil and metals primarily are the ones I'm in. And real estate. So there's a company, St. Joe Real Estate, that has a lot of residential real estate in Florida. They've been doing very well in the panhandle area. And so hard assets, as opposed to financial assets or real assets versus financial assets. Okay. So we like Ray Dalio's all-weather portfolio? I am not sure about his all-weather portfolio. What I'm talking about is actually what he called his holy grail portfolio. And that was the idea of 15 to 20 good uncorrelated investments, right?

So they're good. They're all going up, right? But they're uncorrelated. So they go up and down at different times, right? So I had Alcoa in my portfolio and I had... Actually, not in my portfolio. A portfolio I designed had Alcoa and Schwab. And on Monday, I guess it was, Alcoa was up 6% and Schwab was down 5%. So they balanced each other out, right? So I'll tell you what the all-weather portfolio I was talking about is and get your thoughts. But first, who is Ray Dalio for folks who don't know? Ray Dalio is the founder of Bridgewater Capital, which is probably still the most successful hedge fund of all time.

Although Ken Griffiths has given him a run for his money now with Citadel. So he says the all-weather portfolio that I talk about in my new book on page 215, if anyone is interested, is 40% long-term bonds, 30% stocks, 15% intermediate-term bonds, 7.5% gold, 7.5% commodities. Now, according to Ray, there are four things that affect the value of assets. Number one, inflation. Number two, deflation. Number three, rising economic growth. And number four, falling economic growth. So based on the factors, he says you can expect four different seasons, which is what this all season thing is about.

First, higher than expected inflation. So rising prices lower than expected inflation or deflation higher than expected growth or lower than expected growth. So this portfolio that he says has weathered these types of seasons over time have been historically backtested. This portfolio made money 85% of the time and just lost 20% even during the Great Depression. What do you think? It sounds like a well-diversified, minimally correlated portfolio of things that have gone up consistently over time. Very smart. And that's the key, right? That is the key. Yep. I mean, I do think that there are opportunities for individuals who are willing to do some work and do some research to apply those same principles to more individualized investments, right? So he's talking about broad asset class categories. I think you can follow a similar strategy with individual equities and even with some

cryptocurrencies. And that's what I like to do myself. I don't really like investing in ETFs and index funds. I want to, as an investor, I want to influence the future. I want to invest in things that I believe in. And I want to build a personal portfolio of complementary investments that work similar to kind of what Dalio is talking about, the all-weather portfolio there, but are made up of companies and innovations that I personally care about. For today's tip, you can dig straight to the bank. You should double-click on Ray Dalio's all-weather portfolio. You don't have to treat it as gospel, but it is worth looking over if just to pick and choose some of his suggestions. looking over if just to pick and choose some of his suggestions.

Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.