Reset Your Portfolio Expectations (Before It's Too Late) (EP.217)

0:28We all need to make smart decisions with our money. We talk a lot about not just what's been going on in markets recently, but how to think about markets for the rest of 2025. We think about some of those concerns that have shaped the faith of some people in long-term investing in general. And we talk about what if we have our third recession in 20 years. There's a lot of stuff that we get to in this interview that I think you'll enjoy. And because I had just turned in my manuscript when we were doing this conversation, I think there's a lot of concepts from the perfect portfolio that show up in it.

0:58And if you want some exclusive updates on The Perfect Portfolio, you can find a link at the top of the episode description or visit theperfectportfoliobook.com. And now here is my conversation with Jesse Kramer. Today, I'm really excited because Peter Lazaroff is back and will be joining me. Peter is the chief investment officer at PlanCorp, and he's the host of the Long-Term Investor podcast. Peter is routinely recognized for simplifying complex investing and planning issues for clients and for listeners. He's been repeatedly named a top 100 US financial advisor by Investopedia. He's always a great resource for teaching people about investing.

1:38And you'll see that today, simply through the frameworks and explanation that he provides. Peter first joined me back on episode 77 of this podcast. Go ahead and listen to that one. And now he's back for round two today. Peter, it's messy out there, man. We've had an interesting year so far. We're recording in mid-June. This will probably publish in mid-July. We started on some highs. Boom, April hit. We had some lows. Now maybe we're back towards highs. But still, one thing I'm struck with is there's this big difference between short-term signals and long-term direction when it comes to investing.

2:11I'd love to maybe start with just how have you felt and what are some of your thoughts about how 2025 has been so far? Think about being a long-term investor is that when you go into a year, clients are always talking about a few things and tariffs were certainly on people's mind. You know, the election results have just come in. And I would say in any presidential election, my experience has been that half of people are very upset and half of people are happy. And I think a lot of people who are upset were saying the market is going to crash. I don't like some of the policies and things that are being said on the campaign trail.

2:46And lo and behold, I mean, I wouldn't call a 20 % drop a crash, but we had a near 20 % pullback and you have people who feel validated. I can't tell you how many times in my career I've put up slides showing that who is president does not impact the stock market or a political party does not impact the stock market. So one frustrating part about 2025 is me now realizing in about three years when we have our next election that when I put up those charts, people are going to say, well, what about the tariffs that Trump put out there, that did happen. I suppose that validated, but as you mentioned, we're already back.

3:21It's a great reminder that the market is going to fall 10%, 20 % with a pretty surprisingly large frequency. And this story is always going to be different. But the most important thing that I was talking to clients about and talking to employees and friends and family is earnings. Yes. In the case of tariffs, which by the way, by the time this airs, that 90-day pause will be close to expiring. And so there'll probably be more headlines related to it. Here's the thing is no matter what the tariffs are, do you think McDonald's is going to try to sell us cheeseburgers or Coca-Cola is going to try to sell us Coke or Ford's going to try to sell us cars?

4:00No, they're going to try to sell as much of their product no matter what. Will there be more obstacles? Have the rules to the game changed? It's like if we got out a board of monopoly and we've been playing by the same rules that monopoly has always existed with. And suddenly we change some rules. It's going to change your strategy a little bit. But when you invest in the stock market, you are betting that CEOs like money and that shareholders will demand that CEOs maximize their value. So 2025 has been a full long-term market lesson all wrapped up into six months. It'll be really interesting to see what goes on with tariffs, what goes on with the spending bill.

4:36I want to play devil's advocate here on behalf of the listeners, but also, Pete, I mean, on behalf of client conversations that you and I both have, maybe someone's listening right now and go, OK, we don't know what will happen over the next month between when we're recording and publishing. But let's say the S &P stays about where it is right now, which is close to all time highs. We haven't really lost any ground on the year. But imagine someone says, I hear what you're saying, Peter. McDonald's will keep on trying to sell cheeseburgers. But we saw something this year where one politician was able to push some policy forward and then pull it back and then kind of push it forward and pull it back and just whipsaw the stock market.

5:15And that has fundamentally shaken my faith in long term investing. Is there any merit to that argument? What's your response there? I think there's merit to that feeling. The feeling is valid. Feeling concerned, feeling worried, feeling uncertain, all valid, all normal. Nothing wrong with that. When you take a step back and you think about why we invest in the first place, I always go back to really the first principle level is we invest because we're trying to grow our savings faster than the rate of inflation without taking undue risk. What is undue risk? Yes, there is risk in that concern and that feeling that one individual specifically is exerting a lot of influence over the short-term fluctuations of the market.

6:02There is a risk that the market will fall 10 % roughly on average every 12 months, because that's what it's done historically, and fall 20 % every three to four years on average, because that's historically what it's done, and fall 30 % or more about once a decade on average, because again, that's historically what it's done. I generally think that when I'm investing in stocks, I'm going to assume that we're going to have downturns with a similar magnitude and frequency as we have in the past, to me, that's not an undue risk. That is risk. And it is okay to be uncomfortable with risk. It's okay to be even more than uncomfortable, to be afraid.

6:39That's why some people hire an advisor. I feel like I operate with robot-like execution with clients, but even on myself, I don't. And let me give you an example, Jesse. During this downturn, I don't have a lot of cash. I don't keep a ton of cash on hand. My biggest asset is the firm that I'm a part owner of, PlanCorp. I fund all my retirement accounts. I fund my health savings account. And so the best thing I could come up with was directing my entire paycheck to my 401k. So basically like speed funding my 401k while the market was down. And typically I wait to fund my HSA until December, like when I get my year end bonus and I have a little bit more cash.

7:17But basically I just took all my paychecks and just put them right into the market. When you do it in a 401k, as your listeners and you and everybody probably knows, it goes right into the market. My HSA had to make a couple stops. And Jesse, we're recording this on June 10th. The cash in my HSA is still not invested. I am human like all of the rest of you. And all of the systems that I have in place for myself that generally mean that money's getting invested right away don't apply to my HSA, in part because of like the way the account's set up and in part because it requires me to click a button.

7:49Now, is it because I'm afraid? No. If I'm being perfectly honest, I saw a little spike and in my head I said, well, surely most bear markets don't resolve themselves this quickly. And here it didn't. Now, what am I waiting for? I've not publicly shared this story. I guess by December when I normally would have made the contribution, I will definitely do it by then. Maybe I'll do it right when we get off the call. In fact, mark my words, I'm going to do it right when we get off the call. My 2025 investment will get invested. So by the time you're listening to this, dear listener and the audience, it will be done.

8:21But my point kind of going all the way back to your concern was, I think it's valid. It is very human. We all feel it. And when people like you and I are telling you what's best, what we have set up for both your clients, what we have set up for my clients is to do it without emotion and to do it without human judgment and follow processes and financial theory. because the long term, those things work out pretty well. But the problem with the long term is that it is an eternity to live through in the moment. And so for the people who still feel uncertain and shaken about what has happened and what might happen, I will again reiterate for the third, fourth time in the past five minutes, totally normal.

9:01Just remember, why is it that we invest and what is a risk that you get compensated for? And what's a risk that you don't? You don't get compensated for trying to time the market. You don't get compensated systematically, at least for trying to pick exactly the right security. So even though I poorly timed the market here, I'm going to go buy the single fund that I own that's 100 % stocks, globally diversified. I will make no choices other than what my predetermined plan is. And you go forward that way. One of the crazy things is you look back at every drop and it seems like an obvious opportunity in hindsight, but it's always seems like a risk in the moment.

9:37And so find a way to turn what feels like a risk into an opportunity. Because I can assure you that when you look at one of those long-term charts that goes up and to the right and has all the headlines, this is just going to be one of those headlines that shows up on the chart of long-term returns despite all of these headlines. This is going to be on that chart. Give us a year so there's enough room on the chart to include it, and it'll be in every history book like that. You touched on a few things there, Peter. Well, first off, I want to say that your quote, that part of our job and part of any investor's job is to grow their assets faster than inflation without undue risk.

10:11I'll be honest, I've stolen that one from you before and used it. That is a fantastic explanation of the reason why we're all here in the first place. It's not to become kajillionaires and die atop the greatest pile of gold that we can. It's to simply grow our assets faster than inflation, but also keeping risk in mind, which is huge. I want to dive more into behavior. Because to me, when I've seen what's happened so far this year, one of the biggest risks we all face as individuals is that risk of overreacting. It's that risk of mistaking volatility for some sort of signal that we need to change our plan.

10:45I'm pretty sure, correct me if I'm wrong here, I think I listened to a podcast episode that you put out earlier this year, where you said something akin of, there are some times actually where you suffer volatility, maybe for the first time as an investor or the first time as a retiree, your account, your portfolio really takes that first big drop. And you learn that maybe your risk appetite isn't quite what it is. And changing your portfolio actually is the right thing to do. It just so happens that it was also the right thing to do before the volatility hit. You just didn't realize it. Can you dive into that logic a little bit?

11:20It's interesting. And I don't think it's something that I would have said at the start of my career nearly two decades ago, when my only education was really that from a textbook. In reality, when you're dealing with humans, you can't take the human nature out of humans. And I think a lot of times as we work with clients, it's not just to be a robot fact machine. I mean, many instances, we have the unique privilege to listen like a therapist and ask questions and dig deeper. What I've come to learn as a result of that is nobody really has a problem with the volatility itself, with the down market.

11:59We'll sign an investment policy statement before we invest a client's assets, just like any other good advisor will do. And you'll say, hey, the portfolio, the worst 12 months it's had, like if you had a million dollars, would you be comfortable losing$360 ,000 of it or whatever? They're like, yeah, of course. I really think people believe that. And that's how we set that stock bond mix. But what I've come to learn is that while people can handle the volatility, they can't necessarily handle the narrative. And I think that's a very different piece of the pie that has given me a different appreciation for what my job is as your portfolio Sherpa.

12:36I'm not just here choosing investments. I'm going to think a lot about the experience of investing. And if that means that we didn't dress you warm enough for the winter, we're going to get you an extra layer of coats, which in this case, I guess are bonds. I don't know. This is off the cuff here. Or if you're too hot, we're going to get you some swim trunks. In a perfect world, the market's down and you find out that you're too conservative, that you're in your seventies and you have more money than you're going to need. And so you're going to more closely align your portfolio with the time horizon of those who are set to inherit it.

13:07And you get more aggressive in a downturn. But if you're approaching retirement or having just entered retirement and you realize that you can't handle the downturn, it's not ideal to sell while markets are down, but it is much better to adjust an allocation a little bit than to go to all cash. There is no doubt that getting entirely out of the market is the wrong move. Naturally, when people want to make such a move, I remember in the years 2007, 2008, 2009, that was a very common conversation. I want to get out of the market. Everything is going down. Everything's going down in flames. And we used to call them jumpers.

13:47They're jumping out of the market. Not jumping off a billion, but just call them jumpers. I was working in an office that had no individual offices. We were on a totally open floor where all the founders and partners of the firm were dispersed equally among us. And so you could hear all the client calls. And that to me was a very different vibe, trying to make sure you don't get all the way out of the market. Whereas if somebody's a 60 % stock portfolio and they want to go to 50-50, in the grand scheme of things, it's not that big a deal. If it will help you sleep at night, it's not that big a deal.

14:15And I'm going to reluctantly say, oh, by the way, if you really want to make a change that's going to make a real difference in the long term, you should probably make a move by more than 10%. But I don't know that that's necessarily what I want to see people do. I recognize that 10 % point changes aren't going to really change your trajectory that much. And so as a result, if it's really going to help you sleep at night, that's fine. What I like to do in those instances is document it really for the benefit of the client. The best traders in the world, and we're definitely not traders, but they keep journals.

14:44They have their reasoning why, what would make them change their mind, and just create an archive of, hey, this is what I heard during our conversation and why you want to make this move. And the reason you do this is because if it fast forward six months or six years and the sentiment's totally flipped, we have to make sure that we have a clear roadmap of why we got to where we were for making these changes. You're allowed to make changes with your portfolio. In a perfect world, you pick one strategy and one allocation, you stick with it for as long as possible. But at the end of the day, if you can afford to make that change, yeah, you're right.

15:16I think I've become a little more lenient in my sentiment around that issue. You reminded me right there, there's this Cliff Asnes story that maybe you've heard before, where I think it's his aunt or his great aunt. I think she lives in Australia, but she travels back and forth to, I believe it's the USA pretty often. And she knew that Cliff Asnes, listeners, if you're not familiar, he's a hedge fund guy. So she would ask Cliff, hey, I know you do these currency trades or whatever it is you do. When's the right time in any given year when I need to move my Australian dollars to US and US to Australian?

15:49And for years and years and years, Cliff was like, I can't tell you that. I can't zoom into it this specific day. And she interpreted that as you're just withholding information from me. You know the answer, but you're withholding from me. And so eventually, he said he kind of got this better EQ, emotional intelligence. And he'd say like, you know what, Aunt Cindy, next Wednesday, you should do it next Wednesday. Because she got the narrative that she wanted, which was she was getting expert advice. And Cliff realized it's all just arbitrary anyway. Telling her next Wednesday isn't any worse than telling her, I don't know.

16:19There's a similar, not maybe exactly the same, but there's a similar idea that you just described there, Peter, which is if someone is 60-40 right now, they feel like they have too much risk, going 55-45 or 50-50 makes them feel better for the rest of the year. Okay, all else equal, it's probably not a coin flip. I would rather they stay 60-40 if that's better for their plan. But if it does help them sleep at night, it's close to being a coin flip. And I'm okay with that change. And it's a lot better than saying a month later, screw you, Jesse, you told me I can't change and now I'm going all cash, like sayonara.

16:52It's a much better outcome. There is this interesting gray area. I also wanted to touch on the narratives idea a little bit more because one hard thing that I find, Peter, is I'm certainly not a fake news conspiracy. They're all lying to us person. But at the same time, I do realize that if we consume too much news, whether that's cable news or just reading Google algorithm, feeding you the news that you're already reading, it is easy to convince yourself that the narratives will start driving your portfolio decisions. One of my struggles or just one of the hard parts I find about answering reader or listener questions or answering client questions is when they say, but haven't you been paying attention to the news?

17:32Everything is going badly. It was the case when President Biden was in office and some people were saying everything is going badly. And now it's the case when President Trump is in office and everything. And it really is largely narrative driven. Maybe I'm beating a dead horse here. But what do you say to the client who's addicted to the news and is telling you that you're wrong about the world? I experienced those same conversations and I try my best to always, anytime the conversation comes up with a concern, the first question I ask is, how do you think that impacts earnings? Because at the end of the day, the stock market tracks earnings so closely, shockingly closely.

18:08I mentioned working on this book. It's become such an important idea to me that it's almost an entire chapter and there's some charts in there that you'll be able to see like how closely it's all tracked. And the economy and the stock market are not the same thing because the economy, they're real people losing their jobs. Good businesses, they have access to sell to the whole world. Now, are things worse because of a set of policies than they would have been otherwise? Perhaps. I think that's a logical concern. But does that mean that earnings won't continue? Let me put this a different way. So I own a stake of the business that I'm in.

18:44I'm not selling my business because of the way the world is going. We're trying to figure out as a business how to earn as much money as possible. All of my clients who are business owners are doing the same thing. The front end of my career was most of the doctors. When I came to Plain Corp, I introduced a lot of business owners into the type of people I worked with. I've never, ever, ever met a business owner who says, I'm going to just sell my business because the economy is terrible. I'm just going to sell my business. What is it that we all think we're doing in stocks? We own businesses. And that's where it's a narrative correction.

19:15What's so interesting is so many times people give me all these reasons that things are bad. I'm like, those are all facts, but they're not necessarily relevant. That actually comes up with the investment case for a lot of things. We don't have to go down a huge rabbit hole. One topic that I really struggle with, for example, are private investments. Maybe they're useful. If they're free, I'm all in, but I don't think they're necessary. The primary narrative for using them are all facts. I'm just not sure they're relevant. When you come to things on policy or the economy, all facts, all something that I think might impact you in real life.

19:49I think especially in the last six months, the thing I've been reflecting on is, hey, this is the sort of thing that's going to affect our everyday lives, but it's long term, not really going to affect the way that businesses, in the sense that they try to make as much money as they possibly can. If we get to a point where businesses stop trying to make money, that is a massive problem. I don't really see that happening. If the U.S. consumer, they say, well, they have to sell to the U.S. consumer. If the consumer's worse off, you're like, well, they might be worse off, but maybe they're going to go sell more in a different country.

20:22Well, aren't those earnings less because of all the tariffs? Maybe, yeah, but they're still going to try to make as much money as they can. This is not the first obstacle that businesses have faced. And so I think going back to like these narratives of the economy is looking bad. And look, to be clear, actually, the economy is showing mild signs of strain. What does that mean? Nobody really knows because some economic data doesn't read out the same way it used to. It all goes back to earnings. And that doesn't mean that you can't have temporary declines in earnings. But generally speaking, as long as you think companies will keep trying to make money, earnings have historically grown more than inflation.

21:00Why? That's because when there's inflation, the businesses pass on the price increases and then boom, you got higher earnings. Well, then it's a matter of, well, some companies earn more than others because new markets are created. Think of like Nvidia, the chips that are needed to run AI programming. Those were a market for the last 10 years, but boy, did they become an important market in the last year or two. And what's pretty crazy about the stock market is less than like 5 % of stocks drive all the returns basically in any given year. And so it's not that every company needs to do well. And maybe that's something I should have led with.

21:35You get me talking long enough, I'll get to the points eventually, but let's just go strictly with tariffs. There will be winners and there will be losers. The winners might win so big that the losers, it doesn't really matter. They might more than make up the earnings loss from some of the smaller companies. And oh, by the way, some of these losers in the total stock market make up less than a tenth of a percent of it. So it's not to say there won't be winners and losers. It's not to say that there won't be winners and losers in the real economy. And those are real concerns. And I feel really bad for a lot of people who this impacts.

22:07And I'm going to say this, I hope the audience doesn't take it the wrong way. I mean, one of the things about the policies recently, as well as all of the policies since the great financial crisis are that if you are an owner of financial assets, you're probably in a pretty good position. So does that mean it widens the inequality gap? I'm not an expert in this space, but my intuition would be yes. If you're worried about being able to meet your own financial goals, I would say that as long as you're a holder, because again, we're just trying to outpace inflation here. That's the first principle why we're investing.

22:37If you have financial assets, a lot of these things, maybe your assets won't grow 15 % a year like they did for a while there. That was unusual. That was not normal. But you're probably going to be OK long term. That's always an interesting one to touch on, Peter. I've struggled with it as a content creator over time, whether it's writing or podcasting, where we do notice things where we say, boy, this particular tax law, it might make wealth inequality worse. Or there are some things I know in like the financial independence movement where you say like, wait, you could retire with millions of dollars, artificially show very little income and get totally free health care.

23:13I mean, the answer is yes, you can. It's difficult for us in our positions to fundamentally change policy. If someone wanted to ask us, we're free to give our opinions there and say, yeah, these policies aren't necessarily fair. But at the same time, if our job here is to give the best advice we can to the individuals listening, there's something to be said where people who own income-producing assets have tended to benefit from that ownership, potentially to a disproportionate amount. Okay. But still, you're better off owning them than not. Maybe we'll leave the philosophical discussion to another podcast or another episode.