David Bach, one of America’s most respected financial authorities, has just published an updated version of his #1 national bestseller, Smart Couples Finish Rich. Bach, a co-founder of AE Wealth Management, an RIA with nearly $3 billion in assets under advisement, has published nine consecutive New York Times bestsellers about personal finance; a record unmatched in the annals of book publishing.
He took some time to speak with HuffPost about what smart couples—or smart individuals for that matter—should be doing in terms of today’s frothy financial markets.
Michael: David, as we speak, the NASDAQ is over 7,000, the Dow is over 25,000, and we haven’t had a bear market in more than nine years. What’s your message to folks today about the market?
David: First of all, if you have been invested, congratulations! Your net worth, and 401(k) plan should be at an all-time high. Celebrate but don’t get greedy. I want you to be grateful, conservative, and practical. But let me step back for a second.
Back in 2009 when the recession was at its worst, I wrote a book called Start Over, Finish Rich to encourage Americans not to give up hope. My message was that recessions always make the most millionaires. Everything gets put on sale. The stock market was on sale and the real estate market was on sale. It was a great time to invest.
Michael: So where are we now?
David: We’re now 8 1/2 years into the second-greatest bull market of our lifetime. You’ve enjoyed annual double-digit returns. The market overall is up over 300% since the low, and with reinvested dividends, the S&P 500 is up 390%. Real estate is back to an all-time high in most major markets. You’re hopefully feeling really good. Now is the time to be both grateful and practical.
Michael: We’ve had a correction in every decade. Are you expecting one anytime soon?
David: Bull markets traditionally come to an end and the time to prepare is today. At the end of bull markets, things become euphoric. People go from being negative and pessimistic to becoming overly confident and silly. You get 8 1/2 years into a bull market and smart people can do dumb things. The show we’re watching now is one I have seen before, and if you’re not careful, it can end badly.
Michael: What do you mean, you’ve seen this show before?
David: The last time the market looked like this, it was 1999. I was a financial adviser at Morgan Stanley and there were dot-com millionaires everywhere in the Bay Area, where I lived.
I’d have 30-something year old kids coming into my office and they’d have $10 million of AOL stock, which was trading at $81 a share. I would say, “You should sell half of it today, diversify your investments, and be financially secure for life.” But they wouldn’t do it. They would literally smirk and say, “AOL is going to $200.” And everyone wanted to own a “tech fund”.
Michael: What happened to your clients?
David: Our clients did great—we kept them practical. These “dot-com” millionaires who didn’t hire us, or didn’t listen and diversify, got crushed. A few years later, some of them were back in our office, often with worthless stock or with stock that was trading for a few dollars a share. They wanted help selling “what was left.” It was really sad to see.
Michael: How does that compare to today?
David: I’m not as concerned that the market is as overvalued as it was then. I’m concerned that people are becoming overconfident and forgetting that markets go down as well as up. Be happy. Be appreciative. But don’t get greedy.
Michael: What’s your feeling about timing of the market?
David: I fundamentally don’t believe in market timing. I really don’t. You cannot time the market.
But I will tell you that for the last year we’ve been very proactive, doing financial education programs for our clients on understanding market corrections. We’ve had our advisers presenting these seminars to clients around the country, reminding them that market corrections happen, and reminding them just how painful market corrections can feel. We’ve been encouraging them to be prepared and to rethink the concept of “risk.”
Michael: How do investors’ emotions change as the markets change?
David: People were terrified from 2009 to 2012. Today, they’re becoming not fearful at all, and this is what worries me. This is primarily because of the lack of volatility. In 2017, the S&P 500 experienced no greater decline than 3% (a total rarity). The question you have to ask yourself and what we discuss with clients is: “How would you feel tomorrow if your account went down 20%, 30%, 40%?” But it’s even more powerful when we use real numbers. So we’ll say, “You have $1 million. How would you feel in the next 90 days if your account went down $400,000?”
If someone is close to retirement, they start sputtering, “What do you mean, down $400,000!”
So we tell them, “That’s what happened in 2008, and it can happen again. That’s how the markets work.” Or we’ll say, “Your 401(k) plan is now 80% stocks and 20% bonds, and that is way to risky if you want to retire in less than three years.”
We’re telling our clients, if you’re ahead of your plan, maybe now is a really good time to pull back, diversify and enjoy some of that money. We’re not just talking about reallocating and rebalancing, which is critical. We’re saying that maybe this is the year you should spend some money. Splurge and take that cruise with your grandkids. Buy that new car. Donate to charity. Gift it to your grandchildren, investing in their 529 plans.
In a market like this, it is a time to be grateful, not a time to be greedy. Unfortunately, in these kinds of markets, sometimes smart people do very dumb things.