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MASON & ASSOCIATES, LLC

Federal Employee Financial Planning: Investment Jargon Part One (EP39)

Ever wondered how a bull and a bear could hold the key to understanding the stock market? Join Michael, John, Tommy, and special guest Jeff Hybiak, Chief Investment Officer at SEM Wealth Management, as they unravel the enigmatic language of investments. They break down the importance of diversification, cautioning against blindly chasing the best-performing ETFs or mutual funds as it may lead to purchasing duplicate investments rather than diversifying your portfolio.

You will discover the origins of bull and bear markets, where their attacking styles symbolize the rise and fall of investment prices, how long these market cycles typically last and the knowledge to make informed investment decisions. Listen in as we touch on the tax disparities between mutual funds and ETFs and share the potential implications for investors. 

Listen to the full episode here:

What you will learn:

  • Why Mason & Associates avoids using investment jargon in client meetings. (1:45)
  • The power of visually seeing how your investments work. (3:15)
  • The difference between bull versus bear market. (5:04)
  • What an ETF is and why this is important to know. (7:45)
  • The importance of diversifying your portfolio. (11:30)
  • Why you must be diligent with checking what you’re actually purchasing. (13:00)
  • The tax differences between mutual funds and ETFs. (15:40)
  • How long bull and bear markets usually last. (18:48)
  • At what point is it short term or long term in the investment world. (20:45)

Ideas worth sharing:

  •  “If you think about how a bull attacks someone, they start down low and they sttack up. A bear comes from a higher level and they attack down. So that is how they came up with bull and bear markets.” - Jeff Hybiak
  •  “People who own many different ETFs or mutual funds, especially the ones who are just picking the best performers every year, likely have just bought the same things 10 times and are not diversified at all.” - Mason & Associates, LLC  
  • “Generally ETFs are a more tax efficient vehicle.” - Mason & Associates, LLC   

Resources from this episode:

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Read the Transcript Below:

Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.

Mike Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, certified financial planner; John Mason, certified financial planner, and Tommy Blackburn, also certified financial planner, certified public accountant as well.

Mason & Associates have over three decades of experience helping federal employees with their financial plans.

This show, Investment Jargon — to help us with that, we've got a special guest, Jeff Hybiak of SEM Wealth Management. Jeff is the Chief Investment Officer, and he's going to help us a little bit with the Investment Jargon. Hopefully, John, we can bring these difficult terms into easy to understand.

John Mason: Well, the investment jargon is … so we've spent you and Ken, Tommy, Jeff, all of us, Ben, everybody; one of the things that we do as financial planners is we have to take very complicated concepts and we have to apply real world, understandable, digestible action items to clients.

And if you just use investment jargon all the time, you're not going to convey the importance of these various tasks and action items.

Although we're going to do this episode guys on jargon, I think it's important for our audience to know that one of the reasons that all of us are successful and financial planners across the country are successful, is we on purpose, don't use jargon during our meetings.

So, this is an educational experience for our listeners, but this is not going to be … I guess Tommy, what I'm saying is I don't want our listeners to think we're using a bunch of jargon during client meetings.

Tommy Blackburn: Absolutely, I'm glad you said that, John. As I think about one of the biggest compliments, I think we receive is when a client or prospective client, a friend says, “You explained that in a way that I could understand it. I really enjoyed your explanation because it was digestible.”

And as Mike has said before, hopefully, I will get this correct; we speak it in your language so you don't have to speak ours. And that is the biggest, I think, compliment that we can receive.

John Mason: No doubt. And one of the ways that we do that, and Jeff I know you're the same, is we do a lot of client meetings virtually via Zoom. That's primarily how we're meeting with our folks.

And what's so cool about Zoom is you can highlight things on the screen, you can draw pictures, you can really illustrate maybe Excel, really do some illustration and explain the why behind these concepts and not having to use jargon.

And whether you're doing in-person meetings and you can write upside down and backwards on a piece of paper like we used to do, or you're executing it via Zoom, it's not only the not using jargon, it’s the illustration of what we're talking about.

Jeff Hybiak: Absolutely, I think one of the things that we can all take for granted is that we do have this experience, but most people don't have experience in handling money, and they just hear all these terms thrown out by Wall Street who's really trying to market your things and they never truly understand what's happening.

John Mason: Well, that's a great kind of segue, Jeff, into what we're going to talk about today. And before we dive into the subject matter, I just want to thank our audience. This is 2023 that we're recording this podcast episode. We looked at the stats, we couldn't be more excited to see this trajectory and how our audience continues to grow.

Thousands and thousands of downloads, we're receiving questions. We have one about the FAA that we're going to address on a future episode. So, if you have questions or topics that you're concerned about, masonfp@masonllc.net, send us those questions, we'll do an episode.

So, welcome, welcome back, thank you for being a part of this community. Topics for tonight, we're going to talk about ETFs versus mutual funds, bull versus bear market. And if we have time, we're going to dive into these terms guys: conservative, moderate, aggressive and what that actually means. So, where should we start?

Tommy Blackburn: Well, I just wanted to add, we may break this into a mini-series. We may do a few series on this one because there's a number of language that's used that we kind of want to go over.

And also, John, thanks for thanking our audience for all of their support. Did want to thank Jeff as well for coming back, this is I believe your second appearance on the podcast and perhaps, we start with just bull versus bear market. Jeff, can you give us some enlightenment?

Jeff Hybiak: I think that's one of the most misunderstood things, and when I started investing on my own before I decided I wanted to do this for a career, it didn't make sense to me.

And if you think about bull, generally means an upward sloping market. It's going up in general. And then bear, they've always said to mean down market and I never understood that.

And I finally started researching and I found out that the origin of that is pretty interesting, is that if you think about how a bull attacks somebody, they go from down low and they attack up. So, that's how they use their horns, they want to kill the person they're attacking, whereas a bear comes from a very high level and then attacks down. So, that's how they came up with it.

I think what gets more confusing is the way Wall Street and the media will throw these terms around, is they use a very simplistic definition of if the market goes up 20% from the lowest point, they call that a bull market, just blank it. They don't look at anything else, they said that's a bull market.

Conversely, they'll do that on a down market if it's down 20. And I think that can be very misleading because it doesn't actually tell you what's happening or why.

Tommy Blackburn: And Jeff, as I think about it, I guess some subsets of that is we also have a correction, which I think is 10%, and a pullback is 5%.

So, you hear these terms of, “Oh, we've got a pullback, a correction, a bear.” Like what does this mean? And where did we even come up with these?

But at least maybe now, put a little bit of clarity behind where some of these terms came from and maybe some of the metrics behind what they're even saying when you hear them on TV.

I know we're going to do another jargon piece where we're going to talk about, well, what are they even saying when they say the market? So, we'll have to cover that one as well. What are we even speaking about when we throw these terms around?

John Mason: So, bull is good, bear is bad. And so, maybe when we're meeting with clients, we say we're in a good market right now, or we're in a bad market right now. I don't even think, Mike, do you even use the term bull and bear when you're meeting with clients?

Mike Mason: I can't remember using it at all. One of the terminologies I will use is basis points. And I've tried to find a better way, but it's really hard when a fee, let's say is less than 1%. If it's half a percent, you say one half of a percent. But if it's 25 basis points, a quarter of a percent.

So, I just start off explaining that it takes a hundred basis points to make a percentage point, and then it becomes very easy, the clients get it after that. But just using the term basis points, kind of like using ETFs like you guys said earlier, tell me what is an ETF?

Tommy Blackburn: So, I'm going to definitely get the expert in a room to help us on that, but it stands for Exchange-Traded Fund. And so, therefore the acronym is ETF. It is a very common part of how portfolios are built nowadays. And with that, Jeff, can you shed some light?

Jeff Hybiak: Absolutely, first I think you have to kind of go back to the origin, which was a mutual fund, which was a way for most people to get invested in the market because not to bore you guys with ancient history or things like that, but you essentially, used to have enough money to buy a hundred shares of a stock. They called that a round lot. You could not buy it with less than a hundred back in the 1970s and even early eighties. And then they charged just extreme commissions.

So, mutual funds were born, it was a way for people to own an entire basket of stocks inside of a vehicle. Well, then, we started to see different things where they said, “Well, what I don't like about a mutual fund is I have to wait till the end of the day to buy or sell it and I get that day's price.” You can't price them into a day.

So, they started evolving and they came up with ETFs, Exchange-Traded Funds. So, at its simplest purpose, is an ETF is just a mutual fund that trades all day long and you may or may not get the exact price equal to the underlying stocks or bonds that that ETF owns because there is some market fundamental movements inside of that price.

So, it is a little bit more risky as far as defining what price you get when you buy or sell.

John Mason: So, in both of these products, whether it's a mutual fund or an ETF, it's important for our listeners to know you're getting a basket of stocks or a basket of bonds, or if it's a moderate or a conservative or an asset allocation based mutual fund or ETF, you may be getting a stocks and bonds together or you may be even a little bit of cash.

So, it's a basket of securities, whether it be risky stocks, risky bonds, lower risk stocks, lower risk bonds. So, it's a way that most people access the market and to be fair, I think all of us know that there are not very many good stock pickers out there.

So, these vehicles, in our opinion, are the best way for 99% of the population to access “the market” because we're not good at picking individual securities.

Jeff Hybiak: I think the risk that comes into that, and this goes along with what you were talking about; conservative and moderate, is there's now more ETFs than there are individual stocks listed.

So, the choices are just rampant out there. And there's a lot of things that have a lot of overlap. You might own a NASDAQ 100 ETF and an S&P 500 ETF, and then maybe some technology ETF. Well, turns out you probably have 20% of your portfolio in Apple stock.

So, there's so much overlap just when people will look at a listing, whether it's on the internet or if they still look at the Wall Street Journal or Barons, they say, “Here's the top performing ETFs.” If you buy the top 10, you probably literally bought the exact same holdings underneath.

John Mason: Well, you just took us down a different path. And so, we have to bring in diversification now, because diversification means you own a bunch of different things and therefore, your money is diversified.

So, if I own the S&P 500, I'm diversified hypothetically, or if I buy the top 10 performing technology or growth mutual funds of 2020, I'm diversified. But in reality-

Tommy Blackburn: you bought the same thing with a different wrapper on it.

John Mason: Right. Yeah, you bought the same thing 10 times. So, I think people who own many different ETFs or mutual funds, especially the ones that are just picking the best performers every year, likely have just bought the same thing 10 times, and are not diversified at all.

Jeff Hybiak: Yeah, and we've seen that inside people's TSP as they've heard, “Oh, you need to own 10 funds.” And they might own, C, I, F, S, G and then all of a sudden, they start throwing in 20/30 and 20/40 funds not realizing that they're literally just duplicating their efforts there.

With TSP, you can get a very well diversified portfolio with three or four of the funds, same way with most 401(k)s. And time and time again, you'll open somebody's 401(k) statements, see 15 listings when 10 of them are literally the exact same positions.

John Mason: So, don't get lured into a false sense of security just because you own a hundred different things or 15 different things. Like we work really hard, Jeff, with you and you're helping us in the portfolio management to make sure that we don't own the same securities multiple times, and then we don't have things that are overlapping.

And if you just read the name of the fund, it doesn't tell you what you're buying unless you dig into that big nasty thing called a prospectus. That's the only place you're going to find what you're truly buying.

Jeff Hybiak: Absolutely. I mean we've seen all kinds of different things and like I just mentioned, you can have a tech ETF, one might actually be buying high growth tech stocks and the other might be buying emerging tech stocks, and they're going to act completely different, and that's just the mistake people keep running into.

John Mason: Here’s one of my favorites and then I think maybe we move on to the next term.

There's a fund out there that's called the Growth Fund of America. This seems like it's pretty logical of what you would own, but guess what? It owns international.

So, you bought the Growth Fund of America because you thought that sounds pretty cool, I want to be in America, and I want to be in growth. Turns out you just bought international, turns out you probably bought some value stocks. The name doesn't do it just as to what those individual or underlying securities are.

Mike Mason: What's one of the mistakes that the average investor will think about when they hear S&P 500? What do you own? The 500 biggest stocks? Do we own an exact one stock in each of the 500? Jeff, you may have dabbled in those stocks, but it's not equal waiting, is it?

Jeff Hybiak: And absolutely it's not, and I think maybe they're close to 500 stocks again, but because of different mergers and splits and things like that, at one point in 2022, it was the S&P 494, so you didn't even have 500 stocks included in that.

Generally speaking, it is the 500 largest U.S. based companies that are public, but they also have to be approved by the S&P 500 committee or standard employers. In fact, Tesla was bigger than most companies and they didn't get included until sometime in 2021.

So, they have different criteria, but it's based on the size of the company. You don't have an equal position in every company. Therefore, John said that, “Hey, I own S&P 500, I think I'm diversified.” You're actually not diversified when you own that. Even though in theory, you have 500 U.S. based companies.

Tommy Blackburn: You have a over way to probably what Microsoft and Apple and some of your big names there. I got to say John, I think another fund that came to my mind is there used to be, I believe a Virginia Municipal Bond fund that had like 48% in Puerto Rico or something along those lines.

So, it's just one of those things where just because the title of the fund says something, you might want to dig a little bit deeper, hire some qualified help if you're not willing to do that digging yourself.

John Mason: Well, since you just jumped in there, Tommy and you're our CPA on our team here. I think going back to mutual funds versus ETFs, maybe you can share with our listeners a little bit the tax differences between those. Because we've explained what they are. We've explained a little bit of the differences in how they're traded and what not, but from a tax standpoint, mutual fund versus ETF.

Tommy Blackburn: So, generally speaking, by and large, and you guys know as much as I do about this, so jump in here, is ETFs, those Exchange-Traded Funds are going to be more tax-efficient. They by and large are not going to generate those capital gain distributions.

Whereas mutual funds can be interesting because your performance could be down for a year, but if the fund had had previous gains, now as they're trading to free up cash to send out to the investors, the holders of the fund, as they're doing their redemptions, it can create gains kind of like phantom gains inside of that mutual fund that get passed through to you.

So, I think hopefully, at the simplest level, just would say ETFs are a more tax-efficient vehicle.

Jeff Hybiak: Yeah, and I'll just add to that, a very special caveat is we've been in a generally up trending market and the reason they're advantaged and I won't get into all the nitty gritty details, is basically, if more people are putting money into an ETF, they'll essentially never have to distribute their gains out.

But if you run into a year where everybody's pulling money out of that ETF and they're having to actually make sales, you might get hit with a very surprise gain bill just say, “Well, Tommy told me they're more tax-efficient.”

They've been tax-efficient, but it's not guaranteed, especially if you think you were diversified and you bought something that was highly focused that all of a sudden, didn't have any money left in there.

Tommy Blackburn: This is why I said generally, they're more tax-efficient and also, I think Vanguard's got their special heartbeat strategy that somehow siphons the gains out of the ETF. But this is why we say generally, they're more tax-efficient

John Mason: And well guys, we've covered quite a bit on this episode already. Where I'd like to take us back if we can because to pretend like the stock market is not an emotional experience for people, or to pretend like investing is not emotional — it is, it's emotional for us when we see our clients' account values go up and down.

So, bull verse bear, remember, bull’s good, bear is bad. What I thought Jeff, as you were going through that is what's so crazy about the media, CNBC or whatever you're listening to, is you could be in a bull market one week, you can be in a bear market the next week, but what about over the last a hundred years?

Over the last a hundred years, we have been in a bull market, that was the place to be. You wanted to be invested for the last a hundred years, period. So, in those interim periods, those shorter-term periods, you're going to see fluctuations. But we all around this table believe over 40, 50, 60 years, you are going to be in a long-term bull market with some hiccups in between.

So, hopefully, I haven't overstepped there, but maybe you could define for us, Jeff, how long bull markets typically last, those like shorter ones, and then how long the bear markets last. In general, and we know those are blips on the radar, but share with our audience those stats.

Jeff Hybiak: I think that's a really good point. In general, using that a hundred-year number or 80 whatever number year you want to use, the market goes up most of the time. So, all you're really focused on is how long are the bear markets or the down periods going to be.

And what we've found is you got to kind of have a dividing line. If you're in a recession or heading towards recession, bear markets tend to not only be longer in duration, but more severe as far as the losses go.

So, a lot of the times, you might see statistics, well, the average bear market is down 24% and it lasts I think 13 months. But that's including all those what I would call a correction where generally, the market's been going up, it needs to take a little bit of a pause, and then it goes right back up.

I call the COVID bear market when it lost 35% in six weeks, just a minor correction because the trend kept going higher and the recession was over so quickly due to the stimulus.

But if you're looking at a recessionary one, now you're talking about a duration, one that lasts almost 24 months. I think the number was 22 months and goes down 37%. So, obviously, that's a much bigger distinction.

So, what we always tell people and why they need a financial plan is yes, we believe the market is the best place to be for very long-term money, but the question is, does your plan call for needing some of that money during that 40-year period? And if so, you need to make adjustments accordingly.

Tommy Blackburn: So, you need to have a cash flow strategy as part of any investment strategy there to make sure the portfolio can handle these events.

As you were talking there, I was thinking, because I know we tell people this all the time is, investing is a long-term game, go back to your a hundred years and while we're managing for the long term as we believe over the long-term.

And I keep saying long-term, and so what I'm curious about is if somebody was wondering, “Well, what do you mean by long-term? Define like at what point are we short-term and what point are we long-term in the investment world?”

Jeff Hybiak: Yeah, that's a really good point and I think everybody defines it differently and that's more jargon that we actually do use.

In my mind, I've always used long-term as 10 years or longer and that's just because the market has very rarely been down over a 10-year period. I think it's happened maybe like 2% of the time over the last a hundred years.

So, if you're going to be invested longer than 10 years, you pretty much are assured you're going to come out at least break even over that 10-year period. Short-term, we use on the other end of this spectrum of three years because we've seen significant losses in three-year periods.

So, if somebody comes to us and says, “Hey, I have this money sitting around, I want to invest it, but I'm going to need it in two years,” we'd say, “Let's find you a high yield money market or something.” Because we know that you can have that recessionary bear market that lasts three years and you might end up with half as much money as you started with.

John Mason: So, maybe we can give our audience some takeaways here because generally speaking, if you have a long-term portfolio … so, you're retiring a federal employee today, you're 57, you hit MRA and you're out the door, and you're going to be invested for 40 more years.

What we're saying or not suggesting rather, is that you can't touch your invested money for 10 plus years. What we're saying is, it's okay to clip coupons off of that at a reasonable distribution rate knowing that we plan on doing that for 30, 40, 50 years.

When we talk about these shorter terms or intermediate terms, what we mean is we are going to deplete an entire account balance over a zero-to-three-year period, or we're going to deplete an entire 529 balance in 10 years when little Susie goes to Virginia Tech.

So, those are very defined periods of time. So, generally speaking, zero to three years I would say, I think we all say, keep it in cash.

Tommy Blackburn: And I think maybe we kind of are in that middle zone if it's like less than five. So, zero to three seems pretty clear. Maybe if we have a five-year goal, kind of begin to wonder what's the most efficient way to do this.

And the prime examples I'm thinking of here is like I sold a house or I'm going to buy, I've got that large purchase coming, what should I do with these funds? And if it's within three years, I think all of us pretty much agree, we need some type of cash type of account or get as much interest as we can, but we can't really afford to take money or take market risk with it. Because as Jeff said, it could get cut in half. Just bad timing.

Mike Mason: And that's why it's so important to have a financial plan because at any given point, we are all in a short-term investment, a medium-term investment and a long-term investment.

Just have to understand what the targets are and play for those. If there's a new car that comes about every five or six years, we need to know that we have to have that liquidity if we don't want to borrow it or Susie's going to school, or we're going to take that once in a lifetime, 50 to a hundred thousand dollars trip.

We just need to know it, plan for it. Know that the long-term money got the biggest hit in the last couple of years, but that doesn't matter because we weren't getting back to that money for 10, 15, 20 years down the road.

John Mason: And psychologically, Mike, to your point, it's gotten easier. So, March 7th is when we're recording this episode, it'll air probably in May or June. But recording this, I saw yesterday, there's 6% CD rates out there. So, now leaving your money in cash isn't so painful because we're making 6%.

Now, us around the table know that if inflation's running at seven or eight or what have you, you're still losing money. But for whatever reason, it's not as bad to leave money in cash psychologically now that you're earning it.

For my entire career, the previous 10 years, we had to fight with people to leave that money in cash because they were like, “Well, I'm not earning anything.” That's okay. It's okay not to earn anything on your cash when you have that very short-term investment horizon.

So, guys, I say we break this, it’s been an awesome episode. Let's do another one sometime on Investment Jargon. We'll continue the conversation with Jeff. So, we'll wrap this one up.

Thank you, this has been another episode of the Federal Employee Financial Planning Podcast, we're Mason & Associates. You can learn more about our financial planning process at masonllc.net. There's another episode on the client experience and if you have any questions, masonfp@masonllc.net

The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.

We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.