Redrick Terry:
4 Your Money time now, we’re joined as always by David Nelson, CEO of NelsonCorp Wealth Management. David, welcome back.
David Nelson:
Thank you, Redrick. I appreciate it.
Redrick Terry:
Absolutely, glad you’re with us today. So, perhaps the most notable theme today is risk management. So, having experienced a significant financial stock this year and seeing the stock market come charging back, what is the most important thing pertaining to risk management that you think people should understand right now?
David Nelson:
Well, my friends like to call me Nervous Nelly. I’m always concerned and always trying to help people grow their money and not lose their money. Clearly, after what we’ve gone through, the impact of these extreme events that literally come out of nowhere, and that impact that that has, that’s probably got to be front and center. Risk management as far as the industry that we are in basically looks pretty much at statistics. An example of that is that long term stocks have averaged 10%, and stocks outperformed bonds and stocks go up most of the time, and I always want to emphasize that, because again, the argument of staying invested is part of that justification. And what we want to do today is we want to talk about risk and we want to illustrate as far as as clearly as we can to folks as far as the impact that these things can have. Don’t get me wrong, the tools that people have out there help, but not as significantly as what we think people probably believe they can.
David Nelson:
So, the first slide that I brought, it’s a histogram and it’s kind of a bell curve for those that have this as far as in school. What we’re trying to illustrate here, and if you focus on the middle of this right now, the three tallest bars, the blue bars, that’s showing where the market is most of the time. And that most of the time, on a monthly basis, is plus 5% rate of return or negative 2.5%. And so, that’s where it is most of the time, and the yellow lines we put in there are illustrating as far as the outside of that are what we call tails, as far as in our industry. Things that don’t happen very frequently, and that’s what we want to focus on today.
Redrick Terry:
Well, what is the significance of those outlier events that you mentioned?
David Nelson:
You used the perfect term, outliers and they are outliers. When we look at it on that first chart, it was basically they’re pretty benign. Chart two is going to illustrate it a little differently. What we’re looking at here, cumulative returns. And cumulative returns, as far as if you remember on the first slide, it had a lot of blue as far as between the two gold lines. Now, we don’t see so much of that. We see some, but we don’t see as much. And as small as those things were, 10% of the time were the outliers, those tails as we call them. But that contributes to 40% of your overall returns. And as we can see I think with this visual, it’s very significant. Those big events, just like what we went through as far as in March, are very significant as far as any overall return.
Redrick Terry:
So, you’ve talked about various risk management tools before. Are any of those applicable in addressing this type of risk?
David Nelson:
So, most people in this industry, they like to talk about stocks and bonds, that mix. And that will help, don’t get me wrong. Tactical money management will help. Defined risk-type tools will help. But when the type of events that we’re talking about, the significant draw downs like we just went through, those are only pretty much handled based on what our experience has been with explicit hedging and hedging these types of events is very significant long term.
Redrick Terry:
All right, David. As always, we appreciate you being here. Thanks for the time.
David Nelson:
Thank you, Redrick.
Redrick Terry:
And if you missed any part of our discussion, we’ll make it available to you at OurQuadCities.com.