Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker/dealer, member FINRA, SIPC, investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.

Gary Determan:
Well, it is the first Wednesday of the month. So the program is live, expanded to the bottom of the hour. On the phone with us is Dave Nelson. Dave, how you doing?

David Nelson:
Great, Gary. How about yourself?

Gary Determan:
Not too bad. Now it’s been actually a couple of months since we’ve had the chance to catch up with you. How have things been going in the world?

David Nelson:
It’s been interesting. Health-wise, feeling much better. So I’m thankful for that to say the least. And as far as the business side of things, as far as the market, I got a couple things I’ll touch on today as far as stocks and bonds, as far as pricing, and what have you, as far as are things looking up, they look down. I mean the coronavirus, as far as the Delta variant. Heard that today, there’s two more variants that they’re concerned about. It’s crazy times to say the least. And you know, again, I won’t get into the medical side of it obviously because I’m totally inept when it comes to that. But the impact that it’s having as far as the markets, maybe what we can discuss here.

Gary Determan:
Has anything like this ever occurred before where it has been a medical reason that has affected the markets, Dave?

David Nelson:
Yeah, we’ve had some bird flus as far as in the past, but as far as the impact in the U.S., it’s been basically non-existent. It’s had huge impact as far as over in China, much of Asia as a whole. But this is the real first go round as far as for the U.S. and an impact like this. And again, at the end of the day, what most people are interested in, I mean we’re obviously focused on our health and trying to stay healthy and trying to do the right things. But this can really impact one’s net worth either positively or negatively.

David Nelson:
And so what we’re trying to do is not only factor in the ramifications as far as, I mean as far as that we normally focused on, which is again, some boring stuff to most individuals. But PE ratios and things of that nature as far as our stocks, expensive today, are they cheap, et cetera. Now you have to factor in, okay, what could the impact be from some of these issues as far as from a health perspective? And somebody would have said, as far as what the front end of this, the coronavirus that the markets would roll over as much as they did, I think most people would think you’re nuts. But that’s what took place.

David Nelson:
Also, if you look as far as towards the beginning of this year, we had a really unusual event that’s taken place. And again, I use these terms, I try to simplify it as best I can. But you have stocks and that’s the way most people think of it is the stock market. And they’re all the same, but there’s a significant difference between what would be defined as value stocks and growth stocks. And over the last 10 years give or take, growth stocks have just overwhelmed the value stocks. They’ve been the place to be.

David Nelson:
And probably the easiest category to describe as far as growth stocks would be technology. We all know technology has really changed things. And so technology stocks and things like that in the growth category have done remarkably well. Now, you get outside of that and talk about more old-school type stocks, maybe your consumer staples, utilities, things of that nature, over the last 10 years have underperformed significantly as far as the growth arena.

David Nelson:
At the beginning of this year, it was really, really strange as far as what took place. And it happened literally overnight. And that was when it looked like we’re going to reopen as far as the economy, and we’re going to be back to business as usual. You saw these value stocks absolutely explode on the upside. And a couple of good examples would be hotels, restaurants, things of that nature, travel, airlines, things of that nature. Those stocks went up … And I’m not exaggerating. Most of those stocks went up 100% in a matter of months.

David Nelson:
And so again, they had been trashed. Don’t get me wrong. They were really down. And so they recovered a big, big percentage up until about May of this year. May of this year, we started seeing a shift. Maybe things aren’t as good as what we thought. And the end result is that maybe that the economy isn’t going to be as great, and maybe these variants are going to have some impact. All of a sudden, we saw a shift again where people went from value stocks to growth stocks, and again, value stocks are the place to be when the economy is roaring and things are good as a whole, then you want to own value stock.

David Nelson:
When it looks like growth is going to be hard to come by, the value stocks aren’t going to typically give you much as far as return. At that point, you want growth stocks. These are the companies that, the Amazons of the world that really exploited this opportunity as far as with the virus, the pandemic, and that stock just went to the moon all because they’re in a nice position to take advantage of that. So it’s been a really, really unusual year this year. And right now growth is working again and value stocks aren’t working nearly as well as they did up until May.

Gary Determan:
So you have growth and you have value. Are there any others or is that it?

David Nelson:
That’s pretty much the big broad categories as far as stocks. And if you take pretty much any stock you could slice and dice a whole bunch. And value stocks, most people think of value stocks are stocks that have been roughed up. So in other words, like the name would imply, these stocks were expensive and then they got trashed. Now they become a value stock, but that’s not the only way of defining. And again, depending on who you talk to, these can be defined differently, like utilities. Utilities, most people would define as value, but at certain points, they might be deemed as growth stocks. I wish it was simple where I could explain that to people in a very simplistic way, that here, this is the ironclad rule, but the reality is it’s constantly changing.

David Nelson:
Microsoft was a growth stock for the first 20, 30 years of the company. And then it turned into this stock that really didn’t do much, but they started paying a dividend. So it was now being kind of defined as a value stock. Well, forget that the last three or four years. It’s now back in the growth category and that sucker has made people a fortune if they owned. Again, I’m not saying buy it. I’ve got to get all my disclaimers in here. I’m just using that as an example as far as how things change. But it’s crucial that individuals pay attention to these types of things as far as if they want to … again, the typical person that we work with, they want to grow their money with a plan. They want to protect as best they can as far as what they’ve got without sticking their neck out too terribly far.

David Nelson:
And we all know that stocks are going to go up and they’re going to go down. But the key is to be able to try to mute the downside and trying to capture as much of the upside as you possibly can. It sounds easy and exciting. The reality is it’s very difficult to do. And again, that’s why we as far as in our office here, spend as much time discussing and trying to explain this to people as we do. It’s a tough battle.

David Nelson:
There’s a lot of smart people out there that are trying to, that might be on the other side of the trade. In other words, if you want to sell whatever stock that you own, somebody else has to be willing to buy it. And that person may have a little upper hand as far as knowledge as far as pertaining to that stock. So it’s a tough game, but it’s an important one. And as we all know, and I’ll get into this maybe a little later, we’ll talk about interest rates as far as the impact that they have as far as on growth versus value. And again, how this can impact one’s net worth in a big, big way.

Gary Determan:
Again, visiting with Dave Nelson on Financial Focus. We will continue to the bottom of the hour. Now you talked about getting together your team there at NelsonCorp, what are those sessions like, Dave? They got to be quite interesting I would imagine.

David Nelson:
Yep. They certainly are. To most people this is just like beating their head against the concrete as far as they just hate the whole area. That’s a pretty typical client that we work with. This just isn’t their cup of tea, but what we’re constantly looking at is just trying to assess risk. I think that’s the, we use the term all the time weight of the evidence. You can’t look at one variable. I brought up earlier PE. What is PE? And that’s the price to earnings ratio. You’re looking at the price of stock based on the earnings, the expected earnings that are coming down the road. And you’re trying to establish a value as far as, is this realistic? Is this stock worth this? Or should I be selling it? And so that’s one item. One of literally hundreds that we look at as far as to try to make a determination, as far as what to do.

David Nelson:
Most people, Gary, get really charged up when they think of stocks in particular individual stocks. Like, “Yeah, I own this company, John Deere. I own Microsoft, whatever,” whatever the company happens to be.” That to them is kind of exciting, but it doesn’t always translate into good returns. We talked to people in terms of diversification and whether it be individual issues or whether it be into other pre-packaged type stuff. It’s really important that people understand what they own. And it’s important that they understand not only what they own, but what the potential downside could potentially be. And that’s the hard part, because most people have been trained to think that not that it’s going to go straight up, but that over time it’s pretty much assured that it’s going to be higher a year from now or three years from now or whatever the case may be.

David Nelson:
And so oftentimes we have to be the bad guy and point out all the examples of companies that have over a five-year or 10-year period have negative return. And most people are shocked to hear that. At least some of them are household names. Some of them are in our own backyard just a few years ago. One over in Morrison had pulled up and no longer has a factory as far as over there. So again, it’s not poking holes at companies. It’s just looking at the facts because people don’t come in our door expecting to lose money. People don’t buy bonds expecting to lose money. And so you need to educate them as far as the good, as well as the bad. And here’s the risks, and here’s the potential returns that you could potentially look at. Is it worth it?

Gary Determan:
Yeah. You said PE, I thought you were talking about physical education. That’s how much I know.

David Nelson:
There you go. You like to talk sports a lot. [inaudible 00:11:46].

Gary Determan:
Hey, we’re going to take a break for the weather. There is more. What are we going to talk about in the second half, Dave?

David Nelson:
Let’s talk interest rates. I think that’s a really, really crucial topic, and we’ve been yapping about a lot as far as with one-on-one with clients. So I’ll spend a little time on that.

Gary Determan:
All right. Very good Again, a check out the weather, brought to you by Awesome Carwash.

Andrew Stutzke:
We’ve got another pleasant day ahead of us. Low humidity and warm temperatures too. Looking for mostly sunny skies this morning. A few more clouds building in for the afternoon, and we’ll see an afternoon high of 84 degrees. A few clouds sticking around for us tonight. Still cool and comfortable, lows near 61. A few more clouds working in for Thursday. Skies likely to become mostly cloudy later in the day. That’ll see a high of 83 degrees, followed by a round of thunderstorms possible late Thursday night into Friday morning. And that’ll be the transition from comfortable levels of humidity to more sticky conditions, especially Friday afternoon. Highs will rise to near 86 degrees. With the Storm Track 8 forecast, I’m meteorologist Andrew Stutzke.

Gary Determan:
Thanks so much, Andrew. Fair skies. We’re at 68 degrees right now. We do have light winds. This update brought to you by Awesome Carwash.

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Gary Determan:
It is the first Wednesday of the month. So Financial Focus presented by NelsonCorp Wealth Management continues to the bottom of the hour. We’re visiting with Dave Nelson. Now, you talked about interest rates. What are we talking about there, Dave?

David Nelson:
Yeah, it’s a big broad category. And again, I’ll try to get to where people are just bored out of their skull. This is a really important variable when we talk about earlier growth stocks versus value stocks. And when analysts try to value as far as the stocks, they’re looking at expected tight cash flows a year from now, five years from now, et cetera. And factored in the interest rate as far as that currently is that the cost of capital today. That’s a really important one. More specifically, I guess I want to talk to people in terms of just looking in the rearview mirror just briefly. If we go back a little over a year and a half ago, individuals that were buying 10 year government bonds were looking at an interest rate of roughly a half percent. That’s correct, half a percent. That’s for a 10 year government bond.

David Nelson:
Now fast-forward to give or take a few months back, we were getting close to 2% on that same 10-year government bond. Fast-forward to today, you’re looking at about one and a quarter percent. That’s just ignoring inflation. That’s just looking at today as far as that with what’s called nominal yields. But in other words, what you would be getting paid. It’s an interesting factor here. And again, this is looking at what are called TIPS T-I-P-S. These are treasury. The same 10 year type bonds but were if this one factor is in inflation. And so when we look at that type of bond today, the actual net effect of inflation on top of the yield that you’re getting, you’re getting a negative 1.15% return today. Now again, when people hear this, they’re saying, “I’m confused.”

David Nelson:
I said, well, again, you go in and you buy a CD let’s say as far as in a bank or a money market account or whatever. You put them in as a safe type investment. Now you have to factor in inflation because obviously the cost of gas and bread and milk and whatever, things are going to go up as far as over a period of time. And that we call inflation. If you factor in inflation, layered on as far as the return that you’re getting, whether it be a 10 year government bond, whether it be a CD, whether it be the money market account, checking account, et cetera, you are losing money each and every year as far as with inflation at one or two or three or 5%, whatever the case may be. So this is a really period of time that people need to pay attention.

David Nelson:
You say, well hard to see because the average person ignores inflation. They don’t really factor it in. You need to factor it in because as we tell people, if you don’t, basically what it is, is a slow death financially. That’s again, if you have a negative rate of return for a year, two years, three years, five years, what impact is that going to have as far as on your ability to again enjoy your retirement or whatever the case may be? So interest rates are really, really important. We’ve been chatting about those for the last several years as far as getting to these extremely low levels. You look at Europe. You look at Japan. You look at many parts of the world. Their actual rate of return is negative. United States, it’s not negative until you factor in inflation, but you got to factor in inflation in order to get a real good read.

David Nelson:
We look at this Gary and say, what are some of the ramifications of it? And probably the biggest one centers around people are being forced to take more risks as far as with the money. And so in other words, when I started back in 1981, you could go into the bank and you could get 15% as far as on a CD in the bank. People looked at that. They ignored inflation, and I’m going to for this discussion. They’re getting 15%. They don’t need to stick their neck out anywhere else. They got 15% guaranteed rate of return on their money. That’s good enough. Today you’re not getting 15%. You’re getting a half percent or 1%, whatever the case may be. Now we factor in inflation, throw it on top of that. Again, you’re in the negative rate of return category.

David Nelson:
So people are being forced to take more risks. The problem Gary is that most people don’t understand the amount of risks that they’re taking. I’ll just give you one quick example [inaudible 00:18:16]. If you look at a government bond today, 10-year government bond. What did we say? And roughly one and a quarter percent ignored inflation. One and a quarter percent. You could go buy a corporate bond probably pick up an extra half percent, and maybe even 1%, depending on the type of corporate bond that you bought. But that’s not the whole story.

David Nelson:
The rest of the story is you just took the risk level from a government guarantee bond to a corporate bond that no longer has that government bond guarantee attached to it. So you’re depending upon that corporation, that entity that’s issuing the bond that they’re going to pay you back. So incrementally you’ve increased your risk. Depending on the type of bond, you may have increased it to dramatically or just say incrementally, but point being you’ve increased your risk in order to get that return. And you’re hopeful that you’re going to get that return. Again with no guarantee attached to that as far as from the government. From the corporation maybe, but the bottom line from the government, the answer is no.

Gary Determan:
Again, visiting with Dave Nelson of NelsonCorp Wealth Management. This is of course, early August. When we visit with you again, it’ll be September. We’re getting toward the end of the year. How do you see things going forward, Dave?

David Nelson:
Predicting tomorrows are tough, but I’ll put it this way. We’ve had a spectacular year so far. We’re in the mode. I’m not talking about us personally. I’m talking about the stock market as a whole has done really, really well here today. And plus percent, depending on what index you look at, international U.S., et cetera. So it’s been a really good year. We’re basically by nature a conservative, cautious type operation. We don’t want to stick our neck out because again, when people work with us, they’re typically giving us their what? Their serious money. They’re not giving us their play money. They’re giving us their important money that they need to have for the rest of their life. So with that said, and you’re up double digits as far as markets. It’s probably a good time to be looking at the amount of risk that you’re taking. And has the risk level increased from the beginning of the year to today? And the answer is obviously yes.

David Nelson:
So maybe it’s worth considering again, every situation out there is different, but it might be worth considering as far as taking a few dollars off the table. The other big issue I think comes back to the, are we going to get some of the stimulus as far as infrastructure? And again, I’m not getting into politics. You got both extremes. We need to do it. We don’t need to do it. Not yet to get into that. But what we what we do know for certain is that it’s being priced into the market as we speak. So in other words, both of the potential good news, if it is good news as far as the spending, to some degree has been factored in, as far as stock prices.

David Nelson:
I don’t know how much additional we’re going to see as far as the stock market taking off if and when we get approval as far as on it. Also, this is the biggie, and this is the one that again, we talk to people a lot about, and that is let’s focus on stuff we can control. And taxes are a big item today, and taxes are going to be a big item tomorrow for the bulk of the people that we work with. They’re not in the top bracket most people, but they’re in the medium type bracket, and that can change pretty dramatically as far as with some of the discussion points as far as in Washington. So again, we recommend to people as far as you need to have somebody competent, as far as in that space as far as to help you make decisions.

David Nelson:
When you make these decisions, you should be, as far as your investments, you should be factoring in as far as tax ramification, every decision. We find a lot of people that come in the door here, and we’re talking to them. We go through this discussion and say, “When’s the last time that the person that you work with actually took your tax return out and did some evaluations prior to making recommendations on buying or selling, what have you?” And so rarely do we hear that. That’s a really important variable, because again it’s something we can control, the tax issues. We can’t control stock markets going up or down, and we can’t control interest rates. We can have an impact as far as on the tax statement, and that definitely needs to be factored in.

Gary Determan:
You make a very good point. Of course, this program is heard every Wednesday at 9:05. We go live with you at that first Wednesday, but you do have Andy Ferguson and others who come in, I think once, maybe twice a month to talk about this with Nate, about things like that.

David Nelson:
It’s so crucial, Gary. And I think people, we focus if I’m still working, you get your paycheck and you see all the money that’s being yanked out for taxes. We gripe, and we complain about that. What we don’t pay enough attention to is the investments that people have and the taxes associated with that, whether it be annual today that they’re paying taxes on a whole bunch of that money, or looking down the road and saying, how much tax am I going to pay on this if I don’t position this money correctly today? And so that’s the importance of the teamwork. That’s important of the importance of looking and spending some time as far as for your individual situation. I get frustrated with some of the commercials that run as far as I’m on TV from some of the big household names, and they talk about tax smart planning. Tax smart planning in the manner that they’re speaking about it is basically buying something and being married to it for the next 20 years.

David Nelson:
That may be good from a tax perspective, but that can be a disaster when it comes to, as far as your investments. That’s one of them. The other one, which is even probably drives me even more crazy is the people sitting in chairs saying, “We don’t want to pay any commissions. We don’t want to pay any fees.” And then they’re being led to believe that that is [inaudible 00:24:30] out there. And you just think about that logically and say, who the heck is working for free?

David Nelson:
These big corporations are running all these commercials just out of the goodness of their heart. So it just blows me away. So what we want to do with both, and what we try to do with them is to be very candid with people as far as that there’s better ways of than oftentimes most people are being led to believe. In other words, put your money in, fall asleep, and life is going to be good 20 years from now. And it just simply may or may not be the case. We think that monitoring this stuff is crucial as far as along the way.

Gary Determan:
Always interesting to catch up with you. Looking forward to visiting with you when we get into September. You take care of yourself and gosh, I’m really looking forward to see you in the studio someday, Dave.

David Nelson:
Sounds great. Look forward to it as well, Gary. Thank you.

Gary Determan:
Thank you.

Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker/dealer member of FINRA SIPC. Investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp com.