Is a War in Iran Likely To Hurt Your Retirement?

PW: Hey, welcome. This is “The Investor Coaching Show” on this uneventful Saturday in Middle Tennessee.

What Will All of This Lead To?

Nothing to talk about, Jim. Jim Wood is hanging out here with me. Just nothing to talk about.

Jim Wood: Nice, peaceful, warm day outside.

PW: Just a nice day to go out, hang outside, and just wash your car and act like nothing’s happening in the entire world.

JW: Just don’t turn on the news.

PW: Yeah. Yeah. Okay. We’re not trying to get any sarcasm awards, but I think we might qualify after that.

It has been interesting. You wake up and you go, “Okay, I’ve got to get ready for the radio show this morning. Yeah, put some stuff together. Look at what’s going on in the world, finance, and the headline of Wall Street Journal, of course.”

Everybody’s looking at that kind of thing. And you go, “Wow, what will all of that lead to? Where will it go? It could be selfish to even think this way, but how does that affect me, my finances and those types of things?”

My wife and I were going, “What’s gas going to be?” And she thought immediately going to the pumps would be higher, and it wasn’t.

But it’s just interesting to me, Jim, to see how many different countries have come together regarding this. A lot of countries, even Saudi Arabia, for example. Other countries are joining in this.

And I guess there’s going to be a lot that comes out over the next couple of days. So it’s one of those things I don’t even want to talk about too much because I don’t have a clue.

JW: Well, exactly. And that’s a whole thing.

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It’s really unknowable what’s likely to come out of this. 

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And certainly people ask, “Oh, well, is it going to affect my portfolio or that type of thing?” And maybe in the short term. But it’s nothing that’s ever predictable, and it might go the exact opposite of what you may be thinking.

Futures Markets

PW: Well, the thing that Ike picked up on this morning was because markets are not open. Stock markets are not open. You don’t have trading on the weekends, but you have futures markets.

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You’ll have what is likely to happen. Futures markets — it’s a much smaller market, people trading based on what they think the market’s going to do. 

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And for those of you who don’t know what those types of derivatives really are, it goes back to literally farming days. You didn’t know what the crop was going to be in the fall. You didn’t know if you were going to have one. You didn’t know if it was going to be a good growing year or it was going to be a bad growing year.

So you had to sell your crop, but you’d go, “Okay, I can get $10 for something,” let’s say. If everything goes well and the crop is good, I can get $10. If I don’t have a crop, I don’t get anything.

So I’d just go, “Hey, I’ll do this. I will accept $7 right now. Guaranteed, you’ll pay me $7.”

Now, if the crop’s good, whoever has sold the future contract that allows them to buy it from me for $7 can turn around and sell it for $10, and they make money that way. So you’re taking risk off of the farmer is the idea. You’re just basically transferring risk from an entity that can’t take the risk — the farmer — to an entity, a large financial institution that can — the future’s issuer.

Well, the same thing exists in the stock market. That’s basically what these things are.

You see these commercials all the time, “It’s not an option.” Ever seen those? These two guys are basically on CNBC going, “Jim, it’s not an option.”

They’re showing you how much they made on the option versus the stock. “If you’d bought the underlying stock, this is how much you would have made on the option.” And they’re only showing you their winning bets, right?

JW: Oh, yeah. Yeah.

PW: You know how that goes? And it is incredibly risky, but there are people out there that that’s what they do. They try to magnify.

And in fact, that’s what insurance companies do. They use options contracts in these annuity products, and a lot of them expire worthless, absolutely nothing. And that’s why if you look at history, the return of these products that say, “Hey, we can give you the benefit of the stock market with no risk,” have little to no returns.

So the idea with the futures contracts and those types of things, is you can go out on the internet and say, “Hey, what’s the stock market likely to do based on what has just come out?” And it’s limited, but you can watch it.

What’s the Difference Between Bitcoin and Stocks?

PW: But it was interesting to watch what Bitcoin had done. And they said, “Is this telling us what is likely to happen with the stock market?” Because Bitcoin dropped in value.

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The issue with Bitcoin is, as I’ve often said, that it’s not an investment, it’s a speculative thing. It goes up and down based on supply and demand. 

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And I was talking to somebody about that. Squirrel moment.

I just want to cover this because I was talking to somebody about this this week, Jim. And I made the comment because it was like, what’s the difference between stocks and something like Bitcoin? And the difference is I get earnings.

Think about it this way. If I buy large U.S. stocks, historically, the price I pay is $16. And what do I get for that?

Over the next year, the expectation is $1 of earnings if you’re looking at futures or future earnings or forward earnings is what we call it. And the next year after that, another dollar is expected, maybe it’ll go up, maybe it’ll go down, maybe I’ll get $1.20 if the company has a good year. And then if it has a bad year, maybe I get 90 cents. But it’s back and forth, and that’s hence the reason the stock market goes up and down.

But let’s just make this super simple and say that all I am going to get is that dollar of earnings this year. Next year, I’ll get another dollar. The year after that, I’ll get a dollar. The year after that, I’ll get a dollar.

The company, whoever’s running the company, is so inept that they can’t grow the earnings. When I pay $16 for it, and I get those dollars of earnings, it takes me what? Sixteen years to get everything that I paid for the stock back, not in the value of the company, but in just earnings.

Now, if I look at that and I sell it in 10 years, that’s assuming, let’s say, that they pay out everything in dividends. Now part of it’s going to be replowed back into the company, so the earnings tend to grow.

I’m oversimplifying this just so you get this concept on how important this is. I get it all back, and I still own the company, which is worth $16, which is a vastly different scenario than if I buy a Bitcoin and it has no earnings whatsoever and I’m just hoping that there’ll be somebody that wants to pay more for it than I did a year from now, two years from now.

So hence that’s the difference between them. So that was something that came up this week. Somebody, we were talking about that.

Stock Markets During Wars

PW: But back to the Iran thing. I mean, what are you thinking? What’s going through your mind regarding any of those things happening over there right now?

JW: Well, it’s just one of the things. When you start talking about options, I just wanted to hit on that because, out of all the different people I’ve met, hundreds and hundreds of clients, the worst abuse of a client that I ever saw was done to them by somebody who was trading options on their behalf.

PW: Yeah, I remember the case.

JW: Yeah. And this person was just churning the options for commissions, and it lost them six figures multiple times.

PW: High six figures.

JW: I mean, it was horrifying.

PW: And they wouldn’t complain. That was the thing. I remember the case because you brought me in on that and we talked about it, and the issue was that they wouldn’t complain about it, even though they had a case, because that’s the way people are.

They’re embarrassed. They don’t want to do that. They feel inept after doing what they’ve done. And hence people do get in trouble.

So the whole thing, just in general, one thing that I want to bring up regarding Iran, the disruption in the Middle East, if you look back through times of war in general, we have a whole workshop on this, if you go back through times of war and actually look at what has happened in stock markets historically during times of war, the lead up up to it has typically a decline in values. And the reason that you have a decline in stock values — typically, if it’s going to be like World War II, we look at that, for example — typically, the reason is that increased risk.

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If all of a sudden I’m looking at the risk of what’s going to happen, how are things going to play out, I won’t pay as much for a stock. 

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And what I’m doing is I am basically setting myself up if I’m the buyer of that stock for a higher expected return in the future. So just to put a number example on this. Let’s say that things are hunky-dory and everything’s going great and I’m paying $20 for every dollar of earnings. I get $1 for every $20 I pay, that’s 5%, one divided by 20, 5%.

If I’m just worried, I’m going, “Oh gosh, I don’t know what’s going to happen. This is kind of shaky,” I may only be willing to pay $10 for those earnings. Now what’s my earnings yield? One divided by 10 or 10%.

Looking at Market Downturns in History

PW: If I drop it down like the 1970s, we had some real disruptions in the 1970s. You know what the S&P 500 was selling for in the mid ’70s?

Think about the oil crisis years. Think about the Carter years and think about stagflation. Think about all of the disruption that was happening in the 1970s and all of the worries that we had.

Now, we had great music. During the 1970s, we had awesome music.

But what was the S&P selling for? Answer: about $7 for every dollar of earnings. So you look back and go, “Whoa, wow.”

Now going forward, you had a fivefold increase in value, fivefold increase in value in the 1980s, when all of the things that we worried about didn’t come to fruition. As the risk went away, prices came up significantly.

And the same thing happened during pre-World War II. You had the same thing that happened pre-World War II. Markets, you had the Great Depression, but markets recovered significantly up to the end of 1936.

Then 1937, you had some things. You start to see some unrest in Europe, things are starting to go a little bit south. And then you get into 1938 and ’39, and then we get involved in the war effort.

And all of a sudden, we’re starting to pump out things like crazy here, production of military goods; tanks, planes, ships. And all of a sudden, companies that make this stuff were making money hand over fist.

Now, the money, where was the money coming from? You had a lot of government spending regarding this, and then companies made lots of money. And then during the 1940s, the stock market, the sky was the limit. Incredible returns.

So war does not necessarily mean bad for any of you that are sitting there going, “I’m worried.” Because you see, people say, “Oh, I want to buy gold,” or something like that.

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Then all of a sudden, the fear and all of the unrest go away, and those types of assets drop in value like crazy.

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So that’s one of the things I want to just get you to keep in mind, that when you have unrest and you have markets do the thing that they do, when they go down in value, you’re literally looking at a scenario that now the future expected return is even higher as a result of that. So that’s something I want to point out right there.

The second thing I want to point out is how long do market downturns last when they happen? I mean, not very long. Historically, when they go down, they come back fairly soon because companies either cut expenses or they increase sales or whatever. So just a little bit of thinking about that, not as much of a worry.

Investing During Market Volatility

PW: There was an interesting little thing I was reading this week, it was The Prudent Speculator. And I thought, What an oxymoron.

JW: Yeah. I was going to say, that’s a contradiction in terms.

PW: But it was a good article. I’ll give the devil’s due. It was “Investing During Market Volatility.”

We don’t know what’s going to happen Monday. You don’t. You just don’t know what’s going to happen.

But when you have market volatility, they were talking about, “Now it’s time to buy.” And I tell people, watch out for that type of thing.

But the statistics were interesting. “Short-term market declines are common,” they said. “Since 1976, the S&P 500 has had an average intra-year drop of 14.1%.”

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In other words, how much can the market go down inside of a calendar year? Fourteen percent. 

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I mean, literally, your 100,000 becomes 86,000, just to put that in perspective. That could be pretty scary for anybody. A million dollars becomes 860,000.

That’s the average. That means that some years, it was even more than that.

JW: Yeah. Last year, when did that happen? Happened around all the tariff talk, right? About this time last year.

PW: March.

JW: Yeah.

PW: Yeah. March.

JW: And it was just, again, an intra-year drop. And look how the year finished.

PW: For sure. Yeah. Oh yeah, precisely.

So the intra-year drop average for the S&P 500, large U.S. stocks, is 14.1%, including years that ended with positive returns. Like what Jim is saying: You could have a big drop in the middle of the year and then the year ends up. “Between 1976 and June 2, 2025,” that’s what this data is of, “S&P 500’s average annual rate of return was about 10%.”

Now, it gives each year. And it was interesting to look at all these different years. That one year was 16% intra-year drop, 14%, 10%, 17%, 18%, 17%. Next year was 7%.

I’m going year by year, by the way. And you see one point or let’s say 13%, 8%, 9%, 34%. I mean, that was one year you had that 34%.

Guess what year that was? If you guessed 1987, you nailed it. That was the Black Monday that everybody talks about.

So you had that big of a drop. People don’t realize 1987, even though you had that big of a drop in the market, the market actually ended up for the year.

So just get the point that this happens. It’s fairly normal. Nothing to get too terribly worried about.

The Wall of Worry

PW: Recognize that news like this, you can’t predict it. You don’t know what’s going to happen, how it’s going to happen. Even though the news, you look at it, the precursor to the market before this announcement came out that this was all taking place in Iran, what did the market do? It went down.

It went down in anticipation that we were going to do this. You see? So it went down in anticipation that there would be something happen that nobody really knows.

JW: Well, there are a lot of charts out there that I think are really instructive on how to react to that, direct to this, and which I think is you don’t react to it, is they’re just called the Wall of Worry.

It’ll take just some long period of time. And I mean, we have one sitting on our wall literally in every office. But it just shows kind of all the major bad things that have happened over the years, from world wars to presidential assassinations to economic crises.

And it shows that, yeah, the stock market long term, it’s not a straight line. It has dips. It goes up. It goes down.

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Historically, about three quarters of the time it’s going up, about one quarter of the time it’s going down. The downturns are temporary. 

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That’s the price you pay to capture the long-term premiums you get from investing in stocks.

PW: The question comes in is this. If we have this in general consensus, let’s say, or let’s just take a look at just Iran in general. You have a lot of people that have been over there, you’ve been seeing it on the news, just like I have, where people are demonstrating against the regime, they’re looking for freedom, they’re looking to have their lives back, they’re looking for not being controlled.

Humans Becoming Healthier and Wealthier

PW: Somebody was talking to me about this the other day. I don’t remember who it was, world traveler. This guy goes everywhere. And he and I got into a conversation about his travels all around the world.

I said, “God bless you, man. I’m not a traveler. I don’t like going all over the place. I’m a homebody.”

But he said, “Oh man, I don’t know how you do it, Paul. I don’t know how you do it. You ought to go and just go do stuff and see things.”

And I’m like, “Ugh, I can watch it on TV.” And he’s like, “You don’t watch TV.” “Oh yeah, that’s right.”

But he made the comment that no matter where he went, he was talking about how nice people were in these places that he’d go to. And he says how curious they were about him as an American showing up in their country. And I said, “Really? What’s it like?”

He said, “Oh, I’ll be going to some cafe. They’ll find out I’m American and they want to know, ‘Where do you live? What do you do? What’s it like over there?’”

And he said, “There’s so much curiosity.” It reminded me so much of, Jim, you remember the video that we had where the guy was the economist in kind of an open area and he was doing this thing where he was waving his hand and it was a chart?

JW: Hans Rosling.

PW: Thank you. You always remember his name. I never remember the guy’s name.

He was talking about over the decades how, number one, economic income and people’s incomes have gone up and life expectancies, those two things. On one axis was income and one axis was life expectancies. And as time went on, countries were going northeast on the chart and people were living longer.

JW: Healthier and wealthier.

PW: And they were healthier and they were wealthier. And is it possible that this is an outcome? Recognize that we as humans are going to look at this thing, and we’re going to look at it through the lens of our choice.

Some people look at things as glass half full. Some people look at it as glass full. It just depends on who you are and how you look at it. But it doesn’t matter what you think is going to happen.

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People tend to make their lives better as time goes on. They tend to look for ways to improve their lives, and companies are run by people. 

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They will figure out if, and we don’t even know, if you have a market decline, they’ll figure out how to get it to come back. And historically, it’s pretty doggone rapid.

This is why I look at these things, and I don’t worry about my investments when I see news like this. And that’s mainly what I want to spend my time on in this first segment. Just addressing that idea of this is why we diversify.

You don’t know what’s going to happen in the world. You don’t know what calamity will befall us. But recognize when you’re really, really well diversified, it doesn’t matter.

There are going to be winners, there are going to be losers. You’re not trying to bet who’s going to be the winner or the loser when you’re a prudent investor.

Changing Your Portfolio Based on Predictions

PW: Okay, so if you missed the first segment, that’s where we talk about Iran. We may hit it here and there throughout the show, but I just wanted to just cover that first part. People are wondering, What are you thinking about all this stuff? And I don’t spend a whole lot of time trying to analyze it.

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If I try to change my investment portfolio, by definition, it is market timing. It’s any change based on a prediction or forecast about the future. 

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Is there management of the portfolio or anything that’d be done there? Absolutely. Always. When you’re rebalancing your portfolio.

Who’d have thunk? As I’m sitting here talking, who would have thunk that year to date the top area of the market performance-wise was emerging markets? No clue. Small value stocks.

All anybody could talk about last year. And all the major investment companies are focused on is big U.S. companies.

And you wouldn’t hear anything about some of these other areas of the market because they’re just really not exposed to it in target date-type portfolios. I did a whole video on that where you had 1 or 2 to 3% tops of the portfolio in small value stocks, for example. Nothing comparatively.

And yet the things that have been performing incredibly well over the past year and a half, well, a little bit over a year, not quite a year and a half yet, have been those other areas. So anyway, that’s why I don’t worry about it.

JW: Well, I was just thinking during the break, and it’s funny because when I sat down and you started talking about Iran, and I just thought, I hadn’t thought of that in terms of portfolios one bit. I mean, I think of it in terms of the political, like what’s the motivation, what’s the pushback going to be?

PW: Yeah.

JW: But in terms of how that’s going to affect markets did not cross my mind. And just because I’ve just been doing this for so long, this, in terms of current events, has nothing to do with my portfolio.

PW: Well, sure. And it is funny you say that, Jim, because so often I’ll talk to other people outside just because I’ve got to get my head out of my way of thinking.

And I’ll watch other things on TV and I’ll listen to other financial people, just because I’ve got to remember how it used to be when we were in that financial world, that aspect of the financial world. All of us having come from banking, insurance companies, the big brokerage firms, the big investment firms, and traditional mutual fund companies, even. It’s just a different way of thinking.

And you think, Well, no, all fund companies act that way. They all act prudently like that. And I’m telling them, “No, I’m telling you it’s not the way it is in that side of the industry.”

But I have to listen to what other people say. You were talking about somebody during the break, the hot companies that were technology, what was that all about?

The Rational Optimist

JW: Well, no, it’s probably something I’ve mentioned on here before, but the whole idea of being a rational optimist. That name comes from a book by a guy named Matt Ridley called “The Rational Optimist.” And the whole focus of that book was also really similar to the message from Hans Rosling that we talked about earlier, was that just long term, things look really positive.

PW: Yeah.

JW: There’s going to be stuff that happens day to day, month to month, year to year.

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But you’re in a world that is getting healthier and wealthier, as we mentioned, and with new miracles every day. 

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They put out a newsletter — if somebody’s interested in it out there, just go and do an internet search on the Rational Optimist Society. They put out this amazing newsletter where every one that comes out is talking about these new companies. Mini nuclear reactors that you can put in the back of the truck.

PW: Sure. Sure. And I’ve talked about that before. Sure. Yeah.

JW: Yeah. Things like that.

PW: You see the new one on chips? There is some rule regarding chips and how fast the growth in computing power is. There’s kind of a, I forgot what the law is. Oh, gosh, I should remember this, but it’s a certain like Moore’s Law or something like that.

JW: That might be it.

PW: Is that what it is?

JW: I think that’s what it is. I didn’t come up with that, but that sounds right.

PW: So it’s like this is likely to be blown out of the water soon. That was what they were saying.

And I was like, wow. And they were talking about why, what’s coming, what we’re on the cusp of. And I thought, That is just crazy. But as you look at how people typically handle this stuff, it’s typically speculating and gambling with money, versus prudently investing.

JW: Yeah. I mean, if you’re trying to pick the winners and losers there, you’re likely to get it wrong. Few people will get it right and they’ll win the lottery. Most people don’t win the lottery.

PW: That’s exactly right.

JW: But when you own a properly built portfolio, you’re going to own all that stuff, and you’re going to participate in those worldwide gains of global markets, global companies.

I always like talking about companies as opposed to stocks. Global companies are doing exactly what you said: increasing their earnings over time. And ultimately, that’s what stock prices follow. It’s not a one-to-one correlation, but it’s a really good correlation.

There’s another guy named Peter Diamandis, not Dan Mandis, but Peter Diamandis. And he puts out a lot of real similar information along that, as a rational optimist, again, talking about just new technology that’ll just blow your minds.

And stuff like that just always makes me so positive. Yeah, no matter what’s going on in the short term, long term, things are really, really good.

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