Supply and Demand Investing
How can you decide when to buy or sell investments? By going back to economics 101 – paying attention to supply and demand. In this episode, we discuss how.
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Full Transcript below:
00;00;00;00 - 00;00;28;07
Unknown
And we're back with 30 minute money. My name is Scott Fitzgerald at Roc Vox recording and production. Steve Wershing from Focused Wealth Advisors. My cohort in the podcasting game here. Nice to see you. Nice to see you too, sir. And we're going to touch on something that we all learned in school early on. Supply and demand, supply and demand.
00;00;28;13 - 00;00;50;08
Unknown
I know economics 101. This is this is about investing though. It is. And that's. And then what people are surprised at sometimes is that the supply and demand works on investments. Two do tell. Yes. Well, you know, I, and I wanted to talk about this because I had a comment from a listener a while ago saying, you know, you never really talk about how you invest.
00;00;50;08 - 00;01;05;21
Unknown
So I thought, oh, I should cover some of those basics. I think that would be that would be interesting. And so I'll set this up by saying, you know, I've, I've done this a really long time. You know, I've, I've been a financial advisor for a long time. I've been doing this long enough that I've been through for once in a lifetime.
00;01;05;21 - 00;01;28;17
Unknown
Bear markets. And each time we went through that, you know, I did what they told me. I did what my training told me, which is to say, keep your allocation rebalanced. Stay the course, you know, don't panic, don't jump out. It's going to get better. And it always did. But especially in 2008, you know, which was a particularly grinding market, a particularly difficult one.
00;01;28;19 - 00;02;02;10
Unknown
I was thinking to myself, there's got to be a better way. There's got to be a better way than just like, let it ride, you know, because that's that's so many people are looking at this for so long. And a couple of years after that, I discovered, yeah, actually, there is a better way. and it's, it's because and the better way stems from the fact that just like everything else in the economy, investments have no choice but to adhere to the one irrefutable fundamental law of economics, which is supply and demand.
00;02;02;13 - 00;02;22;27
Unknown
And as long as there is demand for something, then its price can be maintained. As long as, you know, as long as people want enough of something, then they'll be able to. Whoever's selling it will be able to to maintain a certain price. But if demand ever falls away and supply takes over, that means that, you know, prices are going to go down.
00;02;22;27 - 00;02;47;08
Unknown
That's just how it works, right? And it turns out that supply and demand, works in investment markets, and it works on individual investments just like it works on anything else. So as long as there is demand for a particular kind of, particular kind of investment or a particular investment, then there's, there's, there's a, there's support for that price there.
00;02;47;09 - 00;03;04;16
Unknown
There's the, there's a platform front for, you know, the to keep the price from going down and that can help push it forward. But if supply ever comes and takes over then, you know, then then you want to you want to clear out of it a little bit. And so this is how we this is how we apply that.
00;03;04;19 - 00;03;25;11
Unknown
We'll go back to January of 2022. 22 was a particularly bad year for stocks and bonds, for all kinds of investments. And, you know, we can we can measure and we can, track supply and demand for different kinds of investments. And so that's what we do. And so we a couple times a week I take a look at, you know, what are those numbers look like.
00;03;25;11 - 00;03;48;01
Unknown
What what how much pressure is there on the demand side versus the sales side. And, or the supply side. And in January of 22, it became pretty clear. I mean, we could say mathematically supply has taken over, demand is falling away, and we are now in a downturn. And so we didn't go crazy. We didn't say, get rid of it all because that that would that would be not prudent.
00;03;48;03 - 00;04;08;20
Unknown
but you can make little adjustments to a portfolio. So we backed everybody off the stocks a little bit. You know we took took allocations down out 10 or 15%. We just sort of like put a little bit off to the side and you know let that run its course. And then you know when, when when it bottoms out and demand picks up again, it starts pushing that up again a little bit.
00;04;08;23 - 00;04;30;06
Unknown
Then we're in a position to say, okay, as long as demand is strong, if demand is strong for everything and that's that happens. we just stay at whatever the long term allocation is. So if you have a pie chart that is, you know, this much in stocks and that much in bonds and this much, you know, in different things, as long as you demand for each of those things, we let it ride, we let it, we let it.
00;04;30;07 - 00;04;55;17
Unknown
We stick with the long term allocation. The long term allocation is specific to an investor. So it's based on your age. It's based on how long it is between here and your goals. It's based on your your risk personality. And so as long as there's demand for everything, that's where we that's why we stick with it. But if demand falls away and supply takes over, then we might decide to back away from a little bit of it for a little while.
00;04;55;19 - 00;05;15;03
Unknown
And, you know, and that's particularly useful, like in times like now because the market's been on a tear, the market's been great. And a lot of people say, oh my gosh, you know it's trees don't grow out of the sky. You know whatever goes up must come down. Right. And so you know when's this party going to be over.
00;05;15;06 - 00;05;31;18
Unknown
Well, the nice thing is if you can measure supply and demand, then you can just watch it. I would never want to manage client portfolios based on what I think is going to happen, because nobody does that. Well. Yeah. Right. So I let the I let the market tell me what's happening. And you can measure supply and demand.
00;05;31;18 - 00;05;59;22
Unknown
And so as long as demand is there then we then we stick with it. There's a, there's an expression for that in investing. it's called don't fight the tape and don't fight the tape means if prices are telling you something specific, don't try to assume that the market is wrong on something. If something's going up and up and up and up and up, you know, or where people really make the mistake is if things start to go down and down and down and down, they're like, oh, I'm going to stick with this.
00;05;59;22 - 00;06;16;04
Unknown
I'm going to believe in this. I'm going to now, we're not talking about markets generally because market generally will will rebound and go back up. But for individual things you don't want to ride it all the way down. You don't want to make an argument there. And so, you know, if the market is telling me that there's lots of demand there, we stay at long term allocations.
00;06;16;04 - 00;06;34;23
Unknown
If the market is telling me that demand is falling away and supply is taking over, we might make a few adjustments and sort of get out of its way a little bit. And how long do you look at something to to say it's a trend. Is it weeks. Is it like how does that work. It it's more of an accumulation of signals.
00;06;34;25 - 00;06;57;21
Unknown
So if if we have three consecutive signals, that the trend has changed. That's when we take action. We might get three signals in a in a week, we might get three signals in a year. But we watch we watch for the, you know, for the, for the, for those signals to pop up and for barriers to be broken and for actual trend lines to change.
00;06;57;21 - 00;07;17;11
Unknown
Or when a trend line changes, that's that's when we make a decision and it's not frequent, by the way, you know, in 22 we made a few adjustments, which is kind of a lot, you know. But in a typical year we might adjust it once twice three would be on the high side. So it's not a frequent thing.
00;07;17;13 - 00;07;36;29
Unknown
but you know, because trends aren't you know, trends tend to last for a while. And we don't want to be traders. We want to be investors. but we want to, right? We want to we want to go along with the trend. And the trends don't actually change all that fast. Sometimes we get faked out. We might have an extra adjustment or two in a year because we thought the trend, the trend changed.
00;07;37;01 - 00;07;56;28
Unknown
Actually, it gave us a head fake and it turned back around the other way. But usually we let it go long enough that that we accumulate enough signals that, yep, the trend has changed and then we get a chance to stick with it for six months, nine months, a year before the trend changes around again.
00;07;57;00 - 00;08;27;07
Unknown
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00;09;15;04 - 00;09;59;06
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That's focused wealth advisors.com/webinars to find out more and to sign up today. Supply and Demand investing. What's your 30 minute action item? 30 minute action is when will you adjust your portfolio? And thanks for watching and listening. 30 Minute Money three minute top money. You can find us on all the platforms like, share, subscribe and we'll see you next time on 30 Minute Money.