Brian Perry

In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]

In this market update webinar, Pure Financial Advisors’ Executive Vice President and Director of Research, Brian Perry, CFP®, CFA®, looks at the outlook for stocks in a post-COVID world, the potential for inflation and what to do about it, and what the new Biden administration might mean for your finances. Download Brian’s slide presentation.

The outlook for stocks in a post-COVID world

– Stock Market Since 1890
– S&P 500 – 5 Years
– U.S. Stock Style Returns
– Intl. Stock Style Returns
– Small Cap vs. Large Cap Stocks
– Returns and Valuations by Sector
– Sector Weights: U.S. & International
– S&P 500 Performance by Sector: 2020
– S&P 500 Performance by Sector: 2021

The outlook for inflation and what to do about it

– Cost of living increase since WW2
– Inflation rate since 1996
– 12 Month Price Change
– U.S. Dollar Index (50 Years)
– U.S. Dollar Index (Last 12 Months)
– Treasury yield since 1958
– 10 Year Treasury (2016-2021)
– 10 Year Treasury (12 months)
– Bitcoin – 5 Year Chart
– Gold since 1968
– Returns in Different Inflation Environments

What the new Administration means for your finances

– Annualized Returns During Presidential Terms
– Where do you think taxes are heading?


How does inflation compare state to state? Are there states that historically perform better?

Why do higher bond yields raise inflation fears?

With 10-year bond yield rising., what is the strategy in terms of bond investing for the foreseeable future?

What is a fair comparison for my returns (last 3 years)….it seems the several 2020 retirement funds (vanguard/fidelity) have done much better with almost no fees…..I really appreciate Pure’s transparency so sorry for the hard question!


Andi: Please welcome your presenter for today’s Market Update webinar, Brian Perry, CFP®, CFA. Brian, are you with me?

Brian: I’m with you, Andi. How are you?

Andi: Very well. Good to see you today. How are you?

Brian: I’m doing great. I’m doing great. Yeah, I feel like there should have been a drum roll leading up to that, but yeah, I’m doing good. Despite the rain.

Andi: Yes, this is really unusual. I actually got a little bit of thunder before we got started today. So I’m hoping that we don’t have that throughout the presentation.

Brian: No kidding. Well, it’s the year for it, right? We’ve had everything else. It’ll start raining cats and dogs next.

Andi: Locusts, yeah.

Brian: Locusts are coming. Yeah, that’s- that’s the message for today. The locusts are coming. Beware, right?

Andi: Hopefully not.

Brian: Yeah. So good. How’s everybody doing today? Hopefully if this was a crowd, I’d get a ‘great’. But hopefully everybody’s doing all right. Right? I mean, let’s make this interactive here. Right Andi?  Ask questions, please. Andi: Yep. Type them into that chat function and- and we will get to them throughout. I’m just going to interrupt you throughout the entire presentation, Brian, and say someone has a question. Brian: Please do. Yeah, I’ve got some slides here, but let’s make this interactive. I want to make a housekeeping announcement actually first, and we’re going to write something up and send it out. But just wanted to address the idea of we’re getting closer, I think, to the end of Covid, don’t have a crystal ball as far as when it’s going to be. I heard today, maybe May 31st is the goal to have everybody vaccinated and stuff like that. I know for those of you that are local to one of our branches, whether San Diego, Orange County, L.A., you’re used to coming into the office in many cases. Those of you in other places are always been doing it remotely. That being said, we are continuing to meet with the vast majority of our meetings via video due to Covid. Right. And so some of the people have been vaccinated now, they’re like hey can I come in? It’s great that you’ve been vaccinated. We’re looking forward to getting vaccinated, too. There’s still some question as to whether or not even once you’ve been vaccinated, while you may not get the disease, whether or not you can bring it and give it to somebody else, So we’re still erring on the side of keeping both our employees safe and then also other clients safe. Right. So we don’t want Covid in the office. So we’re still doing most things remotely for the time being. We will keep you in the loop and let you know as soon as we can welcome you back and looking forward to seeing everybody in person for sure. Cool. Well, we’ve got this new fancy remote mouse thing, and I’m going to try to figure out how to use it. So let’s see here. Kind of works like a trigger. There we go. We should be seeing some slides now, right, Andi?

Andi: Yep, you got it.

Brian: All right. There we go. And then it’s got this really sensitive trackball. All right. So I want to start with a couple of things. I want to start by talking about the outlook for stocks. Right. And this first slide is just for some context is the idea that stocks generally go up. Right. Over long periods of time, stocks tend to go up since 1890. And I feel like I keep changing the title on the side and keep somehow getting changed back. It should say stock market since 1890. All right. So since 1890, stocks have gone quite a bit higher and you can see it really there are periods when they go up and periods when they go sideways, not too many extended periods, especially if you take out the Great Depression where stocks fall, although certainly it does happen. The dotcom bust wasn’t a great time, the financial crisis. And then more recently, obviously, we had the really sharp sell off last Spring with Covid. But again, just for some context, that over the long run, particularly if you look at the post-Great Depression era, stocks have generally gone up over time, sometimes faster, sometimes slower. And that’s despite a variety of calamities. And certainly we’ve had some craziness in the last 12 months. I don’t have to tell any of you that. We’ll probably see more crazy things coming up. But the stock market has done well despite things like not just Covid and political turmoil, but the assassination of JFK or Black Monday in the 1980s, the Cold War, World War II and the like. There have been some real struggles and challenges we face as a society, and we’ve always come through it in the past. And I personally don’t think this time is going to be anything different. But last 5 years on the S&P 500, a little bit of a different story, pretty good period, right? I mean, except for that one rather jarring collapse of 35%, 40%, it’s been a pretty good run and again, volatility is not unusual. What is unusual is how sharp that decline was. I mean, we just fell off a cliff. I mean, I think that part of the reason is that markets just move more quickly now. Markets adjust. There’s more access to news, easier to trade. There’s- there’s just more connectivity and stuff. The other thing is we’ve never in the past had a time where things just went from 100 to zero. Right. It’s like it wasn’t slowing down, it was hitting- hitting a brick wall or going off a cliff where the economy was open and then it was shut down. And not knowing how to react to that, market participants sold. At that time, I’m sure some of you were on the phone with your advisors and some of you might have even been on the phone with me. And we were saying, hold on and recover. Stay the course. This is why you have a diversified portfolio. You have the bonds or whatever to counterbalance the stocks and maybe some of you rolled your eyes. I’m not going to ask you to raise your hands who you were, but maybe some of you rolled your eyes or said, oh my God, those guys are crazy. This is why. It doesn’t always come back this quickly. But certainly we have seen a pretty significant rebound here in financial markets. Switching gears a little bit and talking about kinds of stocks. And so we talk a lot here about small companies versus large companies and growth stocks vs. value stocks and quality stocks. As those of you that have been clients for an extended period of time now, we’ve gone through a relatively difficult period for value companies certainly, and smaller companies to a lesser degree. And again, if you look at the research over the long period of time, small companies have done better than larger companies; value companies have done better than growth companies over time, but not all the time. We’ve gone through a relatively difficult period for those. Certainly in the last, I don’t know, since the towards the tail end of last summer, small companies have done phenomenally, to the point where almost reining in expectations they’ve done so well. They’ve absolutely skyrocketed. Value continue to lag a little bit, but it’s picked up some. And so this is the United States and looking at those- what we call style boxes, where horizontally across the top are your large companies, horizontally across the bottom are your small companies. And then from left to right in columns are your value, your core and then your growth stocks. And what you can see is year-to date-through February 26, so almost two full months, markets mostly did ok. But those large growth companies, the top right-hand column, which have been the best performing stocks for most of the last 3 or 4 years, actually down on the year through February 26. And again, some of these numbers might be a little bit higher. We had a pretty good market rally earlier this week. But then look at like the small value, up 15% and small companies in general up 15% anywhere to 8% for small cap growth, outperforming their larger cohorts. And again, those value companies outperforming growth where large value, 5% positive versus large growth down about 1%. So again, not saying that this is going to continue, but it is nice to see over time that, again, we’re fundamental believers in this research. And we think that there’s a logic to why if you pay less for something, it should do better. But in the last several years, growth has really been rewarded. We’ve seen a little bit of a change here in the last several months. We’ll see if that continues. This is the United States. And then this next- this next slide just looks at the same stuff, but for international stocks and you can see a similar story, where the small companies have done better than the large companies and the value companies have done better than the growth companies. And again, we’ve pushed portfolios in those directions, depending on exactly what model you’re in, relatively more or less. But we do it both domestically as well as internationally. We push portfolios in the direction of small and value based on that research. I talk a lot and I want to revisit this, I talked about this back in January as well, about the composition of different indexes by sector, because a lot of times when we talk about value versus growth, what really is going on is a sector story. And here there’s a lot of numbers. But what I want to highlight is this is small companies versus large companies, the index. The large cap stocks are the gray and the green is the small caps and it looks at different sectors in the breakdown. What you see at the top is that information technology, IT, that 28% of the large company universe, but only about half that, about 14% of the small cap universe. And then as you look at health care and some other sectors, there are some changes. And then if you come down to things like energy and industrials and financials in green there in the middle, look at financials are 15% of the small company universe, 10% of large and industrials, about 15% of- of the small company universe, about 10% or 8% of large. And so the idea is that if you look at this, this continues into different sectors, and so there are a ton of numbers here, and if you look kind of where my mouse is hovering, it’s a little bit hard to highlight here. And I’ve got like I said, I’ve got this new- this new mouse- can you move my picture Andi, please? Thank you. So let’s see if I can actually do this, all right. So if you look in here, I’m going to focus here on technology. And you see in here, and again, pretty ugly drawing, but for those of you that have met me in person, know that I write like a kindergarten kid, so it’s no surprise I can’t write with whatever this little device is. You can see the S&P, about 27% of it is comprised of technology. But if you look at the S&P growth index, about 45% is tech. Look at the S&P value index, about 10% is tech. Right. That right there is one of the reasons you see growth outperform value and tech stocks are doing better. And, you know, if you kind of come across here and look at like financials, you see about, I don’t know, about 2% of the growth index is financials, about 20% of value. And the story continues. And so one of the things that we’ve certainly seen here this quarter is that you’ve got a little bit more performance from some of the sectors that were previously unloved, financials, energy and the like, and a little bit less love for the technology, which is wading through into the growth stock versus value stock story, as well as a small versus large stock story. And it’s a similar thing abroad too, where on the left-hand side here, you’ve got the S&P, on the right-hand side, you’ve got the ____, which is just international developed countries, Europe, Japan and stuff like that, Australia. And you see that IT is about 26% in the US versus about what is that, about 9% internationally. Financials, conversely, are, what, 10% in the US and 17% internationally. So again, the big tech companies that have really dominated the marketplace in the last several years, the Googles, Amazons, Facebooks, Teslas, mostly concentrated in the US, which is one of the reasons you’ve seen that relative outperformance of US stocks versus international. We’re still big believers in global diversification. We’ve really in the last 9 months seen emerging markets stocks do great and in a lot of cases be the best performing asset class. International developed stocks haven’t done quite as well, but they’ve done OK. They’ve posted positive performance. We still like the diversification that they provide, the fact that in some environments they do relatively better or worse. We also think they provide a hedge. And I’ll talk a little more about this in a bit. Again, just things that happen in the US. Right. Countries are going to come out of Covid at different paces. Right? Maybe one country does better than the other. Countries are going to have different rates of inflation, different interest rate policies. We think having that broad diversification is going to allow you to capture countries that may be doing relatively better. And finally, and I’ve said this a number of times, the US doesn’t have a monopoly on great companies. We like Google- Google, we like Apple. Those are two of the biggest positions in your portfolio. We also like Nestlé and Toyota and want to own those as well. Here’s again, that sector story, so this is 2019, so here you are looking at sectors for 2020 returns since 2019. So this is for the calendar year 2020, you can see online retail up almost 70% and IT up 44%. Again, not surprising if you can’t leave your house, you’re going to shop more online. Online shopping does better. Technology does better. Led the way in 2020 and then you see what did the worst, energy. You can’t drive, you can’t fly. Energy falls, airlines not surprising, hotels and the like, real estate, banks. So some of the sectors that did the worst again concentrated in value. And then you’ve got the big IT companies doing the best. And then if we flash forward now, that was 2020. Now if we look at 2021, you can see that the story has reversed where technology is not doing badly. It’s basically flat on the year. But look at the sectors that are doing the best just in a couple of months since December 31st of last year you’ve got- excuse me- energy up about 27%, financials up almost 10%, industrials up a 2%. So a real sea change in the sectors leading the way the last couple of months, which again, is leading to that outperformance of value stocks versus growth stocks. We’ll see if that continues. Now, we’re going to talk about is the outlook for inflation. And we’ve been hearing a little bit more in the way of questions about inflation. There’s a little bit more of it in the media. Some of you have been asking about it. I’m going to talk about it some here. Also be aware, we sent out an email, I think it was- when did that newsletter go out, Andi? Was it yesterday?

Andi: I believe that is correct.

Brian: Yeah. And in there, there’s a bunch of stuff, an introduction, Joe Anderson’s in there; Susan Brandeis, who runs our financial planning department, had a bit in there. And I had also done a video as well as a blog, a written blog on inflation or what it might mean for investing. So I’ll talk about it a little bit here, but then feel free to look at that as well for more information. All right. So inflation has been in the news. What’s the deal? Well, first of all, I want to acknowledge that inflation is a real thing. Over time, stuff gets more expensive. So if you look, this is inflation since about 1945, 1946. So since the end of World War II. And you can see that over time the cost of living has basically gone up about 12 or 13 fold. So it’s true that things get more expensive over time. If you feel like they do, it’s because they do. Right. I also want to acknowledge that in a lot of cases, inflation, the official statistics that measure consumer price index or something like that, a lot of people feel like maybe that’s not relevant to them. It may or may not be relevant to you. It’s a basket of goods for a typical consumer. It may not match your basket. Right. So if you have health care bills, if you have children in college, if you travel a lot, some of those things have gotten more expensive while some basic goods have gotten less expensive. Right. So it really depends on what you’re measuring. But I will say that Google and MIT together use online pricing to kind of measure CPI. And over time that study has tracked relatively closely to CPI. So we use it because we don’t have anything better, I guess is the bottom line. All right. Inflation rate since 1996. So while inflation has gone up over time, a lot of people still remember the 1970s, right. Inflation, double digits, stagflation either- even- I talk sometimes about inflation like it’s the boogeyman. Right. It’s like I’ve been afraid of the boogeyman since I was 3 years old, but I’ve never seen him. But inflation, it’s been a thing my whole life. I’ve heard about it. But since I was a young boy I was born in 1974. It was around when I was a kid, as basically since high school, I haven’t seen it. But this is the last 25 years. And you see inflation has never been above 6%. And there’s only a couple of instances here in which it’s even been above 4%. So inflation has been relatively well contained for the better part of 25 years and beyond. In fact, can you move the picture again, Andi? Right. So if you look at inflation in the long run, the average is right around 3.7%. And here’s that 4% mark again with my terrible drawing. You can see that it’s rarely been above that. Again,  inflation, the 100 year average and the 50 year average are both about 3.7%. What that means is if you just look at the math, if inflation was running double digits in the ‘70s, you need a lot of years of pretty low inflation if you’ve got a few double digits thrown in there to average out to 3.7%. So we run as- as you might remember, your financial plans at 3.7%. We think that lends an air of conservative-ism to the plan so that even if inflation does go a little bit higher, you’ve got some protection in there. We want to make sure that you can make it to and through retirement, even if inflation escalates. This is a look at inflation. It’s been running about 1.5% or so, 1.5% to 2%. Right now, in that range at 1.5% to 2%. But one of the things you often hear is that when the Federal Reserve or the government looks at inflation, they take out food and energy. So they look at CPI, consumer price index, ex-food and energy. And the joke is like, ha ha, that’s great. If I don’t drive or eat, it’s I’m all set. Right. And admittedly, we all eat. I’ll be honest, since the pandemic started, I’ve eaten too much, they’re using a wide angle lens more and more now on me, so I’ve got to get out of the house and get some exercise right. Don’t drive as much as I used to, but I still do some driving. The reason they look at it without food and energy is simply this. The green last year was all- was all items except food and energy, and so was the red. So this was inflation last year, 12 month change. You can see food prices were up a bunch, energy prices were down a bunch. Energy and food are very volatile. And when the Fed’s making monetary policy, they want to control inflation. They don’t want- they want to do something that has some lead time. Because it’s not instant. It’s not like the Fed does something and it has an instant impact. There’s about a six month lag between what the Fed does and when it has an impact on the economy. Because of that, they want a steadier data series. So they strip out food and energy. Because it’s a little more stable, gives them a better view of where inflation might be heading. Because otherwise, just to use an example, let’s say there was a huge freeze like there recently was across the southern half of America and all the crops got destroyed. Well, if that happened and food prices skyrocketed, all of a sudden it looks like inflation is going higher. The Fed changes monetary policy on something that’s only temporary because as soon as it thaws, food prices go back to normal. So that’s why they look at CPI, ex food and energy. So now I want to talk about why people care about inflation and the concerns that they often reflect back to us. And one is that they’re worried about what’s going to happen with the dollar. Hey, if inflation gets out of control, is the dollar going to collapse? And usually this is tied in some way to the deficit. Hey, I’m worried about inflation going higher, and it’s because of the deficit or money printing and the like. And let me just pause and say that I think inflation very well could go a little bit higher. I think I don’t know about today, tomorrow, but over the next 5, 10 years, I could see inflation running, you know, instead of 2%, running 3%, 4% or 5%. certainly. Again, that’s why we build it into the plans. I think that there are plenty of reasons why that could happen. But there are also some disinflationary factors at work, including the Internet, right? Never before, if you look before prior to the year 2000 or something could people go to the store and before making a purchase, price comparison shop online with basically all the stores in the world, right. It’s really hard to raise prices when somebody has got pricing power in their pocket and can just leave and go somewhere else if your prices are too high. Because of that, as well as the fact that the Fed knows how to fight inflation by raising interest rates, I don’t think inflation is going anywhere near the 1970s, though I could see it escalating. So what impact does inflation have on the dollar? Well, you can see that the dollar- this is going back 50 years. You can see a big price spike in the value of the dollar in the ‘80s. And then in 1987, a bunch of central bankers and Treasury officials from around the world got together in New York. They call it the Plaza Accords. They wanted to weaken the dollar because it was hurting US trade and stuff. And so you can see the big decline in the dollar, the big up, the big down. You can see another increase in the ‘90s into the 2000s. So certainly volatility. But if we look more closely, what we can see here is- let’s get it there. All right, the last 12 months- in the last 12 months is a story of, for the most part, a somewhat weakening dollar. And a lot of that, there’s a lot of factors that go into currency- is a lot of it is the interest rate differentials. Right. The fact that for a long time US interest rates were so much higher than other places. And then with some of the rate cuts by the Fed, interest rates are a little bit more comparable. And so you’ve seen some of the- some of that reflect itself in dollar weakness. Now, the reason I bring this up is. what’s the impact of a weaker or stronger dollar? Where it comes through is on the international securities that you own. And so all else being equal as a US based investor, when you own international securities, if the dollar weakens, it helps your returns. Conversely, if the dollar strengthens, it would hurt your returns. Right. So you don’t want the dollar to collapse or whatever, but all else being equal, a slightly weakening dollar would give a tailwind to your foreign investments.

Andi: Quick question for you, Brian.

Brian: Yeah.

Andi: Sam would like to know, “How does inflation compare state to state? Are there states that historically perform better than others?”

Brian: That’s a really good question. I don’t know the answer to that. You know, my guess is that in periods of time, you probably see some differentials. And this is just an educated guess, particularly around weather and stuff like that. So and economic trends, if, for instance, you saw I don’t know, let’s say in the early 2000s, right, where the tech bubble really burst, you know, you could very well see lower inflation in let’s say the Bay Area versus someplace else just because you’re seeing more unemployment when it’s concentrated in a particular sector. If you think of something like Hurricane Katrina, that’s going to lower inflation for sure in let’s say Louisiana relative to the rest of the country. But over time when they measure it, they mostly measure it by different sectors. And so, for instance, they look at CPI for, let’s say, health care or stuff like that. And you can see that that’s run higher in the past. So great question, no, I don’t- I don’t know the full answer, and I haven’t looked at that data in a little while. So Treasury yields, right? So the other impact that inflation has is on government bond yields and this is a long term rate. Our long term chart, the blue chart is Treasury yields. The gray is what they call the Real Yield. So that’s the yield on the Treasury, less inflation. So that’s what you’re actually getting as far as growth in your purchasing power. You see the increase from the late ’50s into the 1981 and then the long, slow decline. You know, one thing to keep in mind is there’s something called an Anchoring Bias. Right. An anchoring bias is a financial bias that basically what happens is that whatever we grow accustomed to, that becomes kind of quote unquote ‘normal’. And we’re always measuring everything relative to that. And why that’s important is if you remember getting a 15% mortgage or something like that or buying a Treasury bond at 12%, that’s normal. And you’re- now it’s because rates are so low, they’re too low, because you’re looking at it relative to that. The reality is, is that there’s no magic to either that 15% in the 1970s or ‘80s or to the 1% or 2% today. They’re both just numbers and they’re going to adjust based on market fundamentals. Right. And so are interest rates going higher? I don’t know. I do think that when you got down below 1% to .5% on the 10-year Treasury, I think that that’s a little bit of an unnatural level. I think that that was a price that reflected and a yield that reflected basically an Armageddon scenario where the economy shut down and we didn’t know what was going to happen. And I frankly, my personal opinion is I don’t think that’s healthy for the economy. So but as you look forward, the long run over the last 10, 12 years, the range of Treasury bonds for the tenure has been 1.5% to 3.5%. And we’re right back in that range, more or less, right around 1.5%. So we’ll see what happens from there. All else being equal, higher inflation would lead to higher interest rates. Right. Why is that important? Well, because one question that I often get is what happens to my bonds if yields fall? Let me see if I can get to the- to the drawing on here. So I’m going to go to- to draw, let me- can we zoom in here on this? And I’m going to draw on just over this, which is going to be a little bit ugly, but basically when you think about bonds, there’s two components. There’s your yield and then there’s price movements. And I’m just going to make up numbers here. These numbers don’t mean anything. They’re not a prediction. They’re just numbers. So please keep it in mind. Let’s say that your yield is 2% and interest rates go higher and so your price return is negative 5%. Well, what’s going to happen is 5% is a bigger number than 2% so the value of your bond portfolio is going to fall. Let’s say that that’s year one. OK, but what happens in a bond portfolio is that as the yields rise, right, so and remember, bond prices move inversely with interest rates. So as interest rates go up, bond prices fall. Well, as that interest rate rises, you’re getting cash flow from your bonds. Maybe they’re maturing. Maybe there’s coupon payments or something and you’re taking them. You’re reinvesting them. So what happens is that the value or the yield of your bonds tends to increase as interest rates go up. Right. So maybe in year two now your yield is 4%. But interest rates are still going higher, your value fell and it fell another 5%. So what’s happening is you’re still declining, but not as much. And then eventually these even out, right? So now you’re going sideways and then maybe in year 3, what happens is that now you’re at, let’s say, 5% for yield. And maybe interest rates don’t go anywhere because they’ve risen as high as they’re going to increase. Right. Well, now you’re getting 5% with no price movement and the yield starts to come back up. And what happens over time is that it’s just math. When interest rates rise, the performance of a bond portfolio tends to be U-Shaped. And obviously, the exact shape of this ‘U’ is going to vary. It could be very steep. It could be drawn out. It could have a couple of bottoms. So the shape of it is going to vary. But the bottom line is that there’s just math behind it where when interest rates rise, your yield is going to increase to the point where you’re actually better off than you would have been in the first place. So it sounds weird to say, but as a bond investor, the best thing that can happen is for interest rates to go higher because you’re going to end up with more return over time, provided that your- your investment time horizon is greater than the average maturity of your bonds. And remember, we focus mostly on short and intermediate term bonds, and that’s by design. And so the bonds in the portfolio might mature over the course of just a couple of years, at which point that entire portfolio is essentially turned over to take advantage of those higher yields. So let me dive back into the slides here. OK, so. Here’s the 10-year treasury again, I mentioned that sharp decline, this is the last 5 years. It’s just kind of bouncing around in a range, down 1.5%ish, up to about a little over 3%. And then the sharp decline here down to .5% and then back up again to about 1.5%.

Andi: Got another quick question for you.

Brian: Yeah.

Andi: This one’s from Frank. “Why do higher bond yields raise inflation fears?”

Brian: They actually don’t. It’s the opposite for the most- for the most part, it’s the opposite. If- if higher interest rates are raising inflation fears, it’s because people think the bond market knows something they don’t. So bonds are very sensitive to inflation. Right. Because if you lend somebody money for 30 years, your big risk, assuming it’s not going to default, let’s say it’s a Treasury bond, is that the dollars you get back in three decades are worth less or they buy less goods and services than what you could have gotten today. So if inflation fears are being sparked by rising treasuries, Treasury yields, it’s that people think the bond market knows something they don’t. And what are they missing? What happens more often is that people are worried about inflation and because of that, it gets priced into the bond market. So people are like hey, I think inflation is going higher. I need a little bit more compensation for my bonds. So they sell bonds, which then raises yields. And remember, if you look at even in high inflation environments, right, people talk all the time about inflation. Think of how high inflation was in the ‘70s and ‘80s, but you were getting a lot of compensation for it. Remember, the blue is your yield. The gray is adjusted for inflation. So even here in the ‘80s, when inflation was very high, you still had positive returns from your bonds on a inflation adjusted basis just because the yields were high to offset that. So sometimes the question we get, I just want to touch on this, because it does come up, is, hey, what about things like Bitcoin and gold? If the dollar is going to weaken or if there’s going to be more inflation, are these good stores of value? And clearly buying Bitcoin back in 2017 or something would have been a good move, right? I mean, it’s more or less gone straight up. I don’t know where it’s going to go from here. It’s obviously very volatile.

If we took a different chart of this, you would see just how volatile it is. I mean, a couple of years ago it collapsed from about $30,000 to about $7500 and then went back up to $50,000, which when you’re going from $7000 to $50,000, it’s fun. When you’re going from $30,000 to $7000, it’s a lot less fun. When you look at gold in the long run, much more of a nuanced story where gold has these long periods where it really hasn’t done anything at all, where you can see my mouse going over, followed by a big bull market, a big collapse sideways and then a big run. Most of the return of gold has come in three periods, here in the ‘80s, here in the 2000s, and then here again in the last couple of years. But still over time, hasn’t done quite as well as some other asset classes. And by some measures, the inflation adjusted return of gold is actually zero. Here’s- here’s the way that we look at Bitcoin and gold, though, and maybe they are- make sense for people. Maybe they don’t. The problem is simply this, is that the way that we look at investing is if you- are if you are a corporation and you are thinking of buying a- building a factory, you look at what kind of cash flow, what kind of revenue is that factory is going to produce? And then you take those revenues and you discount them back to net present value. You assign how risky they’re going to be, assign a discount rate and then calculate what those cash flows are worth, see how much it will cost you to build the factory. And that will decide whether or not you should build the factory. But it’s the same thing with a stock or bond. What kind of cash flow is going to kick off now and in the future? How risky is it? How much return do you require? And then what price is it trading at and is it worth investing? So investing all comes down to cash flows. Why that matters is that neither gold nor Bitcoin has any cash flows now or in the future. Right. So if you’re going to buy gold or Bitcoin, what you really need to do a switch from the math of cash flows to the psychology of OK, what are people going to say gold or bitcoin is worth tomorrow, next week, next year, next decade? Right. There’s nothing wrong with that. It’s more like trading than investing. Right. It’s more psychology based than math based. It may or may not be a valid exercise. It depends on how good you are at it. We just think it’s fundamentally different than buying stocks or bonds or real estate or something like that. So- so we haven’t historically done it. One last thing I want to point out is if inflation does increase, over time most asset classes have actually done OK with inflation. And so there’s 4 different periods here. So this is since the late ‘80s. And the only reason that time frame is on this is it’s just when there’s good data for these different asset classes, I’ve been asked like, hey, why doesn’t this go back to the ‘70s when inflation is a little bit higher? And it’s simply a matter of data availability. Right. But you’ve got 4 different periods. In the left-hand column, you’ve got times with rising inflation and then the right-hand column times with falling inflation. So the top left is inflation is high to begin with and then going higher. That’s happened 10 times. The bottom left is that inflation is low and going up, that’s happened 4 times. The top right is inflation is high, but falling, which has happened 6 times, and then you’ve got low and falling inflation down here, which has been 13 times. And what I want to point out is that there’s a whole lot of asset classes on here, almost everything is positive returns in every environment. But really, the only the only one that doesn’t here is commodities in an environment with low and falling inflation. Other than that, regardless of the inflation regime, at least over the last 30 years, pretty much everything has done OK. And I think that that’s important. Now, obviously, some asset classes in different environments do better than others. But the point is that many different asset classes can do OK in an inflationary environment.

Andi: If you have any questions, go ahead and type them into the chat, because we can always take more questions and fill those in for you.

Brian: Cool, thanks. And what I want to point out too is there are different parts of the portfolio. Right. And so and I’ll just go on here and draw again. But if you think about your portfolio there- I’m just going to generalize here. All right. You’ve got some stocks, some US stocks. Right. You’ve got natural resources. You’ve got, I don’t know, some REITs, some real estate, RE. You’ve got some international stocks. I’ll just call it international and then you’ve got some bonds. And let’s talk for a minute about how these might do in an inflation environment, and again, I’m going to use those magic words that all strategists, economists and market people like to use, which is, I believe in Latin. It’s like ceteris paribus or something like that. It’s all else being equal, essentially. Right. And so obviously, no- no environment is exactly the same as any other and history doesn’t repeat, but it rhymes. Right. But if we look at just with the rising inflation, stocks, good companies have some degree of pricing power. Right. It might not be instant, but if their cost of inputs is going higher, they can usually raise the price for the good that they’re selling a little bit. Their profit margins might kind of move a little bit, become a little bit more narrow, but they’re not going to collapse and companies aren’t going to go out of business just because their inputs are going up in price. There are always exceptions, like airlines don’t do great when energy prices go up sometimes and stuff like that. But for the most part, US stocks do OK as an inflation hedge if it’s a good company, right. People like to drink Coca-Cola aren’t going to stop drinking Coke if the price of a can is 10 cents higher or something like that to use an analogy. Right. Natural resources, when natural resources tend to do well in an inflationary environment, that’s when things like energy and copper and aluminum and wood and stuff like that tend to do best. So that does OK in an inflationary environment. Real estate, you know, it depends, but one of the nice things about real estate is the landlord is that you can raise rents, right. So you’ve got some power there that if inflation goes up, you raise rents. So that tends to do OK. Well, international stocks, international stocks, if you look there again, one of the things that higher inflation can do is it can cause the dollar to weaken a little bit, which again, all else being equal as a US based investor, if the dollar weakens, that’s good for your international stock holdings. So holding some global security, some international stocks can provide diversification against rising inflation, among other things. So then we’re talking about the bonds. Right. And the bonds being the part of the portfolio that if inflation with an interest rates increase could suffer a little bit. I talked a little bit, right, about the “U”, right, the fact that what happens is that if you start here, if interest rates go higher, you wind up actually at a higher point. So you’re better off. And again, we focused mostly on short term and intermediate term bonds. And that’s because they turn over more quickly. Right. If you have a bunch of 30-year bonds in your portfolio and there are some in ours. Right. But if- if all of them are 30 years and interest rates go higher, you’re stuck for a long period of time versus these shorter and more intermediate term bonds that tend to turn over a little bit more quickly. So we really think, in addition to a lot of other things, by holding these different kinds of asset classes, broadly speaking, there is some protection against potentially rising inflation for those that are concerned about that.

Andi: We do have another question, Brian. This one is from Wen.  “With the 10-year bond yield rising, what is the strategy in terms of bond investing for the foreseeable future?”

Brian: Yeah, great question. I mean, as a starting point, we’re happy that the yield has risen, right, because it- rates are pretty low and it’s tough to get return. So we’d rather see interest rates at 2%, 3%, 4% than at .5% or 0% or something like that. Right. So- so we’re glad it’s rising. The strategy is similar to what we’ve been doing, which is a couple of things. One is that we’re focusing on shorter term bonds because as- if you own a 10-year treasury, right? If you have a 10-year bond, it has something known as duration. And duration, I could get mathematical, but basically just a measure of interest rate sensitivity. And what happens is if interest rates were to tomorrow, you wake up and interest rates are 1% higher, a 10-year bond, you might lose about 9% of your value. If, on the other hand, you have a 2-year bond. You might lose something like 1.5% of your value. Right. So it’s just much less volatile and so by focusing on these shorter term bonds, you’ve got a lot less interest rate sensitivity. So that’s one thing to protect against rising rates. This will just turn over a little bit more quickly, capture those. There are also some corporate bonds in there. Right. What happens is that corporate bonds and the like tend not to be as sensitive to interest rate movements. And there’s two reasons for that. One is that they provide a little bit more yield than Treasury bonds. And so that yield gives you a cushion. It’s known as spread, give you a bit of a cushion against rising interest rates. The other thing is that- a perfect example is the last year or 9 months or so- as interest rates have gone higher, it’s because hopes for the economy have picked up, right? Well, if the economy is doing better and you’re a company, you’re probably better able in a good economy than a bad to pay back your bills. So corporate bonds tend to do a little bit better because a lot of times rising interest rates are a sign that the economy is doing better. So that’s something else that we do. And then certainly we look at the average maturity in the portfolio to make sure that we think it makes sense as far as given the environment we’re in and where we’re going. Again right now, we’ve chosen to focus on relatively short term bonds.

If we got to an environment where interest rates were very high, maybe we’d go out a little bit longer to capture those higher rates.

Andi: We do have one more question. This one is from Alex. He says, “What is a fair comparison for my returns of the last 3 years? It seems that several 2020 retirement funds have done much better with almost no fees. I really appreciate Pure’s transparency, so sorry for the hard question.”

Brian: Yeah, I mean, that’s a little bit of a tough question to answer, not because it’s a hard question, but just because I don’t know what- what portfolio he’s in or what he’s comparing it to. So it’s a little bit like comparing two things that I don’t know. What I would say is this, is I think that if you look at 2020, 2019, 2020 and 2018, so 3 years. 2018 wasn’t a very good year for a couple of reasons. One is that in the tail end of the year you basically had a 20% price drop in stocks. So what happened is that stocks fell pretty sharply, which led to a negative year for stock returns. It was also a- you remember I talked about value versus growth- is that the- the value stocks didn’t do as well as growth. So growth beat value. All right, 2019 was a good year for most asset classes, so I know that many portfolio mixes and we have clients that are everywhere- and the reason that I don’t know is that we have clients everywhere from 100% stocks to 100% bonds, 2019 was a year in which diversified portfolios that we manage, a lot of them averaged double digits and some well into the teens. Right. However, that being said, if you owned, particularly the tail end of 2019 and into the beginning of 2020, if you owned like, let’s say, just Amazon. Google, and Apple, and maybe like Tesla or something like that, your portfolio probably crushed what we did, right? And so when you- when you look at an index fund or something like that, the big 5 or 6 stocks are about 25% of the S&P 500 is made up of 5 stocks. We just think that you take a quarter of the- if anybody out there, if you’ve worked for 3 or 4 decades and now you’re thinking of retiring, we think the idea of taking a quarter of everything that you’ve accumulated from 3 or 4 decades of hard work, putting it in 5 stocks, no matter what companies they are, just doesn’t make sense. Right. So in a year when those are doing the best, that’s not a great strategy. Right, because, well, it’s a quarter of the S&P 500. It’s maybe 5% of your portfolio. So those big tech companies are still pretty much the biggest holdings in your portfolio. They’re just not as big, relatively speaking. Right. And so 2019 into ’20- at the beginning of 2020, those large tech companies really led the way. We lagged rather badly, freely admit that. The back end of 2019 and the first part of 2020 weren’t great for our investment strategy. The second half of 2020 was much better. So we saw a small company stocks go up 40% or 50% the second half of the year. Large tech companies did OK, but they didn’t quite keep up. So relatively speaking, the performance of our portfolios has been much better in the last 6 to 9 months than it was in the couple of years prior. As far as an exact comparison. Again, I don’t know what mixes we’re talking about, so it’s a little bit hard to get more granular than that.

Andi: And it’s back to you.

Brian: Cool. Good question though. I appreciate- appreciate tough questions. All right, I just want to finish up here today with what the new administration means for your finances, and I don’t necessarily have a crystal ball here.

We don’t know yet everything that’s going to come out or that’s going to pass. So I just want to touch on a couple of things. And I also want to make it really clear, every time I talk about the administration, the election, this is apolitical. I’m not saying Democrats are good, Republicans are good, one is bad or worse. What should or shouldn’t happen. I’m just focusing on what seems to be factual, right. And so what’s factual is that this is different presidential terms going back to 1929 and what you see is blue is Democrat, red is Republican, almost every president has seen positive returns during their term. Herbert Hoover didn’t work out so well. That was the stock market crash in 1929 in the Great Depression. George Bush didn’t do too well either. He had a couple rough things going on there with the tech bust at the beginning of his first term and then at the end of his second term, the financial crisis. Everybody else has been positive. The reason I point that out is that there’s no magic to either a Democrat or a Republican in office and the market doing well. It depends on a lot of factors. And the person in office is just one of them. I also think it’s important from an investment perspective to kind of find a mix you can live with. And we all have opinions and it seems like we’re in a very divided country and there’s a lot of access to media. I mean, we all have a lot of time on our hands, too, because we can’t go out so we can watch the news. And it’s easy to get swayed by whether or not the political views we hold are in favor or going out of favor, whether we like the direction of the of the country. But it’s always important to say, OK, well, if X, Y and Z happens, I may or may not like it. But what impact does that have on my financial plan? Hey, if this policy goes on, if this happens, if that happens, if the election goes this way or that way, I may- I may not like it, but what does that mean for my financial plan? Am I still going to be able to retire? And then a lot of cases, it’s like, OK, let’s re-evaluate. Let’s see what impact it has. But in a lot of cases, the answer is still yes.

But the other thing is, I always ask this question, where do you think taxes are heading? So this is- I love this website. It’s USDebtClock.org. The one thing I don’t like is that every time I go in there- we’re going to need to move my pic again- every time I go in there, this number here gets bigger. And again, it’s a little bit hard for me to draw with this, but I feel like we had like $500,000,000,000 dollars worth of debt every time I do this presentation. But you can see about $28,000,000,000,000 in debt. That works out to congratulations. I don’t know how many of you are on this call at the moment, but each and every one of you owes $200- I’m assuming you’re all taxpayers- each and every one of you owes- owes $223,596 to the US government. So take a moment, pause and adjust your net worth down $223,596. So that’s the debt per citizen. If we come over here to revenue per citizen, this is tax revenue is about $10,000 per person. That- guys, you don’t need to be a business genius to figure out that if you owe $200,000 and you’re collecting $10,000 or if you owe $80,000 per citizen and you’re collecting $10,000 per citizen, that’s not great math. I think taxes have to go higher. And that’s even before Covid. Right. You’ll layer in the $3,000,000,000,000 spent last year for the CARES Act. We’re going to spend almost $2,000,000,000,000 here, it looks like, coming up pretty soon. That’s one of the reasons why we spend so much time talking about tax management, because it seems Republican, Democrat Biden and Trump, whoever comes next, it seems like almost a certainty that taxes at some point have to go higher, whether it’s this year, next year or next administration, next decade, whatever it is. That gets back to the question of that debt, we get the question all the time, are you worried about it? Well, yeah. I mean, in a vacuum, yes, I am. I think that you never want to owe that much money. But I’ll also say that from a market perspective, stocks are- the market as collectively is really only capable of focusing on a couple of worries at a time. And right now it’s Covid, the vaccines, maybe, what can happen with interest rates. Someday maybe the market will as a collective will worry about the deficit. It hasn’t been the case over the last 10 or 20 years. How do you satisfy a national debt? How do you pay that down? Well, there’s 4 ways. You can default on the debt. I don’t think we’re going to do that. You can have a technicality sometime where Congress can agree on something and debt payments are delayed a couple of weeks or something. But I don’t think we’re defaulting on Treasuries right? If you feel differently, I’d be happy to discuss it. And if you still feel that way, it’s probably time to move to the hills and stock up on canned goods. Right. You can grow your way out. So if the economy grows enough, then tax revenue is going to slice of a bigger pie is going to help satisfy the debt. I don’t- I’d like that to happen. I don’t know if it will. The last two options are you inflate your way out so you pay back the debt with less valuable dollars. That’s one of the reasons I’m talking about inflation, one of the reasons a portfolio is designed to protect against that.

And frankly, one of the reasons that your financial plans are stress tested by running inflation at the 100 year average instead of last year’s inflation rate is to make sure that you can withstand higher inflation. And then finally, you can tax your way out. And I think that’s the most likely way is that we’ll have higher taxes over time, which again, is one of the reasons that fundamentally everything that we do goes back to that tax management. Really, the takeaway here today is that things have been pretty good. I know, again, like the one question that came up, there was a period of time there, particularly in 2018- from the tail end of 2018 into the beginning of 2020, where those big growth stocks, those big tech stocks did so much better than everything else that the portfolio’s relatively speaking, didn’t do as well. Again, I think it’s important to see the mix, right, if there’s bonds here and the other thing doesn’t have bonds. But those value stocks really suffered. But in the last 6, 9 months, performance has been very good, you know, to the point where I’m now reining in people’s expectations. Small company stocks have come so far, so fast. Now value stocks are starting to pick up. Emerging markets have done great. Internationals done OK, it hasn’t done awesome, but it’s done OK. So most things are doing pretty well at the moment. So we’re happy with the way that portfolios are going. So no real worries there. Again, we’re looking at inflation, keeping an eye on it to see what’s going on. The other thing I want to point out, so from a portfolio perspective, we’re really comfortable with where things are at. I do think we’ll continue to see market volatility. So just because we’re getting vaccines doesn’t mean we’re out of the woods. We’ll still see volatility, still see fits and starts of growth and of coming out of Covid. The last and most important thing again is everybody stay healthy, stay safe. We’re looking forward to seeing those of you that are local in person. Again, that will be as soon as possible, but it’s not yet. But thank you all for attending and for your trust in Pure.

Andi: Thank you very much, everybody. If you do have any further questions, you can contact Brian at info@PureFinancial.com or of course, you can always email your advisor.

Brian: Cool.

Andi: All right, have a great night.

Brian: Bye Andi. Take care everybody. Bye.

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