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 [...]

Should investors worry about regional banks? Will the Federal Reserve finally tame inflation, and is a recession looming? What’s next for stocks and bonds? Pure Financial Advisors’ Executive Vice President and Chief Investment Officer Brian Perry, CFP®, CFA® charter, AIF® addresses these questions as he discusses Q1 market volatility and the outlook for Q2 and beyond.

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  • 00:00 – Intro
  • 00:26 – Is the banking system going to collapse and will it lead to a recession? An update on regional banks
  • 04:04 – What is a recession?
  • 05:17 – Inflation remains high. When will it moderate? – The inflation rate over the last 100 years and the last 12 months, inflation surprises moderating
  • 09:32 – Is the dollar going to be replaced as the reserve currency? The dollar is softening but still strong
  • 11:42 – I’m worried about stock market volatility. Should I stay on the sidelines? – Stock Market Performance, Bull and Bear Markets, Consumer Confidence & The Stock Market, Inflation & The Stock Market
  • 17:23 – The world is a scary place. Should I still own international stocks? – Global Stock Market Summary, Relative Performance: US & International, International Values Compelling, Some Global Markets Are Less Expensive, The Dollar & International Stock Returns, Where Does Revenue Come From?
  • 24:05 – When folks are pessimistic, does that bring down prices? So investors buy more, which drives the market up. And would that also be a good time for the average person to invest?
  • 25:56 – Bonds did poorly in 2022. Is there still a place for bonds in my portfolio? – Negative Returns Are Uncommon For Bonds, Bond Market Performance, US Treasury Yield Curve, Fixed Income Valuations, Historical Default Rates
  • 32:36 – So, what do I do with all of this? How do I go about building my portfolio? – Commodity Market Returns, Crypto Remains Volatile
  • 35:04 – The Case for Diversification
  • 38:00 – Why Stay the Course?
  • 40:10 – The Most Important Question: What is your required rate of return (ROR)?
  • 41:45 – Schedule a free financial assessment
  • 43:00 – If my rate of return is at least twice the cost of management from a money manager, for example, if the management fee is 3% of my earnings, should my rate of return be at least 6%?
  • 44:45 – For the average 50-something person, how much should we be investing in bonds?
  • 46:03 – Is it too late to get into some of the larger stocks like Apple or Google?
  • 47:18 – Schedule a free financial assessment

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Kathryn: Hello and welcome everyone. Appreciate you all being here. I’m Kathryn Bowie from Pure Financial Advisors and thank you for joining us for this market outlook with our Executive Vice President and Chief Investment Officer, Brian Perry.

Brian: It’s been an interesting time, a lot of volatility, a lot of news headlines. As is generally the case. Most of the news headlines have been bad. There’s a reason for that. It’s not cuz the news is all bad. It’s cuz the old saying in the media, ‘if it bleeds, it leads’ and- and I think that there’s a lot of truth to that. And you know, in general, if the market’s up 2%, if it’s up 1%, people don’t care. If the news cycle is good people, yeah, they tune in, they look and then they move on. But if the news is terrible and there’s impending doom, or oh my God, it tugs on our emotions and our heartstrings, and then people tend to tune in and they stay tuned in. And at the end of the day, that’s how the media gets paid, right? It’s to attract and retain eyeballs. And hence, again, if it tugs on your emotions, if it bleeds, it leads. And so the news cycle’s been, you know, quite negative over the last 12 to 15 months or so, and- and certainly even in Q1. But once you look under the hood, things actually haven’t been that bad. So let’s dive in and, and again, like Kathryn said, if you have questions along the way, please go ahead and, weigh in with those. And let’s talk about the market update, and let’s begin with- the way that I did this is I put it into a number of questions that we’ve been getting lately that we’ve heard and kind of organized it that way. And so one of the questions is simply, is the banking system gonna collapse? And if it does, will it lead to a recession? So for starters, is the banking system gonna collapse? You know, at the end of the day, I don’t think so. We don’t think so. Collapse is a strong word. And- and for those that have seen the famous Christmas movie, It’s A Wonderful Life, there’s that famous scene where all the bank- the bank customers are in George Bailey’s office and they’re all asking for their money back. And at the end of the day, there’s a panic and they’re trying to pay everybody off because the banking system is founded on faith. There’s a faith that if you gave your money to the bank, you’re going to be able to get it back. There’s also inherently a distrust of banks, and that’s as old as time itself. I’m sure some of you out there at some point have seen a Western movie, right? Every western movie ever made it’s always like the banker that’s the bad guy in the old western town. So people are suspicious of banks. That’s based on faith, and the government knows that. And say what you will about the government, but they’ve been pretty aggressive in protecting customer deposits and making it clear that there’s FDIC insurance, but even if deposits are in excess of FDIC insurance, nobody will lose money. So we’re not too worried. Obviously paying attention, but the other thing is that each of the banks that has had an issue, it’s been specific reasons. It hasn’t been as systemic as what you saw in 2008, 2009, where there was a lot of bad debt, vis-a-vis low rated mortgages on bank’ balance sheets. In this case, you had a bank that was very tied to Silicon Valley and cryptocurrency. And then you had another one that had a lot of lending in certain markets that wasn’t doing as well. Or you had somebody that was more focused on owning a lot of long-term assets on their balance sheet, and when interest rates went up the asset liability and mismatch hurt them, which is an age old story in the banking industry. But, you know, again, broadly speaking, we- we think the banks are okay. Keep in mind too that there are thousands of banking institutions. One measure I saw was that there are 10,000 banking institutions in the country. I think we’ve had a couple that went under. Right. If people go outside, I’ll bet two out of every 10,000 people get hit by lightning every day. So, although these things do happen, they’re not that common. As far as the custodians, so if you have money at a Schwab, a Fidelity, at Vanguard, etc., is your money safe? And at the end of the day, we think so as well. Many of the deposits, and again, there’s some details here, so, I won’t go in because it depends on what you own and where exactly your money is held within these institutions. But in a lot of cases, there’s FDIC insurance, and then on top of that there’s something called SIPC, which is additional insurance. And then the- the custodians have additional private insurance of hundreds of millions or even billions of dollars to protect customer deposits. So, you’ve got that. You also have the fact that, if you own securities,  your holdings are collateralized. So if you own a money market fund, a treasury bill, a mutual fund, a stock, or a bond, and the entity goes under, you still hold that security. There’s no loss to you. You just pick up your security and go somewhere else. The analogy I often use is if you’re the maker of Heinz Ketchup and you’re at Vons and Vons were to go under, you take your Heinz ketchup and you move it over to Ralphs and you sell it at Ralph’s, you haven’t suffered any loss. Importantly too, customer securities and- and accounts are held separately from brokerage firms own capital, so they’re not accessible to creditors. So again, certainly bears monitoring, even yesterday and today, there’s additional bad news on First Republic. So this thing continues to be some smoke and- and some struggles with certain institutions. But we don’t think it’s systemic and we don’t think it’s gonna have long-lasting repercussions for the financial markets. So what is a recession? The- the common rule of thumb is that it’s two consecutive quarters of negative GDP growth, but that’s actually not true. A recession is defined actually by the National Bureau of Economic Research, the NBER. And the way that they define it is that it’s a significant decline in economic activity that’s spread across the economy and lasts more than a few months. And then in order to measure that, they look at a handful of different indicators. They’re- they’re looking at the whole economy, but the ones on this slide here are some of the things that they look at very closely. Personal income, non-farm payroll, household employment, consumer spending, etc. And this is simply a heat map where red is very weak, green is strong, and then yellow is somewhere in between. You can see, for instance, the sharp, and I’ll annotate this a little bit, the sharp red, right? This is Covid. So as you can imagine, when you’re told you can’t leave your house, all economic activity shuts off. That’s a recession. You can see out here more recently, it’s very mixed. A lot of yellow. So we don’t see a super strong economy when you look at this. There’s not a lot of dark green, but there’s not also, really anything red. There’s a little bit of orange, a little bit of yellow. So overall that paints the picture of an economy that continues to show some resilience in the face of headwinds. The reason people worry about a recession, in addition to recent bank issues is because of Federal Reserve policy with raising interest rates. And of course, they’re doing that in an effort to stamp down inflation, right? So we get the question all the time. Inflation’s high, when’s it gonna moderate? I mean, I guess, you know, I’m assuming most of you noticed things are more expensive lately. If you’ve gone out for gas, if you’ve gone out to eat, if you’ve done almost anything, life has gotten more expensive in the last few years following a period of time when inflation wasn’t very high. Right? So let’s take a look. This is the 100 year rate for inflation. And you can see that, if we look, this is more recent and you can see that followed a period that spike followed a long period of pretty moderate inflation. And then in the past, you’ve seen spikes here in the 70s and 80s, and then in the post-World War II era. So one thing to note is that if you look at monetary policy out to, let’s say, the early 1980s and then subsequently, it’s been a lot more moderate, a lot calmer in recent years. And the Central Bank, the Federal Reserve gets a lot of credit for that, for getting better at managing the money supply and inflation. Sometimes they call this the Great Moderation because we haven’t had a lot of inflation in the last 30 or 40 years until recently. So you can see that the spike that we’ve enjoyed in- in the last couple years has been the highest since the early 1980s. You can also see it’s beginning to tail off there at the right-hand side, and inflation has dipped a bit, although still at some of the highest levels we’ve seen in many decades. If you look at a more recent slide, so this is inflation over 12 months. Again, you can see the same story where we peaked last summer at 8% to 9% inflation, kind of remains stubborn there at around 8%, but then we’ve gradually been tailing off 7%, 6.5%, 6%, and now down to 5%. So still high inflation, but it does look like it’s moderating. I mean, and that makes sense, right? You would expect inflation to moderate, given a couple things. One is a lot of the supply chain chokeaegs coming out of Covid have started to work their way through. So some of those one-off factors that were leading to inflation have started to dissipate. The other is just that the Fed has been really aggressive in fighting inflation. The interest rate increases they did in the last 12 months are some of the sharpest on record. that’s beginning to trickle through. There’s a rule of thumb that Federal Reserve interest rate movements take 6 months to work their way through the economy. So you know what’s interesting is the first Fed rate increase was in March, right? So if you flash forward, you say, all right, if you start raising interest rates in March of 2022, it takes 6 months for those interest rate increases to begin to stamp down inflation and slow the economy. Well, let’s look out here in September, October, about 6 months out from the first interest rate increase. And you can see that- or you can see that that’s when interest rates began to go down. So maybe monetary policy is working if right back here is when they started raising interest rates. And it takes six months, you flash forward in inflation’s high, high, high, and then it starts to moderate right with that 6-month lag. So it does appear that, although in my opinion the Fed was extremely slow to act about inflation, I think they considered it transitory- transitory for too long, did a poor job. they have been very aggressive in trying to catch up. A lot of forecast call for, potentially one more interest rate increase at the next meeting, although we’ll see given some bank volatility. Most people now expect that the Fed, if not next meeting then in June, will pause in interest rate increases and- and take a break and see what’s happening with inflation in the economy before raising any further. Why is all of that important? Well, the reason it’s important is a couple things. One is just to continue on the vein of inflation moderating. These are inflation surprises, so you can see people, if it’s- if it’s high, it’s people are surprised at how strong inflation is, and if it’s low, people are pleasantly surprised at how low inflation is. You can see that again, inflation surprises peaked about a year ago and then have been declining since then. But again, all the talk of inflation, the reason it matters is simply because of the impact of inflation on stocks. And we’ll talk about that in a bit as far as why, investors want lower inflation. Another question, and this goes hand in hand with interest rates and inflation because they’re both big impacts on the dollar, but we’ve got a number of questions lately around the dollar. Is it going to be replaced as a reserve currency? What’s going to happen? There’s talk of cryptocurrencies, digital currencies, the Saudis trading oil and different currencies, China, the Renminbi- Renminbi, being the reserve currency, etc. We don’t think the dollar’s going anywhere in the short term. There’s a couple reasons for that. One is when you look around the world, all currencies are relative and you can point to a lot of issues that the US has. But what country out there doesn’t have issues? Right. If you wanna use China as a reserve currency, well, if you trade in the Yuan, the Chinese Yuan, you need to be able to then convert those  Yuan to some other currency. The currency in China isn’t even freely convertible, so you could trade and then you’re stuck with Yuan even if you don’t want them. So we think it’s a long way away from anything replacing the dollar. And in fact, a lot of people don’t realize, but the dollar’s been incredibly strong over the last handful of years. And so when you look at it, the top left-hand side here, the thick blue line, is the dollar index. So this is measured against a basket of various currencies, and you can see that it’s really been strong since about 2010 or 2011, and indeed has reached levels that it hadn’t seen since the late 1990s. And before that, you have to go back to the mid-1980s before you were at those levels. So despite fears, worries, doubts about the US dollar, it’s actually at multi-decade highs. Again, it has moderated a little bit here, recently. And to be fair, we actually think that a weakening dollar would be good for a lot of investors. So obviously not a dollar collapse and we don’t think the dollar’s gonna collapse, but a weaker dollar and we’ll talk more about this, is a benefit for people holding foreign securities. It can help some US companies as they export goods and services. So we think a more moderate dollar would be beneficial. And if you think about the last time the dollar declined, broadly speaking here in the 2000s, was a pretty good period for investors and for stock markets until, of course, the financial crisis. We’re gonna shift and talk a little bit about stocks before we do that, and- and whether to stay on the sideline, Kathryn, are there any questions we should answer?

Kathryn: Actually, you’re doing a great job. The questions that have been asked, you’ve already answered. We did have one question a couple people have asked, whether the recording is going to be sent out, and yes, it will be. So after this, you will be receiving an email in a few days, and you’ll get to watch this all over again.

Brian: Well, and Kathryn, I think you bring up a really good point. One is, yeah, because I’m doing this, you should watch this at least 4 or 5 times, all of you. The second thing and then pass on to friends, family, you know-

Kathryn: Of course.

Brian: – random strangers, just spread it far and wide. The other thing is, Kathryn, you correctly pointed out my clairvoyance in the sense that I’m even able to anticipate, listener and viewer questions. So with that kind of foresight, obviously everything I say about the market too is 100% correct, and I- I do admit that I have the ability to completely and perfectly forecast future market events. So stay tuned. I’ll tell you exactly where the market’s gonna end at the- at the year end.

Kathryn: And we have some great bridges to sell and other things, right?

Brian: Yeah, yeah. No kidding, right?

Kathryn: But you’re doing a great job. The question-

Brian: Everyone in our compliance department’s running down the hallway screaming.

Kathryn: Exactly.

Brian: Let’s talk about the stock market and- and here this gets to the gap between perception and reality, right? If you just paid attention to the headlines in the last several months, you would think that markets are doing awful. And yes, there is some volatility, but let’s look at how stock markets actually did in the first quarter, or markets in general. Right. So let’s take a look. This is Q1. So let’s look at just the first quarter of 2023. At the top, you’ve got the S&P 500, up 7.5%. Small company stocks, positive, no, you’re not as good as big companies, but positive. International stocks for the first time in a while leading the way at 8.5%. Emerging market stocks up. Bonds following a bad year up. High yield bonds- Commodity is really the only thing that were down. Real estate up, right? So despite the bad headlines and all the negativity, Q1 was actually a pretty good quarter for markets. You know, I- I think everybody out there, you know, if I told you- you could, you know, you annualize these and get 4 times 7.5% is 30% for the year from the S&P, you’d probably sign up for that. 10% here would still be a good year. All right. I don’t know if you could get 4 times 3, you get 12% from your bonds in a year, you’d probably be pretty happy. So, you know, despite the negativity, pretty good backdrop for the markets in the first quarter. Obviously if you look at it a little bit further, the one year performance, not as good. Although again, Q1 of 2023 was good. Q4 of last year was pretty good as well. It was just that the first 3 quarters of last year, as- as you’re all aware, were very tough sliding for markets which contributes to these negative one year returns. But you know, at the end of the day, markets go up. They go down. So, you know, you get bull markets, you get bear markets. It’s part of the course, right? And in this chart you can see the long term upward, momentum of stock since the mid-1960s. And then the blue- the blue bars are bull markets. The red bars are bear markets. And you know, I think a couple takeaways. One is look at how much longer- how so the thicker the line, the longer the bull market or bear market, you can see how much longer bull markets are in general than bears. You can also see how much higher markets tend to go than their subsequent decline. Right? But I think more importantly is look at this chart. I mean, look at this upward line and think of when this started, right? You had Vietnam, then you had Nixon impeached. Then you had stagflation in the late 1970s, then Reagan got shot, right? You had the 1987 stock market crash where the market fell 27% in a day. Right? In 1990s, you had a bear market around real estate and savings and loans and junk bonds and whatnot. Then you had Y2K, you had the tech meltdown, you had the financial crisis in the late 2000s. And then, you all may remember a little thing we like to call Covid and- and the, lockdowns that we all enjoyed, right? Despite all that and a bunch of other stuff, markets went up over time. And- and I think again, that speaks to the fact that it’s not about trying to jump in and out of the market, it’s that in the long run, markets are designed to go higher. Companies are growing, they’re generating profits. You participate in that as an owner when you buy stock. It’s just a matter of drowning out the noise and sticking with it a lot of times. That’s particularly true because in general, the more optimistic people are, the worst markets do, and the less optimistic or the more pessimistic people are, the better markets do. It sounds weird, but across the bottom, this is consumer confidence. So these are, across the bottom are all the lows in consumer confidence when people are most pessimistic. And then the subsequent 12 month returns across the top is all the times that people are most optimistic, and then the subsequent 12 month returns. And I think what’s really instructive is that during the times people were most optimistic, the average return was 3.5% the next year. When people were most negative and they were ready to jump out a window, up 25% the next 12 months. Right? That doesn’t guarantee anything. I mean, we made a- the lowest, really on record here for consumer confidence last, about a month ago, two months ago. and since then, stocks have rallied. There’s no guarantee that this is gonna continue, but it does kind of corroborate with data the idea that the time to buy is when people are pessimistic, not when the lights are all green and people are optimistic. I mentioned earlier the idea that we want inflation to go lower, and there’s a few reasons, right? One is that as bond holders inflation eats away at your purchasing power of your fixed coupons. So inflation is bad for bonds, lower inflation is better for bonds. The second is that when you all go out food shopping or on vacation, it’s nice to pay a little bit less as opposed to seeing prices spiral outta control. The third is for stocks. So you can see this chart on the left-hand column- what I would focus on is- is really just a couple columns here. One being CPI year over year, and the other being S&P 500 performance on an annual basis. When inflation is below 1%, the S&P is averaged about 17% returns; below 4%, it’s average close to 10%, which is about the historical norm. And then you can see at these higher rates of inflation markets have either, you know, essentially done nothing. Right. And this higher range of inflation is really where we’ve been over the last couple years. And you’ve seen stock markets suffer. And so that’s why I think the fact that it appears, and I’m not in the camp that inflation’s gonna drop a bunch or we’re gonna go back to 1% inflation. But if inflation is at least moderating, that is a better backdrop for stocks than where we were a year ago with 6%, 8%, 9% inflation. Okay, so that’s a little bit on the US. Let’s talk a little bit about the world, right? Guys, the world’s scary, right? There’s all kinds of bad stuff. I mean, we could start with Russia and Ukraine and move on to concerns about Russia or- China invading Taiwan and you know, pick a country and I can probably give you some bad news or something that’s frightening about the place. And you know, so the question that we always get is, should I still own international stocks? Well, couple things. One is, and again, there- there’s a ton of numbers on this, slide, so I just wanna focus on a couple of ’em. These are a variety of global stock indexes, and again, the first column here is 3-month performance, or the second column, I guess, excuse me. And then next set is one year. And then when you look at, let’s say like the S&P 500, up 7.5% last quarter. When you look at things like the European stocks, up 14%, Japan, up 8.5%. So you had a quarter where these other countries did better than the S&P. And even over the last 12 months, if you look, the S&P was down about 8%. The NASDAQ with all the big tech stocks was down about 13%. And then you look at Europe up, you know, 14%, 15%, Japan up, China down, but not nearly as much as the US. So, you know, more recently, foreign stocks have done better than US stocks, broadly speaking. Over the longer period of time, though US stocks have drastically outperformed, in recent years, international stocks. Right. And this is the reason we get the question, in addition to all the bad news, is the blue or purple or whatever color that is, are periods where Europe and developed market countries like Chi- like Japan have performed better than the US and the gray is periods when the US has performed better. And what you notice is that when you look over, I don’t know, the 40-year history from the early 1970s to about 2010, you can see it goes in pretty even increments. Times when the US does better, times when foreign stocks do better. But roughly, you know, you’re getting the ebbs and flows. And then if you look in the last decade, the US just took off and dominated international stocks, for an unprecedentedly long amount of time. And there’s a few reasons for that. One is simply that, if you think about the companies that led the way for a good part of the 20 teens, it was tech stocks. And tech stocks, the big ones are a lot of cases concentrated in the United States. So, but anyway, and the other thing is the dollar, right? And so in a lot of cases, when the dollar is strong, foreign stocks suffer relative to the US.

And so if you’re a US stock, if you’re a US investor and you’re buying international stocks, you want the dollar to weaken. Because if so, your foreign holdings become worth more. And so what’s happened is that if you look at the relative under or outperformance of international stocks versus the US when the dollar is strong or weak, you can see that when the dollar’s falling- So here for instance, the dollar fell starting in March of 1985 following the Plaza Accords, the dollar fell quite a bit and you can see that international stocks outperform the US by 33%. You know, conversely, if you look at July of 2011, since then, the US dollar’s drastically outperformed or drastically strengthened, and you can see that international stocks have underperformed the US by 225%. Then more recently, as the dollar has softened a little bit, you can see that international stocks have done better again. So again, the message there that a weaker dollar all things being equal should help international stock holdings. The other part of international stocks is that their valuations are compelling. The chart on the left looks at the discount relative- on price earnings relative to the US for international stocks. Again, a lot of numbers, but I think the key is it’s all the way at the bottom, right. This is about as cheap as international stocks have ever been relative to the US. And then if you look at dividend yields again, relative to the United States, international stocks are about the cheapest that they’ve ever been. This is just another way of looking at it. This is each country relative to its historical average. You can see here in red, the United States is slightly more, if anything above the x-axis, slightly more expensive than historical averages. So for instance, Greece, it’s quite expensive right now. If you look on the right-hand side, though, most international markets are somewhat less expensive than historical norms. Especially look at the right-hand side here. Emerging markets, United Arab Emirates, Malaysia, South Africa, Columbia, Hong Kong, Singapore, Philippines, China, Asian markets and emerging markets are some of the cheapest that they’ve been in years. and that’s just a function of they haven’t done well. We do think that emerging markets are gonna have their day. The story behind the rise of the middle class and emerging markets and the rise of world-class companies in many of these countries has not gone away. But their stock markets have done very little over the past 10 years or so. We think eventually that cycle will turn, and- and emerging markets could be poised for an extended period of strong performance. One more thing I wanna point out, and this gets back to the what’s going on in different countries and why would somebody want to invest in Japan or in Korea or in South Africa. The reality is, is two things. One is that you’re not really buying countries, you’re buying companies, right? And there are great companies in every country in the world. The UK has Unilever, Japan has Toyota, China has Alibaba, right? Switzerland has Nestle. So you’re getting great companies in some of these countries. And then it’s like the other part of it, these companies are not selling everything in their home country. So when you look at it, this is revenue exposure versus country of listing and it’s percentage of total revenue from home countries. Companies in emerging markets sell about 1/3 of their products abroad. US companies sell about 40% of their products abroad. When you look at Japan, Europe, the UK, more than half of their sales come from other countries. So you’re not even reliant on, you know, a French company selling things in France, cuz they’re selling most of their goods and services of abroad. So you’re getting a lot of diversification. The company may be domiciled in Japan, you know, China, The UK or whatever, but they’re selling stuff around the world, just like our multinational companies are selling stuff around the world. Right. Apple sales aren’t all coming in the United States. All right. That’s a little bit on stocks. Before I turn to bonds, let me take another pause, Kathryn, and see if there’s any questions.

Kathryn: Yes. Thanks for pausing. we did have question. “When folks are pessimistic, does that bring down prices so investors buy more, which drives the market up? And would that also be a good time for the average person to invest?”

Brian: Yes. And so, yeah, a lot of times when people are pessimistic it’s because, you know, a lot- a lot of people have panicked and sold or gotten out for a variety of reasons. A lot of times it’s marginal too, right? Every day there’s buyers and sellers. So it may not even be that everybody’s selling, but if there’s just a few less buyers, cuz people are pessimistic, prices could fall. What that means is that there’s dry powder on the sidelines, right? All the people that have been pessimistic and haven’t bought yet, are waiting to buy. And so a lot of times that is the best time to buy is when, people are pessimistic. Historically, there’s a saying that the market climbs a wall of worry. And the idea being that the worse the news kind of the- the more markets tend to perform. Both- think about it, when times are really good. If the economic news is perfect, companies are making a ton of money, your favorite politicians in office and maybe Republicans and Democrats, and now you’re all gonna smile. They’ve come together. We’re all holding hands in a big circle, singing songs, the country is unified, the world is at peace. It sounds like a- a cartoon that my kids would watch. Imagine a world like that, you’d be fully invested. When do you think of how great that would be? There’d be nothing to stress about, worry about. You’d be fully invested, so would your neighbors, so would everybody else. The question, if everybody’s fully invested, who’s left to buy? And the answer is nobody. Right? So a lot of times when people aren’t fully invested, when they’re nervous, there’s more dry powder on the sidelines, that’s when people tend to buy.

Kathryn: Well, thank you very much.

Brian: My pleasure. Let’s talk about bonds a little bit because they obviously had a- had a poor year in 2022. And, you know, people ask, is there still a place for bonds in my portfolio? Well, for starters, I wanna stress that negative returns for high quality bonds are pretty unusual. So this is the Bloomberg Aggregate Bond Index, which is the, the main index in the bond market. Blue years are positive returns and, and the red years are negative. And, and you can see that by my count, you’ve seen 5 negative years since 1980. So 5 out of, what is that, 43. So most years bonds produce positive returns. And you can see that most of the time when the bond market is down, you’re talking a couple percent or negligible amounts, right? One or 2%. The big outlier being 2022, where you’re down double digits far and away the worst performance on record. So one thing I would point out is, history doesn’t, repeat, but it does rhyme. And if you have a statistical, a body of evidence that says that, you know, 80% of the time, 90% of the time, bonds are up and when they fall, it’s only marginal. And then you get one outlier year where they’re down a bunch. I’d probably, my conclusion from this chart would be most years bonds are up and when they fall, they don’t go down much. And rather than, oh my goodness, in 2022, bonds are down a bunch, bonds are- are super risky. The other thing is similar to stocks, bonds have started to recover. So let’s look at the 3 month performance, right? When you look at different kinds of bonds, the aggregate was up 3%, treasuries up 3%, municipal bonds up almost 3%, mortgage-backed securities up 2.5%, corporate bonds up 3.5%. And then the more aggressive kinds of bonds, high yield up, 3.6%, preferred securities 4%, convertible bonds 4%, etc. And international bonds too. Emerging market bonds were up international bonds, so across the board really bonds were up in- in the first quarter. If you look at the one-year performance, of course, bonds still negative, although not quite as bad. So over the last 12 months, the Barclays aggregate down about 5%. You can see Muni bonds have actually eeked out a slight gain in that time. You can also see that certain kinds, bank loans you might notice as an outlier there. That’s because they’re generally floating rate, and so even when interest rates go up, it doesn’t necessarily harm bank loans because their rates can reset to higher rates. Before you all run out and, and pile into bank loans, I will- I will note, it’s not all a free lunch. Yes, their rates reset. But that can work in both directions. They can go down when interest rates are falling as well as up. They also tend to be relatively low credit. So a lot of times you’re taking on a fair amount of credit risk. And they’re illiquid too. They can be hard to trade. So, they can make sense for some people as a small smattering of a portfolio. But this isn’t a place to put everything. The reason bonds have done well lately is just cuz interest rates have come down a bunch. And so you can see the gray line of December 31st, 2021. And then if you look at December 31st, 2022 in green, you can see just how much interest rates had increased during that 12-month window. And then you can see the blue line of March 31st, of 2023, in that 3-month period, rates coming down some. So not so much at the short end, but you know, you can see how a two-year bond went from 4.2% to 3.8%. A 10-year bond went from 3.9% to 3.5% and so on. That decline in interest rates, just like last year’s increase in interest rates, hurt bond returns in the first quarter of the decline in interest rates helped bond returns. And just as a reminder, there’s an inverse relationship. So when interest rates go up, bond prices fall. When interest rates go down, bond prices rise. If you look, as a bond buyer, the more income you can get, yes, higher rates are painful when interest rates are going up and you’re seeing losses in your portfolio. But the reality is, is you want income from your bond portfolio. So in a lot of ways, higher interest rates are your best friend. These bars for various kinds of fixed income, show you what the range of interest rates has been over the last decade. The purple line across it is the median, and then the blue diamond is the current. And so what you see is that although we’re off our highs for most of these asset classes, almost every kind of bond, the yield that you can get today is still well beyond what the bottom of the range, or even the median of the range, has been in the last 10 years. So, you know, as a bond buyer, this is actually a- a pretty good time to- to be around. You know, I- I mentioned, so if you go back to this chart and you’ll look at some of the returns of some of the high yield bonds and preferred stock and so on, convertible bonds, keep in mind that although these can have a role in a portfolio, most of when you buy bonds, you’re building a portfolio. Really the idea behind the bonds is to compliment your aggressive assets like stocks and real estate and whatnot. And so you don’t generally want to take a ton of risk with your bond portfolio. It’s okay to have a sprinkling of riskier assets in there, but you don’t want it all to be risky or you’re really just doubling down on stocks. And when you look at it, this kind of shows why. These are historical default rates for the last 50 years. So these are, what are the odds that the issuer goes bankrupt? The- the gray is corporates and the blue is municipals. And what you see is bonds are rated on a scale, and think of it like a FICO score- 750 is good and 500 is not so good. AAA is the highest rating for bonds. Then AA, single A, BBB, or in this case- this is moody- so BBB is denoted B AA. Just to clarify that. So these in here are considered investment grade bonds. Everything from here, the BB on down is considered high yield or junk. And again, they can have a place in your portfolio. But look at the default rates. I mean, you’re-you’re pretty close to zero for AAA and AA. You’re at 2% or 3%, for corporates, and A and BBB. But then look at as you get into BB and whatnot, and CCC. CCC corporate bonds, half of them are defaulting in 10 years. So again, might make sense and we do use them in some client portfolios, but they’re a little bit like hot sauce on your food. A little bit goes a long way. In general, bonds, you wanna leave to the professionals, use an ETF, use a mutual fund, a separately managed account, rather than trying to navigate that space yourself. That advice goes double for corporate bonds and high yield bonds, and even municipal bonds. As you sink down the credit spectrum, you probably don’t wanna be out there doing research yourself. You wanna rely on professionals to go out there and figure out which half of these CCC bonds are gonna default and which half aren’t. Any other questions, Kathryn, before I talk about building a portfolio?

Kathryn: No, you keep, you’re doing such a great job. People are- they’ll ask a question and then say, oh, thank you.

Brian: No, I know that- I just keep stopping so you can tell me I’m doing a great job.

Kathryn: You are doing a great job.

Brian: Say it again.

Kathryn: You are doing fabulous.

Brian: Ah, that’s better. All right. My confidence is bucked back up. So let’s talk about what to do with all of this and how to go about building a portfolio. Look, everything I’ve talked about, I wanna stop and stress this. Everything that I’ve talked about, are sort of pieces, they’re ingredients. This is the recipe and this is the stuff that if you take nothing else away from this presentation, this webinar, please pay attention to these next couple slides and take away the learnings in it, particularly the last couple slides, because this is really the crux of everything. So, first of all, I wanted to talk about a couple asset classes. People sometimes like to sprinkle into portfolios, one of them being commodities. Similar to the other slide, you look here and you can see commodities were really the only thing in the last 3 months that were down, they haven’t had a very good couple months. Due largely to fears of, a economic slowdown. But look like natural gas was down by half. Speaking to the fact that, commodities can be extremely volatile. We get a lot of questions around gold. Look at the 10-year return for gold is 2%. It’s- it’s had a nice rally here lately. Gold was up 8% last quarter. People sometimes flock to gold as an alternative currency and with fears of banking and stuff, it’s done okay lately. But the longer on return, there’re not- not great. The other question we get is, well, should I add some crypto to my portfolio? And, you know, this is Bitcoin and, and crypto is volatile, right? I think you all know that. Bitcoin fell from 60,000 to about 16,000 and has had really a pretty good run since then. 2023 has actually been a great year for crypto. But again, remains volatile. I mean, it goes up and down 5% per day. So if you’re gonna use crypto again, it should be very much like hot sauce on your food. A little bit goes a long way. This is not something where we think it should be the bulk or a huge percentage of your portfolio. If you wanna sprinkle a little bit of proverbial play money or kind of a- a tail risk kind of thing, where, hey, if it does great, you’re gonna make some money, but if not, it’s not gonna harm your financial plan. Maybe that’s the place for it. Let me now shift into these couple of slides that I think are really fundamental and that I want you to have takeaways from. One is the case for diversification and there was a time before Covid when we used to do these in person and, and it was so awesome, you know. You guys, like, I hope you all, if anybody’s done this, I hope you all appreciate how soul-sucking it is to sit here and talk into the void. As opposed to having all of you here and getting your reactions and having the banter back and forth. I mean, it’s great because we can all be in different locations and bring in a broader audience. But it really is nice to have a live audience. And when we had a live audience, I would say, hey, what is the pattern here? And I would wait for somebody to answer that question. And over time, people would stare, stare, stare. They’d go a little cross-eyed. They’d kind of squint their eyes. They’d lean forward and eventually, right. The takeaway is that there is no pattern to this slide. Right. What this is, is across the top is the year 2008 to 2022 and then these are different asset classes stack ranked from the best performer each year to the worst. And what you see is that in any given year, things could be the best. It could be the worst, it could be the most volatile, the least. But you see very little in the way of patterns. You see some trends over time, right? Somebody will point out, Hey, commodities had a bad run here. Right? They’ll say, Hey, real estate did pretty good in the-you know, first part of the 2010s and yeah- But keep in mind how real estate do in 2007 and 2008, right? So the reality is that there’s very little pattern here. So the best way, guys, listen, the best way to get rich, if you wanna make a ton of money, here’s how you do it, right? All you need to do is figure out which of these boxes is going to be at the top for 2023 and buy it. Then figure out which one’s gonna be at the bottom and sell it. And then in 2024, do it again. Which of these boxes are gonna be at the top? Buy it. which is gonna be at the bottom, and avoid it like the plague or sell it. That’s all you need to do to make more money than you or your family could ever spend, right? Like Kathryn pointed out, I’m clairvoyant. So for me it’s easy, right? No, it’s hard. It’s really hard. How many people do you know that know exactly which asset class is gonna do best in the next 12 months? I worked on Wall Street starting in 1996. I’ve never met anybody that knows how to do that, right? So what’s the alternative? The alternative is to find some sort of path through here, and this is just these grayish white boxes with the line through it is an asset allocation portfolio. It’s a mix, and it’s like, okay, what happens with the mix? Well, with the mix, you’ll notice that this line, right, it comes through the middle. It’s never at the top, but it’s also never at the bottom. And what we found is that most people, if they’re saving for a financial goal, are willing to sacrifice the top. They’re willing to lower their ceiling a little bit if they can raise their floor. And if they can get those middle returns where they get that mid-single digits they need to meet their financial goals. Part and parcel for that is staying the course. Here’s the annual return of the S&P 500, up about 10% per year. However, look at what happens to the return if you miss the best days, right? Here’s the S&P 500. Here’s missing the best 10 days, your performance gets cut in half. Here’s the top 20 days, your performance gets cut by 70%. Here’s the top 40 days. You go from up 10% to negative, right? You invest for 20 years. How many trading days are in 20 years? Maybe 4,000. You missed 40 days. Your performance goes from up 10% to negative. Ask yourself this. You’re saving, you’re presumably saving for something if you’re attending this webinar. If you get 10%, are you on track to meet your financial goals? What if you get negative 1% over the course of a couple decades? Are you on track to meet your financial goals? I don’t know the answer to that cause I don’t know you, but my guess is that you’re a lot closer at 10% than you are at negative 1%. Right. The problem, and this gets back to that consumer sentiment thing, and when people tend to be out, is those best days are almost exclusively during really bad times. You wanna know when they were, it was Covid, it was 2008 and 2009 in the financial crisis. It was the tech meltdown in the early 2000s. It was 1987 and Black Monday. That’s when all the worst days were right. Excuse me. All the best days were, excuse me, the best days were when the news was worst. And that’s the time that people that are trying to get in and outta the market are most likely to bail and then they miss out on those best days and their performance plummets. If you take nothing else away from this presentation, take away the fact that unless you have perfect timing, you’re going to probably get out on some of the best days. And those best days, missing them is gonna destroy your performance and your chance to meet your financial goals. So I have one last question here. I’m gonna ask the audience, what’s your required rate of return? What rate of return do you need to meet your goals? Have you run through your plan, run through your cash flow each year and said, okay, what return do you need to meet your goals? Is it 10%? Is it negative 1%? I hope not. Is it 4%? Is it 8%? What return do you need in order to build your portfolio, in order to meet your plan? And I’m gonna say something, is that if you don’t know what your required rate of return is, how the heck are you gonna meet your financial goals? Right? If you don’t know what you need to accomplish, how- how are you gonna get there? It’s like saying, Hey, I’m gonna drive from California to New York. I have no idea where it is or how far away it is or how to get there, but I’m just gonna start driving. What are the odds you actually wind up in- in New York, you’re probably gonna wind up in either Texas, Tijuana, or Canada, right? You need to know what your required rate of return is, right? And then you need to build a portfolio designed to get there. That’s the most simple basic entry point of being an investor, and it’s something that 90% plus of people miss. So here’s the deal. I’m gonna take some more questions, but before I do that, usually as financial planners, we charge several hundred dollars an hour to meet with people, to work with clients, help them build out their financial plans, help them figure out what’s their required rate of return. Help them figure out their taxes. How can they lower taxes today? How can they position themselves to lower taxes in the future? All right. We usually charge several hundred bucks an hour. For people attend this webinar, we’ll waive that fee. You want to come in, if you wanna get a free look at this, if you want us to talk about how you figure out your required rate of return, if you want us to talk about where your assets lie from a tax perspective. Does it make sense to move money from a taxable account? How do you manage that to lower your taxes today? Does it make sense to move money to a IRA or to a Roth 401(k)? How can you position yourself to lower future taxes? We’re gonna put up an offer for a free financial assessment. Again, usually we charge several hundred bucks an hour. We’ll waive that fee. We’ll meet with you, no cost, no obligation. We’ll spend a little bit of time with you, help you figure some of this stuff out to continue the education process. From a market perspective, we’ll take the kinds of things we talked about today. Boil ’em down to your particular, help you figure out what is your required rate of return? How do you build tax diversification to get control of your future tax brackets? Keep more for yourself, give less to Uncle Sam. When should you take Social Security or a pension? What decisions do you have there? If that’s okay? Frankly, do you have enough money to retire? We’ll take a look at all that stuff. Again, no cost, no obligation. Fill out, the request, we’ll contact you. We’ll set up a time. You can meet with us in person at one of our 7 offices or over Zoom. Again, if that’s something you want to do, go ahead, fill that out. But let me pause there and answer any additional questions as well.

Kathryn: All right, Brian, we had, one question was “If my rate of return is at least twice the cost of management from a money manager, for example, if the management fee is 3% of my earnings, should my rate of return be at least 6%?”

Brian: Well, a couple things. It’s a, it’s a good question. I think first of all, I, I hope your management fee isn’t 3%. Cause that would be extremely high in the industry these days. So if, you know, that’s probably just an example, but, I-, I would hope somebody’s not paying quite that much. yeah, I- I don’t know if there’s a hard and fast rule, but here  ‘s the deal.  Here’s like kind of my litmus test. Are your finances getting better for the fee that you’re paying? Right? Nothing in life is free. Right, but your life needs to get better. You’re exchanging your hard-earned dollars for a service or a good or whatever, and your life needs to get better. So are your returns higher than you think you would get on your own? Maybe, right? Are your returns higher than what you’re targeting? Are your- are you getting those returns with less risk? Right? Maybe it’s the same return, you would’ve gotten, but there’s less risk in the portfolio, or maybe there’s less aggravation on your part because you don’t have to manage a portfolio. You don’t need to do it yourself. You don’t need to worry about it. You’re less stressed, you have more free time. I would take all those things into account as well. I’d also look at the non-portfolio stuff. So what is your advisor doing for you from a tax perspective? What kind of tax planning are they doing? Are they going through your tax return and helping you lower taxes today? Are they doing future tax projections? Are they figuring out where you should be saving to, or how you should be repositioning assets to reduce future taxes? Right? Are they running your cash flows on a regular basis? So you know, are they adding value in that way in addition to the portfolio? And if so, then it might be a good relationship. If not, well, there are firms out there that do all that stuff, including us, and maybe- maybe you should look around.

Kathryn: Another question. Thank you very much for that. And another question was, “For the average 50 something person, how much should we be investing in bonds?”

Brian: There really is- It’s a great question. There really is, no right answer. There was an older rule of thumb that would say that you take your age, you subtract it from, depending on who you ask, either a hundred or 110, and that’s the percentage that should go in stocks. So let’s say you were 50 years old, you would subtract 50 from 110.  That leaves 60, that’s the percentage that would go in stocks would be 60%. The other percentage, 40% would go to bonds. I don’t know, like any rule of thumb, I mean that might be a starting point, but situations vary so much. Cuz it really depends on when do you wanna retire, right? The- the answer if you wanna retire at 55 might be different than if you wanna retire at 65. If you’re behind in your saving, the answer might be different than, you know, if you’re already have met the number you need, and now you’re just working kind of by choice, not by requirement. You know, do you have legacy goals? You might have plenty of money, you might not have to take a lot of risk and be able to own all bonds, but maybe you have charitable goals or family goals where you want to get higher returns. So it, it really is, you know, a personal choice. But I will say that we, we do tend to meet more people that are taking too much risk as opposed to more people that are taking not enough risk.

Kathryn: And one last question. “Is it too late to get into some of the larger stocks like Apple or Google?”

Brian: You know, yes and no. I, I, I’m not, I don’t wanna comment specifically on, on Apple and Google, but I, I would say large company stocks and particularly large company growth stocks, and even more specifically large tech stocks, had such a great run from, call it 2015 to 2020. They then really paused. They’ve had a good quarter, but over the last couple years they’ve really kind of underperformed most of the rest of the market. If you look at history, it would tell you that when a sector really leads the way, the way that tech did for a number of years, it tends to revert to the mean. And so our expectation would be that you might get higher returns from smaller companies, over the next five or 10 years. You might get higher returns from value companies instead of growth. You might get higher returns from some international companies. But I wanna be clear, that doesn’t mean that you should avoid those stocks, those Google and Apple and the other big tech. It just means that I wouldn’t necessarily put all my money in it. I’d have it as a reasonable portion of a diversified portfolio. But do I think they’ll continue to dominate the way they did for a handful of years back there? Probably not.

Kathryn: Well, thank you so much, Brian. Appreciate it.

Brian: Yeah. So again, thank you everybody for, for attending. Hopefully you got some value outta this. And again, if you wanna talk about all this stuff, if you wanna look at your taxes, your required rate of return, if you just wanna sit down and talk markets, fill out the free assessment, come on in. Like I said, we waive the fee. No cost, no obligation. You can meet with one of our CERTIFIED FINANCIAL PLANNER and, and get some free education for it, customized to your situation.

Kathryn: Well, you’ve done a great job and we ask that if you please let us know what you thought about the webinar. We will be sending out a link to everybody so that you can rewatch this over and over again. But let us know what you think by filling out the evaluation. I’m gonna put that in the chat here and please fill that out and let us know other topics that you’d like to hear as well. And thank you so much everybody for joining us. If you want to schedule your free assessment, please, I’m putting in the link right now. You can give us a call. You can click on the link, fill out the evaluation, and we will be happy to get all of your questions answered. Thank you, Brian.

Brian: Pleasure. Take care.

Kathryn: You too.

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