Pure’s President and CEO, Joe Anderson, CFP®, AIF®, and Executive Vice President & Chief Investment Officer, Brian Perry, CFP®, CFA® charter, AIF® provide insight into recent events and discuss strategies for navigating volatile markets.
Outline
- 00:00 Intro
- 1:12 Tariffs: Who Wins a Trade War?
- 2:56 Markets have done fine under most Presidents
- 5:03 S&P 500 declines and returns since 2015
- 6:45 Declines are a part of the deal
- 9:18 Cost of timing the market
- 11:10 Why own bonds?
- 14:01 Manage portfolio as markets move
- 15:40 Question and Answer
- Are you going to address the tariffs because they are so different?
- How often does Pure adjust the portfolio mix in dynamic markets like this?
- How do you handle a stock that runs up so strongly, and ends up being 30-35% of your portfolio?
- 21:15 Control our Emotions
- 22:10 Assess current portfolio
- 23:30 Investment strategies to consider
- 28:05 Rebalancing
- 30:11 Tax diversification
- 31:38 Q&A
- What about the aftermath of the crash and our pension plans like CalPERS?
- What happens if you miss the 10 worst days in the market?
- What about hard assets like gold? How about Bitcoin as well?
- Please explain the return needed to regain the losses from the market.
- Government bonds may not be what they were in the past and investors are selling. Is this a concern?
- You keep talking about Roth conversions, what if you’re in the 32% tax bracket?
- With the probability of recession increasing, what’re the changes being considered for client portfolios?
Transcript:
Kathryn: We appreciate you being here for this update on the recent Market Volatility Webinar. We have with us today our Executive Vice President and Chief Investment Officer, Brian Perry, as well as our CEO and President of Pure Financial Advisors, Joe Anderson.
Joe: Let’s kind of dive in. Brian, I’ll just kind of toss it to you. If we want to get into the sum of the numbers and we can go a little bit back and forth here, but- some breaking news, I believe.
Brian: Yeah, just as we were going to press, we’d like to take credit for the market rallying a little bit, but we can’t. But the Trump administration announced a 90 day pause on tariffs to certain countries, and, in about the last 5 minutes, the market went from down a little bit to up about 5%. So, pretty radical swings, which I think point to a lot of what we’ll talk about today around how difficult it is to navigate these environments.
Joe: Yeah, you know, Brian and I would do these during Covid and it seemed like every time we did one of these webinars, the market surged. So maybe we can keep the good luck going, Brian. But you know, there’s a lot of talk about tariffs and really what’s going on. So let’s kind of dive into the overall markets.
Brian: Yeah, well maybe if we talk a little bit about tariffs and you know, the question of a trade war, right? And does anybody win a trade war? And economists’ opinions will vary. And I think most people would say that- most economists would say that tariffs aren’t good for economies. But I think this chart speaks to what the administration’s probably looking at. And this just shows various countries. And the percentage of the economy that’s driven by international exports, and you can see that the US is by a significant margin, the smallest percentage. And so I think the rationale of the government is that hey, exports aren’t as important to us as to others. We’re also the world’s biggest economy. We’re better positioned to essentially bully or force other countries into getting closer to the trade terms that we want. You know, and then with China as well, you know, that’s really the one that’s been most focused and Chinese trade has been declining for years. And so, you know, maybe not as much of a concern there versus some other countries, you know. So ultimately I think the US views it as hey, we can be strong with China. And if you look at surveys, the vast majority of both Republicans and Democrats have an unfavorable view of China. So I think politically that’s somewhat safe ground for the administration. Trade declining there. And it’s like, hey, if we can get better terms and stop essentially this, what’s viewed as unfair trade, that in the long run the economy will be a winner. Of course the, in the long run, you know, that’s nice, but what’s gonna happen in the short run? You know, and any time you get big policy changes like this, the question of politics comes into play, right? And, here at Pure, we’re not here to talk politics or say whether policies are necessarily good or bad. We look at the world as it is. And we look at facts and then we manage portfolios and do financial planning based on facts and probabilities, you know? And the reality is, that in the last 50 years, 60 years, there’ve been a number of presidents and chances are that everybody out there, there are some of these presidents that they’ve been big fans of and some of these presidents that they liked a lot less. But the market has done pretty well across almost every president. And in the couple of exceptions where the presidents didn’t have strong stock markets during that time, there’s other causes in all likelihood of that. So the bottom line is that there’s a lot that goes on in the world, and even when that there’s a lot of policy coming out at a given time like there is now, the economy is such a large dynamic system and made up of the decisions of hundreds of millions or billions of consumers and thousands of co-companies, that there is a lot going on. And in the long run there’s an upward momentum to markets and economies. The other part, and I think that this is really important, is that let’s just take, if anybody out there, if you were born in 1960, right? You’re 65 years old today. Think about the things that you’ve seen in your lifetime. And this is just a small sampling, but we had a pandemic, Joe mentioned in 2020 when he and I were doing these things. It felt like, you know, every other day, the world shut down. We couldn’t leave our house. You know, companies that had been in business for a century all of a sudden couldn’t be in business temporarily because they weren’t allowed to have people come to their premises. Right? During the last 65 or 85 years, a third of presidents have either been shot or forced to resign from office. You know, some of you may remember 18% mortgage rates or 0% savings rates, and we had the horror of 9/11 and the aftermath, an assault on the capitol. We had wars, nuclear threats, which it hasn’t completely gone away, but has diminished. But the Cuban Missile Crisis where children are hiding under their desks. And then a big one that people forget was the dollar used to be backed by gold. We went away from that in the 1970s, and yet the dollar’s still preeminent in the global economy, and so this is just a small sampling. Despite all that, back in 1960, the Dow was at around 600. Today it’s pushing 40,000. So despite all of this news, all of this uncertainty, all of these things that the economy has faced, the market has done fine. And I think that speaks to the old saying that the market climbs a wall of worry and that the future’s never certain. And then we look at something like this, and this is a chart, it looks like a lot of squiggly lines. So if that’s what you’re seeing, that’s fine. What this is, this is the last 10 years of the S&P 500 and its declines. So each, that’s why the lines are always negative and you can see that the market has fallen repeatedly over the last 10 years. The big one there in the middle, of course 2020 with the sharp decline during Covid. We also see 2022 where markets were down quite a bit, 25% there. Today we’re down about 17.5% as of when this was printed. Look back at 2019. There we were down about the same amount as we are today. I’m willing to guess that most of the people on here today don’t even remember that instance. Right. What caused that? What was going on? Or all the way back in 2016 where the market was down to almost 15%, right? So these things tend to blend in and fade away over time. And I think that’s instructive, ’cause if we flip to the next slide of how the S&P has actually done in the last 10 years, and this is a more traditional slide of the upward movement of the markets, and you can see on there the decline in 2020. There you can see the decline in 2019 and recently 2022. Of course. But yeah, that line that Joe drew, look at the upward momentum of the market. We’re up two and a half X in the last 10 years despite these declines of Covid or 2022 with the interest rate increase and stuff. And I just think it speaks to the fact that it’s important to remember the stock market falls on roughly half of all days, and it declines roughly 3 out of every 10 years. So this is not a one-way ride hire, but in the long run it always has been a ride hire, and I think that’s important to remember. When you look at this slide where there’s a ton going on here, so the goal is not to memorize all the numbers, it’s to take away the key point, which is those gray bars are annual performance in the S&P 500, and then the red dot is declines during the year. And to me, there’s two takeaways. One is that most of those bars are to the upside. In other words, the market was up most of those years. But the other is that there are red dots showing that the market declined in most of those years. Declines are part of the deal. It’s to be expected. And we’ll get into this more later, but we know this, we’re well cognizant of the fact that markets go up and down. We’re also cognizant of the fact that we can’t predict exactly when that will happen. So we’ve built our financial planning and our investments on that premise that markets will decline, and that we wanna be positioned for that and be able to take that into account as we go forward.
Joe: Hey Brian. A couple things to notice here too is that when we have fairly large declines, if you kind of, or look at every single decline, except for this time period here, that’s the 2000 bust, but alright, we’re down 10% the following year. We’re up 15% and then 17% here, we’re down 7%. The following year, we’re up 26%. We were down 2%, and then we have this huge bull run, and then we have the dot com bust. But then look at the years of positive. Here down 38%, but the following years, we got the money back. So even in the high years that we are up, as you were saying the markets were down at some period of time, so it’s impossible to time any of this. And so it’s just looking at these charts in history of saying, alright, here, we’ve lived through this before. What is the appropriate strategy moving forward? Just given our emotions is that when we see down markets and we see the red, it’s very easy for us to bail on the overall strategy.
Brian: So true, right? And we’re all, nobody’s immune to that, right? I mean, we’re humans. Nobody likes to see things fall. Nobody likes to lose money. And the reality is, and again, this is slide with a lot going on, but this looks at consumer sentiment. How happy or sad are people, right? And if you look at the blue dots, or either times where people felt really good or when they felt really bad. And if you look across the bottom there, every time that we people felt really bad, then the gray line is the performance of the stock market and look at how consistently when people are most pessimistic, it was followed by upward movement in the markets. Right? And I don’t know exactly when the bottom of people being nervous or uncertain about what’s going on will be. But history tells us again and again that when people are most uncertain and perhaps most frightened, is when markets are generally poised to do the best. Reason we emphasize this so much, and sometimes we can sound like a broken record of, hey, you have to come up with a game plan and stay the course and figure out a portfolio you can live with is because of the massive, cost of sticking mistiming the market, right? So if somebody had perfect timing and they could get in and out perfectly, then by all means do it. But in 30 years in this business, I’ve never met that person. This looks at a 20-year horizon of how did $10,000 invested in the S&P do? And you can see that $10,000 over this 20-year period turned into about $65,000, right? But what if you were out of the market some days, and what if those were the best days? If you missed just the 10 best days of that time horizon, your returns got cut more than in half, just 10 days. Once every other year, you’re out of the market and your timing is bad, and those are the best days. Your returns get cut in half. If you missed 3 days every year for two decades, so you’re invested 360 days a year, you missed 3 days, you instead of $10,000 turning into $65,000, your $10,000 turns into $5000, your money gets cut in half. And the problem is that look at when the 10 best days were, and this is the reason we do this chart, the numbers are the same. If you flash forward to today, we do this as data’s a couple years old, but I like the way it shows across the bottom when the best days were, you notice they’re all either during Covid or during the great financial crisis, if you’re prone to moving to cash or getting outta the market when times are bad. Or, when you’re concerned, when are you most likely to be outta the market? It was a great financial crisis when the world seemed to be coming to an end and it’s Covid. When we were locked in our houses, those were the very times when the best days occurred. And missing those days absolutely decimated, not just your returns, that’s just numbers, right? That’s funny money. What that really decimated, if you miss those best days, was your chances to retire and live the life you wanted. Because if you invested and you made 5X your money, you’re retiring and living the life you dream of. If you invested missed the best days and your money got cut in half, you’re working till you’re 100, or you’re living on ramen noodles in retirement. So how do you stay the course and what, from here on out, I think what we wanna focus on is some of the different ways to help build a portfolio and build your financial planning in order to take advantage of environments like this and make sure you can stay the course. And one thing to do is to own bonds. Look, I’m a former bond person, right? I’ve worked in the bond market for a number of years and people don’t get excited about bonds, right? You get your relatively consistent returns, but they’re not the same as stocks. They don’t go up as much. But they have a lot less downside and they provide diversification in a portfolio. So we get a lot of questions right now. Are we going in or a recession? Are we already in a recession? And time will tell. But this chart looks at how have markets done during recessions? And the blue bars are bonds. And what you see is during every recession we’ve had going back to 1980, bonds have posted positive performance. So if you think about it, right, if you’re retired, we’re in a recession or times are uncertain and you need cash, you’re drawing from the bonds. That’s the big takeaway from this chart. But the other one is that in about half the recessions we’ve had stocks have actually gone up. If you take out the great financial crisis, which was hopefully a once in a lifetime event, even in the other two recessions, when the stock market fell, the returns were pretty- the losses were pretty muted. And I think that speaks to stocks as a leading indicator. So a lot of times stocks fall before the economy goes in a recession and they start to recover even before we come out of the recession. And so sometimes it’s not as clear of a linkage as, hey, we’re gonna go in a recession, let’s sell stocks, ’cause a lot of times they do okay in that recession. You know this- the other key takeaway there, I think is just to focus on time reducing volatility, right? And so the concept here is that markets are really volatile, as you’ve all no doubt noticed in the last couple weeks, right? And so if you look at the green bar being stocks, the bluest bonds, and then the gray is just a hypothetical 60/40 portfolio. And that’s not to say that 60/40 is right for anybody. That’s just a number, right? It’s just a mix. Everybody’s gonna be different. But you look at how wide the dispersion of the best year versus the worst year is in a single year period, right? The stock market was up as much as 52% over the last, you know, 75 years, down as much as 30% some odd. But if you tighten that time period down to 5 years, now that range of returns to clients to where the worst 5 year rolling return for stocks was down 2%. I think most people could live with that. You’re also lowering the ceiling to where your, now your best year is up 29%. Then you flash forward to 20 year rolling averages and you see that these time periods really compressed in that there’s never been negative returns. And so this gets back to the concept of building portfolios for the long run, based on probability of what sort of outcomes are likely. And then withstanding the volatility in order to take advantage of the math, to get the returns you need to meet your goals. In order to be able to do that though, one of the key things is that you need to make sure that you’re taking an appropriate level of risk, right? And a lot of people, what will happen is that they’ll build a portfolio that has maybe an appropriate level of risk, and then times get good. Times go along and the stock market goes into a bull market and they’re like, okay, you know, I’m just gonna let it run. Right? Or they’re not looking at the portfolio, not managing it on a hands-on basis. And what you can see here is over the last handful of years is you have different asset classes. The blue is bonds and the purple is international, the green is large growth, and US growth stocks and so on. And you can see what happens is that during that period, US growth stocks did well and so that percentage increased. Some of the others moved around a little bit, and then the percentage of bonds went down ’cause stocks are going up more than bonds. Well, if you’re not managing that portfolio, if you’re not managing that risk, what happens is you come up to current and all of a sudden you wanted to have 40% in your safer assets, your bonds, and you only had 28% and when the market fell, now you’ve got more risk than you set out to have. And this speaks to the importance of what we do on our end is we rebalance according to bands in order to make sure that initial risk gets managed. Then the only time we’re taking on more risk is if your life changes. If selling consultation with your financial advisor, you’re like, hey, I wanna take more risk or less risk ’cause my circumstances have changed. But assuming your risk tolerance and risk goals have remained the same, we’re managing that portfolio to keep it on track so that you don’t have too much risk at the worst time, or conversely, not enough risk, right? When markets are poised to rally.
Q & A
Joe: Hey, let’s pause here. I know that there’s a few questions in the queue. Kathryn, if you wanna maybe take a couple of those and Brian and I can answer them.
Kathryn: One thing is that there, a few people have asked, are you going to address the tariffs and how, because we’re talking about the volatility of the market, but what- Because tariffs are so different.
Brian: Yeah. I mean, I think look in, in the long run, we will see what happens, right? But the reality is that tariffs, they’re not completely unprecedented. And they’re at levels, some of the targets are what’s been stated are at levels that we haven’t seen in quite a while. But the first Trump administration, I think is a good example of talking tariffs, ’cause Trump came in 2016. And he’s been- he’s been saying, to be fair, he’s been saying since the 1980s that he thinks the US gets not a fair deal in trade. And so he came into office and he did something about it. Right. He imposed tariffs that were at the time shocking. Right. On China and other countries. Well, let’s look. I mean, the economy, you know, setting aside Covid, which is something you can’t control, right? The economy did pretty well during Trump’s first term, and the markets did really well during Trump’s first term. So we have a precedent of tariffs being in place and the economy and the market doing just fine. Biden continued a lot of those tariffs. It wasn’t as front and center, maybe as under Trump, but a lot of those tariffs remained in place. Now Trump has come in and elevated some of those levels of tariffs, so we’ll see. But they’ve also been pretty clear that in a lot of cases, and Treasury Secretary Scott Bessant briefed Congress before they- they were announced on the 2nd and even said, hey, these are negotiating points. These are high levels that we’re stating to essentially be negotiating points. So I don’t think the goal in a lot of cases is for this to be the actual destination. It’s a, hey, we’re gonna come at you with a hammer, but then we’re gonna give you the carrot too, and let’s find a happy medium that we can all live with. In the long run, I’m sure that there could be some negative impacts potentially as far as maybe the price of whatever you’re ordering from Temu or something goes up. Right? But there are also, the whole goal of this is to bring jobs back to America, to revive manufacturing in America, to take some of the jobs that have moved abroad due to cheaper manufacturing or cheaper goods, bring ’em back to the United States. I mean, theoretically, that should actually help the economy. There could be a shaking up period, but it should be good. Right?
Joe: Do you think it’s probably the execution of how we’re potentially going about it is making the markets very uncertain? So it is just evident today, is that all right, well let’s just put a 90 day pause on it and then the market just shoots right back up. So was this a negotiation? Was it, is it gonna hold true? I think there’s still a ton of uncertainty of what’s really gonna happen and how everything is gonna shake out. So that’s why we’re seeing the massive volatility. I wish we had a crystal ball and tell you exactly what the end of this story is gonna look like, but we don’t, and I think anyone that does tell you that is, is probably lying.
Brian: No, and I couldn’t agree more, right? I mean, I think in a perfect world it would be like, hey, here’s the destination. This is the reason why, and here’s the roadmap and what’s involved. And you know, obviously the policy being rolled out a little bit more ad hoc than that. But to your point on the crystal ball, right? I mean think about it like me and you could sit here right now and say that we know exactly what’s gonna happen and sound like geniuses and- right. There’d probably be a 50/50 chance we’re right. But what are the odds of us winning that coin flip again and again? and people’s future, all of you’re out there, your future’s too important, right? For us to guess just so that we sound smart. So it’s, you know, admitting where there’s uncertainty and then what can we do to position, regardless of what evolves that you’re still going to be okay.
Joe: Alright, next question, Kathryn?
Kathryn: Yes. People are asking about how often does Pure adjust the portfolio mix in dynamic markets like this?
Joe: We’re constantly looking at the portfolio and it’s looked at daily. So really depending on what portfolio that you’re in and how aggressive or how conservative that you are, we’re looking at managing that risk on a daily basis depending on how far that market moves. And then we’re also looking from a tax management perspective too, from a tax loss harvesting. So I’ll get into more details there. But no, our portfolio team is- is looking at our portfolios daily through the technology that we have. Now, if someone wants to get into different asset classes or change their portfolios altogether, that’s a combined conversation with the overall advisor and the client. We’re not going to say, hey, let’s just shift this overall portfolio without having meaningful conversations about the financial planning that’s done upfront.
Kathryn: Excellent. And then, when, how do you handle a stock that runs up strongly? It’s a good company. It ends up being 30% to 35% of your portfolio.
Joe: Yeah. You own Nvidia and then now it’s worth half of it.
Brian: Yeah, no, I think so. In our case, we’re generally building really well diversified portfolios because you never know what stock’s gonna go up. I mean, Nvidia or Apple are good examples, but for every one of them there’s a lot of examples that didn’t. Right. And so, you know, again, we have that rebalancing process in place where we’re systematically trimming if something gets overweight. But if in the instance that you do have a concentrated position, there are various techniques, and we use these with a number of clients. depending on what somebody’s goals are, right? So it’s involving the tax team to figure out what are the tax impacts of potentially reducing that. It’s potentially using options to put a floor under it to essentially buy insurance on that stock. And then in a lot of cases, and what, we can talk more about this, but we might use individual stocks in the rest of your portfolio to compliment it, right? So the last thing you want, if you had whatever, Nvidia is, to buy more Nvidia, so, but are there stocks that move a little bit differently that you can compliment what you’re already doing?
Joe: Yeah, I think if we take a look at the grand scheme of things in some action steps that we’re making with our clients and that you should be thinking about if you’re not one of our clients is that, you know, first things first is we have to control our emotions. You know, we’re twice as fearful to lose a dollar, then we are happy to gain a dollar. And so when we see our overall portfolios go down, you know, 2%, 3%, 5%, 6%, 10%, you know, in a very short period of time, then this is when emotions peak. And I think we all know this, and you’ve all heard this before, but it’s so true because it plays out day in and day out that the average investor significantly underperforms the overall markets because they get in and out of the market at the wrong time. A lot of individuals got outta the market and they missed a 5% run in a couple of minutes today. We’re seeing whips on markets. The last thing that you want to do is make, you know, emotional type decisions. So one of the things that you can do is you have to assess your current portfolio. How much risk are you willing to take? Because there’s hindsight bias and there’s recency bias. We’ve had a huge bull run in the overall markets for the last 15 years. We’ve seen markets do things that we haven’t seen in the history of the overall markets almost. And so we get overconfident sometime of how much risk that we’re taking. But then when the markets pull back, it’s like, well, I might be taking on too much risk. So I think the first step for all of you is just to assess your current portfolio. How much money do you have in stocks? How much money do you have in bonds? How much money do you have in cash? How much money do you have in alternatives? And what does that asset allocation look like and what does that standard deviation, or what is the risk associated with your current portfolio? Do you have the right portfolio? Is it in line to your goals? What is this money for? So if you have a better strategy, you’ll have a lot more confidence as you experience volatile markets. Diversification is our best friend in regards to market like this. So we have stocks, you have bonds, you have cash, and you have alternatives. So Brian, let’s talk a little bit about some of the things that people should be considering in regards to their overall diversification.
Brian: Yeah, I think there’s a couple things, right? And, one is that, and, this is important, is that a lot of times the best advice is to do nothing, right, as far as changing your diversification. So, you know, markets like we talked about at the beginning, go up and down. And so if you’ve got the appropriate mix, changing it may or may not make sense, right? But I think it’s important to, like Joe just said, assess to make sure that you do have the appropriate mix, right? So that’s phase one. And then if it’s not right, you know, consider some changes. When it comes to that asset allocation, so I come from the institutional world and institutions make changes to their allocation as the world changes or as their goals change. But they do it, in measure, right? And, so they’re not going, hey, I’m really optimistic, so I’m gonna go 90% in stocks. And then, oh, I’m kind of nervous. I’m gonna go 20% in stocks. Right? They’re making more measured changes. And I would urge all of you to do the same thing for the very reasons we said. For what it’s worth, like the market was up 5% when we started. It’s up 7% now, it’s gone up another 2%. I mean, we should just keep talking all day and we, who knows, we might go to infinity, right? But there are other asset classes too that you can consider that we use where appropriate, right? And there are various tools for various jobs, but there are assets out there now that are uncorrelated to other asset classes or to stocks and bonds or not as correlated. And what correlation means is, something moving in the same direction, right? And when you build a portfolio. What you want is some things that go in different directions, maybe that zig when something else is zagging, so that when you need money, you’ve got choices around what to sell. A lot of these are what are traditionally known as alternative investments. And back in the day, these were just for big institutions or you know, the Forbes 400 set. But over time that space has migrated becoming available for more individual investors. Right. And so what’s happened is that a lot of new vehicles have come out that make it available to get assets that maybe don’t perform exactly like stocks and bonds but still produce interesting returns somewhere in between stocks and bonds. So in some cases, adding those to your portfolio can essentially take a couple legged stool of stocks and bonds and add a third leg. Right. Another choice is sometimes that individual securities make sense. And so whether it’s individual stocks or individual bonds. And so in some cases, having defined cash flows, right? And, this, again, this is situation specific. ETFs and mutual funds are awesome, but individual bonds can make sense if you wanna maybe map out your cash flows a little bit more specifically. Or individual securities can make sense because there are situations where they might open up more tax loss harvesting opportunity in a volatile market. Or like in the instance we talked about earlier, where somebody has a concentrated position, you can build around it a little bit more. You can customize it if you will, a little bit more using those individual securities. And one of the beautiful things here at Pure is that we’re vehicle agnostic, right? So. Stock, bond, mutual fund, ETF options, whatever it is, private investments, like we’re looking at whatever tool makes the most sense in order to help our clients meet their goals. And that’s part of that conversation with your advisor is what are you trying to accomplish, rerunning your financial plan and making sure that the portfolio mix is appropriate, and then seeing if any changes make sense.
Joe: You look over the last 20 years, Brian, there’s been a lot of advancements in regards to the overall investment landscape. You know, so, you know, when we started the firm in ‘07, thinking about offering private investments to individual investors was really unheard of just because of the cost, the lack of transparency, the fees internally, you know, you really didn’t know what you were paying and all the middleman and everything else. You know, if you look fast forward 15, almost 20 years later, is that the landscape has brought significant transparency to all investments in all landscapes. So that allows us to go to the marketplace and look at interesting options that we truly know what our clients would be going into. So from a standpoint of private credit to alternative investments. And also looking at different vehicles on how to hold individual securities that you can tax manage that a little bit better. Of course, every situation is gonna depend upon the individual, but I think the breadth of knowledge that the market gives us to offer our clients maybe some more alternatives than we have in the past.
Brian: Yeah, I think that’s a great point. And, to your point too is like it takes time for these sectors to evolve, if you will, right? Where, you know, back 15 years ago, if you bought one of these things, you’d want to check your wallet on the way out ’cause it was being sold by a shark. And then the landscape evolves to where there are better vehicles and better strategies. And now there is choice. And some of these have more of a track record to where we can look at it and say, okay, exactly what our client’s getting, how is it gonna fit in the portfolio? And, you know, it’s not right for everybody, but in some cases these can really enhance somebody’s situation.
Joe: Managing risk, I think is key in first, you know, determine that what that portfolio looks like and what does that mix in, regards to the overall portfolio. So, you know, and you’d wanna do this slowly, so as people approach retirement, they could be aggressive growth, right? And then they’re kind of moving down this spectrum to a little bit more conservative as they need to draw income from the overall portfolio. In times like this, it’s not like, hey, I’m in a growth portfolio. Let me get into this conservative portfolio because how I’m feeling today. These movements need to be determined on the overall strategy and what the portfolio’s for, of what demand is for the portfolio. Because if you go too conservative too quickly, right? You’re locking in losses. We’ve already bought the risk. Whatever your portfolio is down 3%, 5%, 10%, or 0%, you already bought that risk, right? It’s down. The last thing we wanna do is that you bought the risk and leave without the goods of why you bought that risk in the first place. Because for an expected return to go higher than cash, we have to take on certain levels of risk to achieve that reward. There is no free lunch. So with when it comes volatility, right? That’s where discipline comes into play and making sure that you are doing things to manage the risk appropriately. We talked about rebalancing. So let’s say you have a portfolio of 50% stocks and 50% bonds. So let’s say the stock market does 10% and bonds do 5%. Over time, you’re gonna see this unbalance of stocks versus bonds. In times like this, this is where you wanna sell stocks and buy more bonds. But a lot of times it’s very difficult for people to do this because it’s like, why do I wanna sell my winners and buy my losers? Because your winners could lose quickly. Stocks are volatile. There is no free lunch. There is no safe travel here. So understanding how you wanna manage that risk and keep that portfolio sound depending on what target rate of return that you’re trying to accomplish. Now, when you look at taxes, volatile markets can be your friend. If you’re tactical. So what do I mean by that? Most of you have a retirement account, an IRA, a 401(k), a 403(b), TSP, or whatever. When markets go down, great strategy. Move some of this money here into your Roth IRA. Why on earth do you wanna do that? Because you pay tax when you go into the Roth. So I move $100,000, I’m gonna move it into my Roth IRA. $100,000 is gonna show up on my tax return and I have to pay taxes on that $100,000. Okay. Market’s down 25% hypothetically. So I could still convert the same amount of shares, but it’s $75,000. So I got a 25% discount on my Roth conversion from a tax perspective. The market recovers. All of that recovery is going to happen in the Roth. This is the best investment possible, or shell, because you’ll never ever pay taxes here again. So when markets go down, you wanna be tactical from a tax perspective, get the money out. Get it into a Roth. Another example here, how much should you convert? Well, I don’t know. Look at what tax bracket that you’re in and you might wanna just fill up the current bracket, or maybe you might want to get aggressive and go to the next bracket. So there’s a lot of different strategies that you can be looking at in times like this.
Q & A
Kathryn: Okay. One is what about the aftermath of the market crash and our pension plans? i.e., CalPERS.
Joe: I wouldn’t be too concerned there to be honest with you, but I mean, just with any investment, they’re invested in the overall stock and bond market. There’s a lot of money in CalPERS, CalSTERS, and any other, you know, endowment. So in times like this, it gets volatile, but it’s a defined benefit plan. So as you look at, there’s benefits that are defined right? As I retire, I get a certain benefit each year. A defined contribution plan is like your 401(k) plan. So the contributions are defined. I can only put so much dollars in. A pension, right, a lot of them are, you know, going to the more of a defined contribution plan, but that benefit is defined for you. I retire, right, then I get a fixed amount of payment for the rest of my life. And so some of the concern is, that, all right, well here, how about if those pensions decline, are they still going to be able to fund the benefit that is defined for me? There’s a pension benefit guarantee corp. There’s a lot of safety gaps behind there. I think how they manage that is based on those benefits. But yeah, I think with anything that’s invested, there’s no free lunch and there’s no guarantees.
Kathryn: Thank you. This was an interesting one. They wanted to know what if, have you looked into what if they miss the 10 worst days? We talk about missing the 10 best days in the market.
Brian: Yeah. I, I don’t have those numbers off the top of my head, but I guess your returns would be a lot higher. But, you know, I think I’d wanna look in a crystal ball and ask myself why if no hedge fund manager or professional on earth can magically miss the 10 best days. What makes somebody that special and unique? And if so, they’re probably gonna become one of the wealthiest people on earth. Yeah.
Joe: I think the point is that usually people get out of the overall markets when it’s bad. And then the best markets happened the very next day or the very next week, and it’s impossible to time it in. It’s all, it’s, impossible to time it out as well. So if you just stay invested, you can know what your return is. But if you could dodge those worst days, call me, please.
Brian: Yeah, send your resume.
Kathryn: Good point. Okay. What about hard assets like gold? And what do you think about Bitcoin as well?
Brian: Yeah, I think, with either of those, I mean, the question is always how much do you own, right? So I think in some cases, depending on what you’re trying to accomplish, having a couple percent in various investments could make sense. You know, do you want all of your portfolio or most of your portfolio in those? I don’t think so. Those asset classes, just like everything else, have their days in the sun and not.
Joe: I think Brian, it just, it goes back to diversification and then buying what you know too. I think, you know, if you take a look at cryptocurrencies and Bitcoin, is it a appropriate place for your portfolio? Sure. Absolutely. But I think a lot of times people might leverage a little bit more into some asset classes that they don’t have any clue of really what it does. How it works, what the volatility is, or hey, I wanna go to safety. And I heard my neighbor or the Uber driver talking about how well that they’ve done in gold. And so, hey, maybe I should leverage my portfolio there. I think all asset classes have a place in certain portfolios, so yeah, I think we’re in favor for all, but then it’s looking at how do you put them in the overall portfolio. As long as you have transparency and you know exactly what you’re getting into, gold does not have an expected rate of return. Because it’s a commodity. So you have to understand how these things work in the overall portfolio. But yeah, I think, you know, having some gold, having some Bitcoin, having some stocks, bonds, cash, all of that in a globally diversified portfolio, I think makes sense. But leveraging too much on one thing, I think that’s where people get into a little bit of trouble or they make millions, right? If I double down and put everything in Bitcoin and it takes off, like you hear the stories. Right. You see very wealthy people there, but then you don’t hear the stories, or maybe you do, people get in a little bit late. They don’t know really what it is. It falls, they sell. You know the story.
Kathryn: Someone asked, please explain the return needed just to regain the losses. For example, a 20% market decline, will require a 30% to 40% return for break even, etc. Yeah. So talking about existing retirees.
Joe: Sure. Right. Sequence of return risk, I think in most cases is probably- especially if you’re in retirement and you’re taking dollars from the portfolio, right? And so people talk about averages, right? And so let’s say if a portfolio is up 20%, or let’s say it loses 25% and then it gains 25%, your average rate of return, zero. You lose 25% and you’re up 25%, but your account balance is not zero. You did not break even because you got that 25% on a lower number. So I’ll have Brian do the math for me, but if I have $100,000 and I lose $25,000, 25% of that, I have $75,000. 25% on $75,000 is not $100,000. It’s close to 90 some thousand, so I don’t even have my money back. So when a market goes down, you have to get a higher expected return to break even. And now when you start taking dollars outta your portfolio to live off of, it makes it that much more difficult to get caught back up. So that’s why I’ve been saying a strategy to create income when you’re in retirement is completely different than accumulating wealth. A volatile market as we’re saving money is our friend, we love it, right? Market’s down 10,000 points. I’m still putting my $200 or whatever it is, into my 401(k) biweekly. I’m buying those share prices lower the same really good stocks that I have. Now I retire and I don’t have a full strategy to create that income. You are selling those really good companies at rock bottom prices. That’s the last thing that you want to do.
Kathryn: The New York Times reported that government bonds may not be what they have been in the past and investors are selling. Is this a concern?
Brian: Is it a concern? No. I mean, yeah, obviously if they’re not what they were in the past, it would be a concern. But yeah. Investors sell and investors buy, the yield on the 10-year treasury had come down quite a bit and it’s gone up in the last few days. And the thought is that maybe some- somebody’s, there’s a big seller out there, but no, ultimately what you’re looking for from government bonds is an asset class that’s guaranteed, right? It’s the safest asset class on earth. It provides income and then it’s not perfectly correlated with stocks, right? To Joe’s point, you want things that act differently so that if you get a down stock market, you can sell something else. And even in the worst year we’ve seen in the bond market, which was 2022, it was down a lot less than stocks. So, you know, sometimes it’s gonna be better, sometimes it’s gonna be worse. But we still think that bonds in general have a place in not all portfolios, but a lot of them.
Joe: Well, I, think Brian, sometimes people don’t really understand what a bond is. I mean, just in real simple sense, Brian’s a lot smarter than me. So he, and talk to technical jargon, but it’s like a bond is a loan. Right. So I’m lending my money to a corporation, right, or to a neighbor, or to the federal government in this instance, right? For the loan that I’m giving them, they’re giving me an interest rate, right? Depending on the term of the loan and depending on how risky that loan is. So the more risky the loan or the longer the term, in most cases, you should demand a higher interest rate, right? So looking at banks, lending mortgages out, if someone who has bad credit, they have to pay a little bit higher interest rate than someone that has really good credit. But a bond is a loan. You’re lending your money to that federal government for a certain period of time. You’re getting an interest rate for that, for them using your capital, and then at the end of the term, you get your money back. So if I look at the US government. You’re loaning your money to the US government. Are you afraid of a default? That the US government would default on the loan? Or are you afraid of interest rates? So there’s term risk, there’s credit risk. So I would not necessarily be too afraid of credit risk, but you know, people talk about the deficit and how much debt and everything else, so I get it. If that is your fear, and if that is your bias, then I would stay away from it. You could still go into bonds, you could still buy CDs. You could go into corporate bonds, you could buy really high quality corporation AAA bonds at a short premium or a short duration, and still get that same effect.
Kathryn: Okay. And then I would say the last question, you keep talking about Roth conversions and filling up your bucket, what if you’re in the 32% tax bracket?
Joe: I would look at what bracket that you’re gonna be in the future. How old you are? So, I hate to admit it now today, is that, I’m 50. I was in my young 30s a long time ago. But the older I get, no, I’m probably a little bit more conservative on tax brackets. But if I’m in my 20s, 30s, and 40s, and if I have a pretty good living and I’ve saved a lot of money, I don’t care. I would still wanna do the Roth because you’re not necessarily gonna remember the tax benefit 20, 30 years from now. And my, just personal opinion, I think tax rates are gonna continue to go up. 32%, that’s a pretty high rate, but it depends how much money that you have in the retirement account. Does it make sense to do conversions? And then what is your RMDs gonna look like? What health are you in? Are you married? So let’s say you have a large IRA and I’m not healthy. I pass away. My spouse inherits it. She still has to take an RMD before hopefully we’re in our 70s, right, when I die. So then all of a sudden now I’m in a single tax bracket versus married finally jointly. So that could be a lot higher than 32%. So there’s a lot of planning involved that you want to be thinking about. But the 32%, if it’s the 22%, 24% in most cases, I would say yeah, without knowing anything about your situation. 32%, you probably gonna dive in a little bit more and do some work. How diversified are you? How much money that you have in a Roth versus deferred versus non-qual and everything else that I just mentioned. Alright. We got one minute left, Kathryn. You got one more?
Kathryn: Okay. With the probability of recession increasing, what are the changes being considered for client portfolios? In a nutshell, I guess.
Brian: I- Yeah, I think we consider a lot of changes, but major changes are based on your circumstances, not on recession. Like we talked about, a little bit earlier, we’ve got bonds in a lot of cases in portfolios. If they are appropriate for risk tolerance, they tend to do well in a recession, and stocks are a leading indicator and there’s not a lot of evidence that they do poorly in a recession. and then value stocks tend to do okay. A lot of the stocks that we own are things like Procter and Gamble, like people still need diapers in a recession. And so we feel pretty good about that. And then the last thing I’ll say is global diversification. Not every country goes in a recession at the same time, and so having, various countries also can help if the US goes in a recession.
Joe: Alright, 45 minutes. That’s it for us. Thank you for taking a little bit of time to join us. If you have more questions, we’ll get the questions from Kathryn. We’ll dig through those and we’ll get back to you for sure, with some answers. I would highly encourage you to talk to your advisor if you’re worried about your current portfolio, you know, there’s definitely changes that you can make. We just don’t make wholesale crazy changes, you know, without really diving in a little bit deeper in your personal situation. You know, when markets get volatile again, the last thing that you want to do is make wholesale changes. But you’re right. We get this question, well, a recession, there’s a looming recession coming. So what changes are you gonna make with anticipation of that? Well, just that statement alone, if you think about it, right? Everyone else knows that information. It’s just not you and I that just came up with, well, you know, there could be a looming recession. And so what happens with stock prices is that it’s all about certainty or uncertainty. It’s, is there a recession going to come or not going to come, and is it expected or not? And so if we’re all expecting that a recession could be looming, maybe half of people are, half of people aren’t. A lot of those stocks are already priced in that a looming recession is going to come. So unless we think we’re smarter than the entire collective group it’s very hard for us to get ahead of things like that. So, again, Brian, great job. Thanks for your great insights.
Brian: My pleasure.
Joe: Wow. Very stoic. Kathryn, I appreciate you hanging out with us today. And, again, for all the clients, prospects, everyone on here, if you want help, call your advisor. You can always go to PureFinancial.com as well. Have a great day everyone. We’ll see you next time.
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