Jon Gay

TRANSCRIPT

Jag: Welcome to the Art of Wealth Unbroken podcast. We’re here each and every week to provide you with investment and economic insights. We’re here to discuss trends and developments in the field of finance and retirement. Creating certainty in uncertain times. These discussions can help you make better informed decisions so you can make better financial choices with the wealth you’ve built and are continuing to grow.

Our goal is to help you live the lifestyle you’ve imagined for retirement. Stacey Andres is a registered financial consultant and Michael Wallins is a certified financial planner. I’m John JAG Gay and for our topic today, we’re talking about where have the returns come from? 

Stacey: Hello, Jag. Hello. So in today’s show, its title is from the question that is on many investor’s minds today.

And that is where have the returns for 22, 2022 come from? Do we sit in the equity markets or the bond market pricing that is contracting? And really the answer to that is yes. And yes, it’s both. 

Michael: Hey, Stacey. JAG and I touched a little in regards to this last week on our show, and we’re glad to have you back in the saddle this week.

I want to take a deeper dive into where the impact is being felt the most. And just to give a quick state of the union on the market returns through April of 2022. The S and P 500 through April is down about 8.72% because we had a really strong rally in the equity markets in April. But still down year to date 12.92%.

And that’s on the S and P 500. For those that look more at the Dow, that’s still down for April with a negative 4.8, 2% a year to date down 8.73%. So when we’re looking at. 60/40 portfolios that everyone talks about and you’re looking at the equity markets, equity markets are down and typically in a contracting market, we would think that other 40% of the market would rally back.

But unfortunately the state of the union on bonds is as dismal as we’re seeing on the equity side of the house. So year to date, if we follow the Barclay aggregate bond index, which is that broad base bond market, that is the industry standard. Through April, we’re down 3.79% and year to date now nine and a half percent.

Even high yield bond, Stacey, we’re down 3.94% through April of 2022 and down 8.14% on a year to date number. The volatility in the markets this year has been fully attributable to multiple compressions. And there really hasn’t been a place for investors to get some offset returns because both the equity and the bond markets have been contracting equally as bad.

Stacey: Just to clarify for our listeners, when we talk about returns, a lot of people think that a return is a positive thing. You can also have negative returns, and that is what we are seeing take place this year. And when we look at 2022, the year has really been about higher interest rates. We see inflation. There’s geopolitical events.

The volatility that we’re seeing is not really about the economics of the economy or the earnings within the companies. Companies are still having very good earnings. And that may surprise some when. Markets are down, but companies are still making a pretty decent profit. And if we look back really, all the way back to the summer of 2008, and look at the 10 year treasury, that rate has consistently been below 4% since that time.

And just after coming out of the COVID crash in the second quarter 2020, that rate dropped all the way down to 75 basis points. That’s three quarters of 1%. So now interest rates are being increased. And the purpose of that is to try to slow down inflation. And those attempts are having a significant impact on the bond market.

It’s impacting equity markets because they’re watching closely to really gauge whether or not what the fed, the move that they’re making to see if they’re working. And if they’re going to be able to successfully stove off inflation without imploding the economy. 

Michael: If you couple that with a rising interest rate game planned with those geopolitical events that are ranging from fossil fuel production, slow down.

I mean, if we just go back. The COVID slow down. As we started seeing the market started contracting, everybody started staying home, so we needed less fossil fuel. So what was the manufacturing? You look at Saudi Arabia, you look at Russia, a lot of these high producers of oil, they started reducing their volume down at that point to try to keep their pricing and range.

We didn’t want to have way more supply than demand because then all of a sudden the profits drop dramatically. So we’ve still seen, a slow down that has came from the COVID labor shortage. War. We’re still seeing the impact of what’s happening in the Ukraine. Look at food shortage. We’re seeing labor issues, export and import imbalances and political power posturing, and you get increased volatility.

The reason that prudent advice at this point would be to not let emotional reactions cost you to lose your wealth is because we are seeing these contractions based on these very temporary situations and not long term events just like you stated, Stacey. Companies are still being very profitable. Their balance sheets are very strong.

But we’re seeing corrections in the market, the contractions over temporary events and not long range planning that would cause us as investment coaches to guide and advise our clients to move into different strategies. And what we’re guiding our clients to do is not abandon the investment strategy that had been put in place that are looking long range, 15, 20, 25 years down the road of providing the income they need for their retirement years. 

Stacey: But we all know that fear is a very, very powerful emotion. We’ve talked about that in the past and how that has a significant impact on the person who tries to do things themselves, how the emotions of fear and greed actually put them in a position where they are underperforming the market over the long run. And Warren Buffett is famous for stating that an investor should do the opposite of what comes normal. When we look at these turbulent times that we’re currently in, it’s really a great opportunity, especially right now, to buy, while everyone else is seeking to abandon the markets over the past several weeks. We have heard more and more people, talking heads, say that, oh my goodness, we’re in a correction and the markets are falling. We don’t know where the bottom is going to be. And sometimes it makes sense to take the contrarian position. Buying low and selling high is always the goal. And right now we are in a pretty good, low position, and there’s a lot of opportunities sitting out there.

Jag: The way I’ve heard it phrased is that equities are on sale right now. 

Stacey: That’s definitely one way to look at it. Yeah. Look at this, back at the, kind of the peak in November, and you look at the tech sector and there’s a lot of tech stocks that are down 70% and 80%. So yeah, now’s a good time to be looking for opportunities for getting some really good growth moving forward in your portfolio.

Michael: The top three sectors right now that we’re seeing on year to date returns, of course, is energy. Number one out there right now, energy is up 38% as of Thursday morning, June 2nd. Utilities are up 4% and staples are down negative 2%. And it’s interesting as we’ve came out of this long-term bull market and we talk about sectors that are most positive or performing the best.

And the third sector is a negative 2%. And we’re saying that is the best performance. Times of contraction is not just happening in one area. It’s happening across all sectors of the market, except for really energy and utilities. And then on the other side, we’re seeing the bond market in a contraction level as well.

Diversification is very important. It’s very important that we look at an overall strategy and planning, and it makes me think of a client that came in yesterday. They sat down in the office with me. Gentleman was 76 years old, had his daughter-in-law with him. She’s in her early forties. And we were looking at how much should we allocate into his portfolio?

We were talking about our methodology of traunching, how much money is going to be needed in zero to three years? How much money is he going to need out of his investment accounts from years four to seven, and eight to ten, and 11 plus. And his daughter-in-law was saying, well, maybe out of the 400,000 that you’re wanting to invest.

Maybe we just start with a hundred thousand now, see how it goes. And then we will then look at adding the other amounts as the market starts, recovering. And before I could even respond to that, he looked at her and he said, well, I don’t think that would make a lot of sense because the market’s own sale right now.

He said, why would I not want to invest all of it now instead of waiting for the market to recover and then try to buy it at the higher pricing of those underlying positions. And it was very contrarian, the way he was looking at it, Stacey, opposed to her fear perspective of saying, but what if the market goes down and he was like, well, if it goes down, the markets are ready, contracted nearly 20%.

So I’m at least buying it at a 20% discount. If it dropped down a little bit more and then rallied back. And then we shared with him a little bit in a strategy of using maybe some alternatives. Maybe using some structured ETF or structured notes. That gave us the ability to have downside protection for a portion of that money that may have been in the second or third traunch.

But it’s about that diversifying. It’s about having a plan as we go. And making sure that you’re allocated appropriately for opportunities, but still have some tailwinds to be able to offset some of these, what I would call headwinds of these geopolitical issues that could still drive the markets down.

Stacey: So when we talk about strategy, when it comes to planning and especially when it comes to investing in the market, there’s different approaches that people take. We have portfolios that are very tactical in nature. You’re going to see more trading, likely take place in those, but we also have portfolios that are very strict in nature.

Those are going to be more of a longer term buy and hold approach. But can you dig into that, Michael, just a little bit? What is the difference between tactical and strategic and how can they impact a person’s portfolio?

Michael: In most cases I would look at tactical as being a situation where short duration money.

You don’t have the ability for the market to do the correction. And let’s just take 2008. And we shared a couple of weeks ago on a show that in 2008, for the pricing of a portfolio that may have dropped by that 51% that we experienced in 2008, it took that investor all the way back to 2013. So that was a five year time horizon. Well, many of investors may say, well, I don’t have time for a five-year correction on money that I’m going to use our need to be depended upon in zero to three years. So at that point, tactical management may be a better solution where it is actively managed. It is looking at maybe momentum as an potential investment strategy inside.

But it’s also looking at mathematical algorithms that can be used to say, based upon specific indicators in the market, may be following the 200 day moving average. If it drops below a certain percentage, history tells us that we see a recession on the horizon, mostly if that is coupled with a inverted yield curve.

So when we look at that, tactical management gives us more of the aggressive, active management to get an individual in or out of the market in a quicker position versus a traunch of your money that may be, let’s say you’re not going to be dependent on this money for 8 to 10 years. Well, you may want to use more of a strategic approach at that time because you’re not timing the market.

And if the market goes through its normal cycle of expansion to peak and then peak through a contraction into a trough, you have time to get back into the next expansion position. But if you’re dependent upon those funds, and what we like to do with our clients is not pigeonhole them into one area, but really take a balance of tactical and strategic investing strategies based upon when that client would be dependent up on the investment to provide them income for their lifestyle.

Stacey: So you guys may have noticed that Michael and I have a little bit of different terminology for things. I call it bucket strategies. Michael calls traunching. But basically it’s allocating portions of your money to different timeframes. Different timeframes require different approaches in your investment strategy, because the goal is that as you are entering into the later stages of life, a retirement that you want that money to last, you don’t want that to run out.

And so this approach, whether you call it the bucket strategy or whether you call it traunching, is to ensure that you have an income stream that is not being impacted by what is going on in the market today. 

Jag: You guys call it different things. I call it CYA. 

Michael: Yeah. And the goal is to have a plan, have a strategy that allows you to be able to go in and say, when times change, is my investment strategy flexible enough that allows me to pivot, to take advantage of opportunities like, JAG, you and Stacey mentioned earlier. There’s a pricing contraction on equities in the market. Right now, there are sectors that are great investment opportunities today. Do we really believe that Apple’s going to go out of business?

Do we truly believe that some of these computer chip companies that are providing 40% or 50% of the market share are going to go out of business? No, we’re seeing a contraction on their price, but it’s only because we have issues due to COVID. We’re having a shortage on having the ability for that supply chain to provide, but don’t abandon your strategy.

You need to pivot and maybe restructure it because you need more flexibility to take you into these very volatile times. 

Jag: You have to have a plan. And that plan allows for market volatility and changes in the market and all kinds of different situations like we’re seeing right now. And I do want to mention that we are offering a free life arc plan to our podcast listeners. If you’re interested in taking advantage of that offer, it’ll get you started with figuring out your financial plan and Michael and Stacey can talk to you about it. There’s no obligation. You can get it for free on our website, artofwealthunbroken.com. Or if you’re more of a phone than a web person, you can always give us a call.And Mike, the phone number is?

Michael: 855-378-1806. 855-378-1806. 

Jag: Good stuff as always. Gentlemen, we’ll talk next week.