How Your Portfolio Is Built To Win During Bad Markets | AWM Insights #133
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Episode Summary
The S&P 500 is down ~23% year-to-date which has felt like an exhausting marathon.
Would you believe us that the -23% return has been created by only nine days? There are 254 trading days in a market year.
It’s a silly exercise but if you had the ability to avoid those nine days, you'd actually be up 9% year to date in the S&P 500.
Unfortunately, these were not nine consecutive days. And more importantly, avoiding the worst days means you risk missing out on the best days all but guaranteeing you destroy your long-term returns.
Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.
From 1/3/2000 – 4/9/2020:
Six of the seven best days occurred after the worst day.
Seven of the ten worst days were followed the NEXT DAY by either top 10 returns over the 20 years OR top 10 returns for their respective years.
Given this reality, if someone leaves the market after experiencing a poor return, it is literally impossible for them to get invested in time to benefit from the best day that may follow.
Over that same period if you stayed fully invested you would have earned 6%. However, if you were to miss only the 20 best days you would have wiped out your entire return. There are 7,398 days over that period.
The cost of being wrong is catastrophic. It’s not just that you don’t earn the returns you deserve it’s that you have less money putting at risk your ability to pay for your priorities.
It’s why we don’t player a loser’s game of attempting to predict the market.
We use the power of data and evidence to build your portfolio to earn higher expected returns and provide you with the highest confidence to achieve your priorities.
The key to staying in the market during difficult periods is know your portfolio has been built knowing in advance these periods would come.
Listen in to hear how your protective reserve is uniquely customized and the role bonds play in your portfolio.
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Justin Dyer: LinkedIn
Brandon Averill: LinkedIn
+ Read the Transcript
Brandon Averill (00:00): Well, Justin, we're back, back for another episode here. We're going to start off a little different, though, because it's early in the morning, and as much as I love wine, I don't know about popping a bottle at what is it, 8:00 AM? So, we did have the idea for bubbles, would have been a good idea, but-
Justin Dyer (00:16): Some day.
Brandon Averill (00:17): ... didn't bring that in. So we're going to go with some coffee today for everybody. Another, I would say, not quite a second passion of ours, but we certainly like our coffee around here. So we've got some Verve Coffee Roasters in the cup here, specifically El Meson, little key lime, meringue, honeysuckle, little ode to Santa Cruz, your stomping grounds for college. And I've got family there, so it's a subscription I get every couple weeks, and I love- Justin Dyer (00:47): Delicious.
Brandon Averill (00:48): ... starting the day with it. So visit Verve Coffee Roasters. If you like coffee, I don't think you'll be disappointed.
(00:54): But let's hop in here, Justin. Like I mentioned, we're recording this a little bit early in the week, early in the day, and it's because you're hopping a plane and you're headed to San Francisco. So I'd love for you to just hit on what's taken up there, and why it's important for you to get out of the office for a couple days to head up there.
Justin Dyer (01:13): Sure, yeah, looking forward to it. Couple reasons. [inaudible 00:01:16] always try and make the most of our time up there but ,first and foremost, one of the venture funds we're invested in, Magnify, has their annual meeting, later today actually. So typically, most venture firms will host an annual meeting, go over the portfolio, what they're seeing, what not, so I think, and what we're going to get into a lot right now today, it's timely. Markets have been very, very interesting, both in the public markets and as well in the private markets and venture, specifically, so really looking forward to that update.
(01:47): And then sticking with venture, tomorrow, there's a conference called the RAISE Global Conference, which is focused on emerging managers. I was on the selection committee.
Brandon Averill (01:58): That's awesome.
Justin Dyer (02:00): It was an interesting experience. I mean, 400, 500 funds applied, it was a pretty rigorous process, and to get to be invited to the conference, it whittled down quite a bit to 20 funds out of that 500. It shows you people are still trying to raise money. People are still starting companies. There's still is a lot of innovation going on, but there's more and more competition within venture.
Brandon Averill (02:26): Sure.
Justin Dyer (02:26): So it's an interesting dynamic that's going on that will continue over the next who knows, 12, 24 months within the private markets. Brandon Averill (02:33): Yeah, totally-
Justin Dyer (02:34): Looking forward to it.
Brandon Averill (02:35): It'll be fascinating to hear the updates and maybe we can give some of the updates on insights next week. But, I mean it's going to be fascinating because as we know, the private markets still make up the vast majority of the investment markets. I think we've got a graphic we use with a lot of people. It's the iceberg. Actually most of the investments, the private investments are below the surface where you don't typically see them, but it's the bigger part of it, of the iceberg, and the tip is really only the public markets that most of us pay attention to and there's no shortage of news out there right now that's certainly causing such interesting times in the public markets and bleeds through to the private markets. So it'll be a pretty interesting update. And I mean, yeah, shoot, the last week, month, year frankly has been just fascinating.
Justin Dyer (03:24): And interesting.
Brandon Averill (03:25): To say the least. And we talked about this a little bit last week, but for clients listening, we feel this pain because our portfolios, our money's invested the exact same way that our clients are and we're in this with them. So to see the S&P 500, for instance be down 23% year to date, I mean we're in the heart of a bear market here. That pain definitely stings a little bit. And so we'll go through some of the things that certainly get us comfortable looking at our portfolios and seeing them down at this point in time. But one fascinating stat I heard on a podcast on the way in this morning was S&P is down 23%, but that 23% is actually created by nine days this year. So-
Justin Dyer (04:14): Amazing.
Brandon Averill (04:14): Which is crazy when you start to think about it, there's 200 and I think 54 days, trading days, in a market year. We're probably about 200 days in, so we're talking about nine out of 200 days. Pretty fascinating if you just take those nine days out, which, God bless you if you could figure out how to wait to do that, I don't even think you could implement that even if you had the crystal ball, but let's say you could. If you're able to remove those nine days, kind of a silly stat, but you'd actually be up 9% year to date in the S&P 500. So just pretty fascinating, I think we talked about it last week.
Justin Dyer (04:49): Yeah, exactly.
Brandon Averill (04:50): The opposite effect of this. If you miss the best days, what's it due to your return, I think it was over 30 years if you missed the 50 best days or something like that, basically it wiped out your return, which was pretty monumental. So just going back, trying to time these things, I mean the margin of error is so small, to just dramatically impact your investor experience over time.
Justin Dyer (05:13): And I think the conclusion that I would try and impart on everyone from both of those statistics is the downside to being wrong if you're trying to time the market or predict the future, we all know it's very, very difficult if not impossible, but just take a step back, even if you say, "Hey, there's a small probability I can be right." The downside of being wrong is substantial. I mean that's what these show you, right? The 50 missed days, wiping out your entire return over a 30 year period. I mean that's painful and then, and that puts your priorities, your goals at risk, which-
Brandon Averill (05:54): Totally.
Justin Dyer (05:55): ... take the investment return out of it, that's what's important. Now, investment returns drive your ability to do that. But think about that, if you can't actually do your goals, you can't actually live this in this life that you've kind of envisioned for yourself because of silly decisions that are not supported by the data. I mean it really just... It's a strong argument in my opinion and obviously why we do what we do, but it's a strong argument just to not play that game.
Brandon Averill (06:21): Totally, well and it's natural, right? You hear, "Oh, I want to participate, broadly, diversified portfolio, et cetera kind of sounds boring. Well what about this new star manager that's just totally blown it out of the water. I mean, Kathy Wood for instance, Arc, that gained all the headlines last year, I mean she was up over 700% in early 2021 over the S&P 500. I mean looked like the can't miss person, I mean money flowing in at the hype beyond all hype, and it's taken a quick turn. She is now underperforming the S&P 500 in less than two years, and just completely incinerated. Well Kathy, I apologize, I think she just cut off her audio. Somehow she's got to tap into it, and got really off at that. But Kathy, it's not against you, it's against all active managers. To be clear, we just don't believe that anybody has the foresight to really make these moves.
(07:23): So I'll move on from Kathy here at the risk of her just killing our audio again, and we'll move on. But I think to go pick on somebody else, I think picking individual companies to invest in, and really trying to figure out what, it's just a hard game. I saw another quick anecdote was that Blockbuster Video actually opened on this day in 1985. So, I think most of the people listening, most of our clients here, know what Blockbuster is, but you're a young crowd, so maybe not, so this may land flat, but fascinating for me nonetheless. Opened in 1985 with one store, actually got to 6,500 stores by 2010.
Justin Dyer (08:05): Amazing.
Brandon Averill (08:05): I mean in 2010 when there were 6,500 stores, people thought this is the future. They're the clear market dominator. They had a meeting with Netflix and the owners there to actually acquire them and save them from going bankrupt. And man, what does time turn today? 2022, there's one Blockbuster store and I think it's an Airbnb.
Justin Dyer (08:27): You can-
Brandon Averill (08:28): ... can actually rent-
Justin Dyer (08:29): You got a VHS.
Brandon Averill (08:29): You could probably pop a VHS in, maybe play some Duck Hunt, but pretty fascinating. And Netflix on the other hand has got 223 million subscribers. So I think it's just... It right? It's really hard over periods of time. And that's just one example, we see in the data time and time again, it's virtually impossible to go pick these companies that are going to win over the long term. So it is just a much better approach to go find that reliable, based on the data, place that we can expect higher expected returns.
Justin Dyer (09:01): Yeah, I mean this is a great example of creative destruction is I think the technical term, but there are so many companies that go bankrupt, de-list ,get acquired. There's this just dynamism that happens within economies, and this is a great anecdotal example of it, and it's going to happen again. And guess what? I bet you one of the big tech titans today is going to be the next Blockbuster.
Brandon Averill (09:26): Totally.
Justin Dyer (09:26): So to speak. Maybe a couple of them. And that's just what happens in predicting that ahead of time. Very, very difficult game to play. And, like I said earlier, that playing that game puts your goals at risk. As opposed to building something that's a lot more predictable. The term I like to use is robust, where we have a high level of confidence that this plan supports your goals. And I think we're going to get into that from a structural standpoint.
Brandon Averill (09:51): Totally.
Justin Dyer (09:51): A little bit.
Brandon Averill (09:52): Yeah, no, shoot, it could be ClipperVision, right? Did you see that ClipperVision? They're launching their own streaming service.
Justin Dyer (09:57): Oh, yeah.
Brandon Averill (09:57): You can watch every game for the entire season. 199 bucks a year.
Justin Dyer (10:03): Everyone's getting into the-
Brandon Averill (10:03): Yeah, everybody's getting the game.
Justin Dyer (10:04): Yeah.
Brandon Averill (10:04): So who's going to be the winner? But you bring up a really good point here, Justin is, we talked about this, but our portfolios personally are built the same way that our clients are listening to this, in the sense of we're implemented in the same way, we have the same positions, but we have completely different allocations because our priorities are different. And I think one thing we might not do the best job of explaining to clients is the role of bonds in their portfolio because...
(10:32): So we come up in this industry always [inaudible 00:10:34] okay, the bonds are the ballast of your portfolio. When equities get crushed, your bonds are going to help you out. They're going to keep the portfolio alive. And generally that does hold weight, but that's not why we do it, right? We do it for a different reason. I think you could even walk through an example, for clients listening, they're in a year where we're actually doing some tax planning. They're going to have a tax liability due come tax time. Why? Maybe explain for them if you can, why that bond that we buy, we don't really care what happens to the price.
Justin Dyer (11:10): Yeah.
Brandon Averill (11:11): At the end of the day.
Justin Dyer (11:12): It's a perfect little microcosm of how we structure portfolios. We structure portfolios to meet your priorities. Or your liabilities or whatever term you want to use, your goals, your cash flow needs. A tax payment in April is a perfect example of that. We know, through planning ahead of time, "Hey here's what your estimated tax payment's going to be. Instead of paying that up front to the government, we're going to keep that in your bank account, earn a little bit of interest instead of the government earning interest on you." That's a slight aside, but we're going to buy a bond that matches a maturity, perfectly to when you need that cash. So yeah let's couple days before April 15th next year that bond will mature and we're not going to take substantial risk with that bond because that's a very important payment to make. And so it's going to be a US Treasury.
(12:05): Luckily now we're actually getting a decent amount of interest on those Treasurys on those positions. But between now, or whenever we took that cash and put it into a bond, the price doesn't really matter, because we have a very confident outcome coming to us in April of next year. The government is going to come due or going to be good on their money and make that payment. When it comes to maturity that the principle of that is owed, it hits your... The account and then we make the payment. So that's how we're customizing portfolios. It gets a little bit more complicated on that depending on how we classify priorities, the timing of it. You think very long term more, "Hey discretionary, it would be nice to have," type things. Those are perfect goals over 20, 30, 40 year periods of time to match up with public equities or venture capital, private equity in general. But that's how we build this. We use the term financial structure, your portfolio, a custom tailor-made portfolio. We build it based on all these priorities as opposed to a typical 60/40, which not a bad solution, but for our clients, for you all listening it's not as robust, it's not as confident really in our opinion, way of going about it as opposed to doing something very custom tailor-made to you and your cash needs over time.
Brandon Averill (13:30): I think it's a great explanation. I mean to put tangibility to it even a little bit, so I have a priority personally at the end of next year that I know is coming, right?
Justin Dyer (13:39): Yeah.
Brandon Averill (13:40): So I have money set aside. We bought a bond, and at the time we bought it, I think is probably paying around 2% interest, right? And let's say it was a hundred dollar bond, to keep things simple. If I look at my account today, that hundred dollar bond is probably worth like 80 bucks, I don't know. So that's a big-
Justin Dyer (13:59): Not that much.
Brandon Averill (14:00): Not that much. Yeah, okay, 90 bucks. Still, let's say 10% down, right? I could sit there and start to stress out about that or I understand that, you know what, I don't really care about that because I'm going to clip this 2%, and next year when I have that liability come due, I'm going to still have that hundred dollars to make that payment.
Justin Dyer (14:17): Exactly.
Brandon Averill (14:17): I think that's the interesting thing to just wrap your head around in understanding what is the role here. And that's how we look at bonds in the portfolio, so hopefully people start to grasp that a little bit.
Justin Dyer (14:30): And going back, the way a 60/40 portfolio typically operates, that's a good solution like I said. But if it's not taking into account your unique situation, there is a chance that it's not the best solution for you.
Brandon Averill (14:42): Totally.
Justin Dyer (14:43): [inaudible 00:14:43] a very good chance because you're holding bonds that don't align with your priorities or when your cash flow needs come about, right? And so there is a better way, which is why we do what we do.
Brandon Averill (14:55): Yeah. So I think a good zinger as we like to end these things, is a good zinger for you, as you're talking to your friends, teammates, et cetera, family, especially with the off season starting here for the baseball player clients that are listening, is just really explain that. Explain the bond side. You're not using this as something to kind of buoy the ship, right? What you're really using it for are your priorities, and we're working through those priorities with you. So this is why we put so much importance on these priorities when we talk to you guys clients, and we're going to kind of redouble down here as we go through annual meetings, et cetera, is make sure we really understand those, so we can have the right allocations to provide for those priorities.
(15:39): So the zinger is, ask people. "Hey, do you know what your priorities are? Do you know why you have a specific dollar amount of bond allocation in your portfolio?" And if they don't, then they're probably don't have one of these tailor customed approach. So as you know, we've got a text line for this, that you guys can text into. Would love to hear from you at the number (602) 704-5574. We'd just love to hear if this resonates. If it helps explain a little bit more how we actually put together everybody's portfolios. Or if there's anything that you want us to cover in the future. So, until next time, own your wealth, make an impact, and always be a pro.