Happy 30th Anniversary to Efficient Investing! | AWM Insights #141
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Episode Summary
Exchange-traded funds (ETFs) were first launched on January 22nd, 1993 and have helped investors of all sizes save money on fees, diversify their portfolios, and reduce their annual tax bills.
The structure and operating process of the ETF paired with a diligent, diversified, and rules-based investment approach enables investors to hold extremely efficient portfolios that could previously only be constructed with 100s of millions of dollars.
We touch on the most important principles and themes to know about ETFs as well as some current events around tech layoffs and why they may not be as negative as they seem.
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.
Episode Highlights:
0:00 Intro
0:35 Anniversary of the ETF
0:58 What do we think about the recent Tech and Banking layoffs?
2:50 What lead to some of these layoffs?
4:48 The silver lining of the Tech layoffs
6:34 How layoffs and market cycles relate to your portfolio, general diversification, and positioning.
8:01 Benefits of diversification and how ETFs help
9:40 What do ETFs enable you to do?
10:22 The positive attributes of ETFs and how they help you save money on fees and taxes.
11:55 Wrap up
+ Read the Transcript
Brandon Averill (00:05): All right, Justin, we're back for another AWM Insights here.
Justin Dyer (00:08): Here we are.
Brandon Averill (00:09): Are you excited?
(00:09): Yeah, excited to get going. At the top here, let's just mention that phone number again. Hopefully people can shoot us a text. Beginning of the year, we'd love to hear from people, just are we hitting on the topics that they want to hit on? All that good stuff. So (602) 704-5574. You can shoot me a text, questions, comments, et cetera. We're open to all of it, but we had a big event, or at least big event in our world, the anniversary of the EFT, right?
Justin Dyer (00:40): Let's bust out the champagne.
Brandon Averill (00:41): Yeah, let's bust out the champagne. In all seriousness, it has been a great thing for investors, I think We believe that at least.
Justin Dyer (00:49): For sure.
Brandon Averill (00:50): So we'd like to talk about that a little bit today. But before we get into some of that stuff, there is a lot going on out there right now if you're paying attention, even not the financial news, but just the news in general. If you've been on Twitter at all, you're seeing that there's just layoffs abound, and it's really hitting the tech sector and the banking sector a lot. So we're getting questions. How's this impacting the portfolio? How are we thinking about that in investment implementation, et cetera? So, I thought it'd be fun to just chat about that a little bit today and try to de-myth or at least talk a little bit about why some of these companies might be laying off and is it a horrible thing? Is it just part of normal business practice? Probably a mix of both.
Justin Dyer (01:35): Yeah, totally a mix of both. And I think it's also important to underscore that in general, the labor market seems to still be relatively healthy. The unemployment reports that came out recently still show a growing workforce overall. I will admit, a lagging statistic, meaning it's looking back in time as opposed to looking forward. And these headlines that we're seeing are forward looking or real time, really. But to your point, they're isolated right now in two main industries and really specifically one, tech, that is. You mentioned it, there's a decent number of layoffs that are happening within the big banks of the world. But the thing to keep in mind with these is, A) it is normal. It is part of a cycle. It is hard to see people lose their jobs. Let's not necessarily take the entire human element out of it, but we are talking about investing in finance and whatnot. And to an extent, we have to look at things at a real high level.
(02:39): And there's actually a good benefit from people being laid off within tech, and I'll try and make sure I remember to mention that. But, what happened here? The last three, four years, let's just call it the pandemic era. These tech companies went on an insane hiring frenzy. Microsoft grew by 53%, their workforce, that is. Alphabet, the parenting company of Google, 57%. Amazon, Meta, parent company of Facebook, their workforce has nearly doubled. I mean, there's this insane amount of hiring that was going on in that period of time within tech specifically. And there was the belief, the reason why this hiring was going on was the belief that all these dynamics and characteristics of the economy that were happening during the pandemic, that they were going to continue on forever. And fast forward to today, we know that they're not.
(03:42): And there's definitely some nuance to that, right? Meta invested heavily in the Metaverse, that's why they changed their name way back when, and they're pumping the brakes on that a little bit. So there's broad macro trends going on here where they're like, whoa, whoa, we may have got ahead of ourselves. Let's take our foot off the gas a little bit. And then there's some sub trends here, too. Amazon's a great one. People are actually leaving their house to go shopping nowadays. People are not spending as much time in the Metaverse as Facebook or Meta would've liked.
(04:17): And then on the finance side of things, I think there's some similar dynamics where they see a slowing sector overall. Interest rates are a little bit higher, the economy potentially is slowing, although the tone has drastically changed on that, looking forward, which is a great thing.
(04:37): But banks are being cautious and saying, Hey, let's reduce our costs. Let's reduce our headcounts. The positive, and I'll stop after this, is within tech, you have these brilliant minds, these engineers, who are now free, if you will, and in some cases forced to go figure out something else. Which is wonderful for say, the venture capital startup ecosystem where you have these brilliant minds now either starting companies or it's talent that is available to existing companies that might be smaller and maybe have different pay packages, or the ability to pay people in the same way that Microsoft, Google, et ceteras of the world could pay. And so that's a great talent pool that can now be really dynamic and creative and ideally grow new companies out of this.
Brandon Averill (05:25): Yeah, I think that's a good point. I think it's a good reminder, too that this is just, I hate to say it, but sort of a normal business cycle type thing. And it's healthy. It's like when we talk about markets. If markets just went up totally in the face of bad news or changing circumstances, we naturally go to the, Hey, things are broken, the market's broken. That's not a good thing, right?
Justin Dyer (05:48): Right.
Brandon Averill (05:49): And so you want to feel the adjustments that go on. I think with the tech sector, Microsoft's a great example, they're laying off a ton of people, but at the same time, they're turning around and buying Open AI and Chat GPT for 10 billion dollars. They're just re-shifting their business priorities. And so they're looking ahead to what the future is. Or you look at Goldman. Goldman laid off a little over 3000 people, they looked at their business and said, the consumer banking division is losing, hemorrhaging money. This isn't where we want to put our capital. We want to go back and reinvest in the investment banking sector where we're an investment bank that's at the heart of what they are.
(06:31): So, you start to see the shift in priorities a little bit, and it just refines the business. And I think that's certainly a big positive that can come out of all of this. And these companies need to adjust. They adjusted with big growth expectations and now they got to trim it back. So how it relates, I think tying it really quickly back to the portfolio and how we invest your money is, these things aren't predictable.
Justin Dyer (07:00): Tell me. And even these big companies can't predict the future.
Brandon Averill (07:03): Exactly. It's very difficult for them to predict. And in the short term, there might be some pain, maybe there won't. Maybe to your point, all these guys and gals roll out these companies and start wonderful companies in the short term. But at the end of the day, we don't know what the near future is going to hold, and so even in the midst of potentially bad news of layoffs or corporate restructurings, this is why we build your protective reserve. This is why we have this cushion sitting there, so your life doesn't change. And we focus on your priorities and tie everything back to what you're trying to accomplish and get really granular with that so that if the world does blow up, say this does turn worse, and even more get people get laid off, you've got to buffer to work your way through that. Or short-term, Hey, positives come out of this. Great, you're going to benefit from that.
Justin Dyer (07:59): Right.
Brandon Averill (08:00): Because we have your allocation in a proper way.
Justin Dyer (08:02): And I think it's a great argument for diversification, too.
Brandon Averill (08:05): Totally.
Justin Dyer (08:06): Which the ETF provides.
Brandon Averill (08:08): Yep. Good segue.
Justin Dyer (08:09): Perfect. I know, man, you set me up there. That is essentially the ETF's duty purpose. It's not the only vehicle that does it, but it's an incredibly efficient vehicle in getting diversification and broad access to various asset classes. But you know, you said at the outset, it's the 30 year anniversary of the ETF, the first ETF. And ETF, let's define it, I suppose, exchange traded fund. It's similar to mutual fund. I think a lot of people are still to this day, more familiar with mutual funds, although ETFs are fast catching up. It is the 30 year anniversary of the ETF. Mutual funds have been around since, geez, I think the thirties, maybe forties, I don't know the exact date. So they've been around for a lot longer.
(08:58): But similar principle, you're pulling investors capital together to get broad diversification. And not only is diversification an incredible benefit for the examples we just highlighted, but you also get the benefit of shared costs and economies of scale, if you will. So as opposed to just going and investing in a single stock by yourself, which is now arguably very cheap because of technology, you're getting even better access, arguably, to a larger swath of shares of companies through a vehicle like an ETF, and it's just phenomenally beneficial to the end investor.
Brandon Averill (09:36): Yeah, I think that's a good note that at the end of the day, I think you can simply think about this as it's structure, and that's all an ETF is. I think in the early days the ETF was very synonymous with passive investing. I'm going to hold the market, et cetera, and that really over the last, I don't know, five, 10 years has completely blown up. So now in ETF, I mean, you could be actively traded. You could basically leverage.
Justin Dyer (10:00): [inaudible 00:10:01] Yeah, yeah.
Brandon Averill (10:01): You can do anything. So I think for those clients listening, that's one thing to remember is an ETF can now be pretty broad. A mutual fund can be very broad, and I don't want to say they're quite interchangeable and we're not going to get in the weeds here, but at the end of the day, you're not just investing in, I don't know, the investment isn't the ETF, right?
Justin Dyer (10:24): Right.
Brandon Averill (10:24): It's what the ETF holds is what you're investing in. But very tax efficient typically. Can be, but not always low cost anymore. But typically can be very low cost and should be for clients listening, all of your ETFs are very low cost and very tax efficient as well. So I think those are some things that historically got really synonymous with the EFT, but no longer is the case. So it's become more complicated I guess, in a lot of ways, but a fantastic structure to build out a public portfolio.
Justin Dyer (10:58): Oh, yeah. Still. The tool set, if you will, or toolkit of ETFs is wider than it ever has been, but they are still phenomenal vehicles to implement an incredibly efficient portfolio, efficient from a cost perspective, trading perspective, all of that stuff. So you don't have all these needless frictional costs or you're minimizing them as much as possible. We say taxes generally can be the number one destroyer of wealth, and an ETF is one of the most efficient vehicles to minimize taxes. When we talk about costs, we're not only talking about the management fees to actually operate it, but like you said, they're also efficient from a tax perspective and you can really benefit from that long-term compounding of wealth by leveraging the right ETFs. They're not all created equal, but they are incredible vehicles and we've all been the benefactor of them.
Brandon Averill (11:55): Awesome. Well, cool. Well, we'll wrap up for today. I'm going to remind you guys again of this number, but (602) 704-5574. Shoot us a text, we'd love to hear from you. Hopefully this was helpful. Hopefully we didn't get too nerdy on the ETF. But yeah, let's adjourn for the day. And until next time, own your wealth, make an impact, and always be a pro.