The Importance of Protecting What You Need and Risking What You Can | AWM Insights #143
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Episode Summary
In markets, risk and return go hand in hand. The more risk you can take with your portfolio, and the more time you can leave money invested in markets that generate a risk premium, the higher your expected return will be.
Even through periods like the dot com bubble and the Great Recession, long-term risk exposure was not punished, it was actually rewarded if you stayed invested through all the chaos. If too much of your money is exposed to risk and markets hit a period of turbulence, there may be a loss of capital, but expertise in management can shield you from these times of market turmoil.
It may sound very simple, but the process of properly thinking through your priorities and figuring out what you need now, and what you can do without until later, ends up generating a great deal of wealth over your investment life cycle and keeps any market hiccups from interrupting your day to day life.
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Episode Highlights:
0:00 Intro
1:03 How do we evaluate the news and updated financial data?
3:23 Are all trends important and what are we looking for?
4:21 Differences between evaluating data as it relates to public and private markets
6:00 How we use your general financial structure to create building blocks that enable you to seek outsized returns in the private markets
7:37 Thinking through your most important factors and goals, and using those to properly tailor your portfolio
9:13 Matching your priorities with assets that help you achieve your goals, and also achieve the highest expected returns
10:45 How your savings and discipline early on in your career can lead to the best chances of achieving exceptional returns
12:09 Protect what you need and risk what you can
12:40 Text us!
+ Read the Transcript
Brandon Averill (00:03): All right, we're back for another one. There's certainly no shortage of information to talk about. The big question is, is it telling a story? Because I think everybody's looking at the data and I feel really sorry for those people that are trying to predict the future with this data because I think we're just seeing mixed messages, right? We're seeing, on one hand the economy seems to be doing super well. We get a jobs report number where,
Justin Dyer (00:28): Blew out of the water.
Brandon Averill (00:29): Just blew everybody out of the water. But then on the flip side, you hear from all the big tech sector, right, that purchases are down, cardboard box sales are apparently down. So trying to infer does that mean something that we're actually consuming fewer products, but then credit card companies come out and say that purchases are up there. So we got stuff all over the map here and I know we're going to get into a little bit today, obviously the news headlines of all this stuff and then how does it fit into our portfolios. And not surprising to anybody that listens to us, we're going to go back to financial structure, I'm sure. But yeah, I would love to just hear from you, Justin, when you start to hear all of this news information come out, it is not like we're totally flippant and just saying like, oh, this is irrelevant. I mean, it's super interesting. There is implications to our portfolio. So maybe just kind of give a two cents as you read these headlines, what goes through your head?
Justin Dyer (01:27): Well, I'm looking to see if anything tells us who's going to win the Super Bowl.
Brandon Averill (01:30): Yeah, there we go.
Justin Dyer (01:31): I'm trying to read between the tea leaves there. Don't have one yet, so come back later this week. Anyway. Yeah, we're constantly reading about what's going on. Conducting an analysis, if you will as well. Not necessarily to try and predict the future, but really the broad way to answer your question is the way in which we read and digest all this information is to say, Hey, does this cause us to question the data? Right. What the data says from the past, right?
(02:09): Because generally speaking, if you're looking at data, you're looking at the past, you're looking back into time, which is a incredibly good place to start. You can always glean a lot of information, you can learn a lot and you can begin to ask some questions, oh hey, is there any reason why what has happened in the past should continue going forward? You're not necessarily using it to predict the future, but you're saying, Hey, are there patterns here where we have some confidence in positioning ourselves based on this,
Brandon Averill (02:46): Right.
Justin Dyer (02:46): Old data? And I think that's the way in which we start to analyze this stuff. Does it cause us to change our general approach to markets, to investing when we're reassessing information? Hey, the Fed came out and raised interest rates a little bit more last week. Does that cause us to change our approach in any way, shape or form? And I mean, the short answer for that is no, it doesn't. There isn't any predictable relationship between interest rates and increases in interest rates more specifically and what the market may do as a result of that. There's been a trend, a defined trend in that over a shorter period of time. But is that going to continue? And the data says no, and we don't have any real strong conviction why that may or may not change. So hopefully that's not too in the weeds, but gives a sense. We're analyzing this information constantly and we're saying, Hey, does this make us change our general approach based on years and years and years of data and what that data says and gives us confidence in?
Brandon Averill (03:45): Yeah, and I think that's a good point. And we're broadly speaking, at least right now about the public markets too, right?
Justin Dyer (03:52): Yeah.
Brandon Averill (03:52): These big macro themes that were kind of popping up in the news and that we're studying. In the public markets, those things, our belief and what the evidence really shows, right, is that as a broad market perspective, we're pricing those things in. And so to try to figure out like, Hey, is the market mispricing this stuff is really difficult as we know, we've talked about in the past, but I think where it does bleed over and maybe even macro doesn't make a big investing decision on the private market side, but it probably has more of an impact there. We know there's tons of inefficiencies on the private market side. So if it's true, right, that the cardboard sales piece and now Amazon's not shipping as much, maybe that doesn't affect a private company that we need to be a little more in tune to when we think through that type of stuff.
Justin Dyer (04:44): Completely, completely. One thing I would say as well though is we're making all decisions very much with the long term in mind, even in the private markets. But to your point, maybe there is a private market fund or private market company that we're invested in where there is a little bit more guidance or a handholding that can happen there, whether it's via us directly with a relationship and a company or via a venture fund to just help provide that guidance to those startup, those founders who are running these companies on a day-to-day basis to help them, Hey, do you turn left here or turn right here, or do you make this higher? Do you not make that higher?
(05:26): There is more activity involved with that, but you also have to have that healthy skepticism around predicting the future. You can't make any guaranteed bets. You need to stay flexible. And great case in point is the IPO market right now potentially is loosening up a little bit. People were saying just three months ago that it's going to be dried up for many, many, many years. And so yeah, it's better to be more conservative and cautious than aggressive, but it's just a perfect reminder that things change fast. We talked a lot about that last week, how fast markets move both in the public and the private side of things. So a lot of it on the private is more almost hand to hand combat, if you will, and really saying, Hey, let's be adaptable, but let's make some changes here.
Brandon Averill (06:13): Yeah, totally. And I think when we kind of take a step back, and I think it's good for all clients listening to go through the reminder of how we actually build the portfolio, right, the construction part of it. How do we figure out how much to put into public fixed income, how much do we put into public stocks or equity? Right. That ownership side of your portfolio. And then ultimately, if you're in a position and you've accumulated enough wealth to really achieve stability in your priorities, then how do we think about the private markets? And I think the one big message everybody hopefully knows by now is that it's really customized. So you may have a client listening that has earned $50 million in their career, they've got a family, et cetera, they're going to have all their priorities built out. And then you have another client that same, earned $50 million in their career and have their priorities and have a family, but totally different priorities.
Justin Dyer (07:12): Totally. Yep.
Brandon Averill (07:13): And so the construction of the portfolio is going to be totally different. The first client may have a 10% allocation to venture capital, whereas the second client may be 5% because they have different priorities, have different needs in the short term. So I'd love to just hear you talk a little bit about, and we don't need to go into depth, we don't want to keep everybody on too long today, but how do you, when you have two clients that seemingly in world standards, most advisors would be look at them and say, ah, they're pretty similar,
Justin Dyer (07:44): Yeah.
Brandon Averill (07:44): How do you think through the complexities of the differences?
Justin Dyer (07:47): So to your point, every single individual is unique and different. Even if you have similar earning profiles, similar age, similar demographics, everyone's different. I think that's a pretty acceptable statement or we could call it even a fact. So that's a starting point and that drives us to customize everything based on that statement. The way in which we do this is to basically categorize priorities in a way that gives us a timing need of those priorities. Right. Is that next year, two years, 10 years down the road? And how flexible is that? Okay, it could be two, I'd like it to be two years down the road, but it could be four if I need to, or no, it has to be two years. Right.
(08:34): So there's a couple different characteristics that we slap onto these priorities, both time and importance, let's call it that. And then what we do is we basically start to match those priorities with an asset, with an investment that behaves in a very, very similar way. Right. This is called asset liability matching. It's plain and simple like that. Now there's a lot of complexity in it in and how we actually assess what are the right investments to match things up. But the simple example I think we hit on quite a bit is for a short term, very, very important priority, right, sending a kid to school or buying a house at a specific point in time, you don't want to take risk with that because when that time comes, there's a chance if you were taking risk that the value is less than you need it to be.
(09:23): And so we start to build on that concept. Right. These are building blocks in a sense where priorities that are a little bit more flexible longer term, we take risk with assets, with investment in matching those priorities. And when I say take risk, we're just, we're putting them into stocks and equity. And then when you start to get out longer or you're projected to have a legacy or excess resources at the end of your life expectancy, those type of numbers or those type of financial structure, makeups then start to give us a lot of confidence in the private markets where you're taking risk.
(10:06): You're also ideally increasing your expected return if everything goes according to plan. But those are also really long duration assets. Right. You're in early stage venture capital, you're typically locking up money for 10 years plus or minus potentially. At least that's around the expectation you should have. And so those are all considerations that then are matched directly with someone's unique overall financial structure and priorities.
Brandon Averill (10:32): I think that's a great way to put it. And it is, right? As you build out this customized portfolio, our goal is to allocate you to the highest expected returns possible. And we're always going to do that within whatever sliver it is. But it also is within your control. If you want to be in the private markets more in a responsible way, it means maybe reevaluating some of the priorities you have on the front end, right? And if you don't require as much on that front end side, then we get to allocate more to the higher expected returns down the line.
(11:06): So certainly within your control and able to put it all together in a really, really effective way. And so I think at the end of the day, maybe to sum it up here is just the reason why we want it to be customized isn't just because it sounds good. Right. What it ultimately does is leads to a higher confidence in the actual outcomes. Right. And if I'm investing money for myself, that's all that really matters. We talk about money as a tool. I mean getting some high end return in one year, but you're risking your entire financial structure is not something we're in the business of. So when we're working with clients, as you're listening and building out your portfolio, that is why we spend so much time going through your priorities. That's why we want want to understand what's important to you, is because we want to be kind of the old saying, we want to be conservative where you need to be conservative, but then we want to be growth oriented where we can take that money and you get what you deserve.
(12:05): There's no sense. We just looked at a portfolio that unfortunately a client, a new client, they didn't have an advisor that did this work for them. And so they were sitting there in these lower returning assets when they could have been allocated to higher returning or higher expected assets. Right. And so the good news is they're young, we got lots of time, but this is why we go about building your portfolio in the way that we do. So we'll sign off for today, but I want to remind everybody of that phone number. We'd love for you guys to text us. Text us, and then that way you also get some updates. We got some exciting things coming that might be fun for you to get a text from this number. It's our phone number. It's my phone number, so (602) 704-5574. We'd love to hear from you. And until next time, own your wealth. Make an impact and always be a pro.
(04:41): And yeah, we totally agree. And it was several years ago that we "saw the light" I think for a long time. And that's what the industry teaches is, Hey, do this goal-based planning, do something called a Monte Carlo, give yourself a percentage and 80% chance or 90% chance of success. And I think it's what hit us is there's a better way, there's a better way to actually understand specifically what the priorities are, what those priorities are going to cost to actually fund, and then build a portfolio around that. So it is different than what the industry talks about goal-based planning. And maybe in the coming weeks we can dig into it deeper. But I did want to address just that when you are seeing all these news events, the Fed is moving things around, et cetera, they were taking a very tailored approach to building that protective reserve and allowing you to be conservative where you need to be conservative and as risky, if you want to call it that, or growth oriented is probably the better way of putting it in the best way possible as well.
Justin Dyer (05:47): Yeah, completely. I think just piggybacking on the topic briefly of goal-based planning, I think like you said, we'll get into a little bit more nuance and detail of that, but typically what happens is that leads to a cookie cutter type approach where portfolios are literally just grabbed off the shelf. Is that terrible? No, I won't be too hard on that, but you use the word there's a better way. And that really is where that's led us to a liability driven or priorities driven approach and custom portfolios. We'll get into the neat details of all this stuff, but those custom portfolios allow far better outcomes. They should allow far better outcomes and allow investors and clients to weather this storm, whether or not we have a soft landing, going back to the topic of the day, soft landing or hard landing, it's a more, I use the term robust, I think it's a more, there's more confidence, there's more strength is a good word to use in that approach to give that staying power, to have it uniquely dialed into each and every individual.
(07:05): No two people are the same. And our industry does view people like that. You get a risk tolerance score or you look at your age and you do take into account your goals and things like that. But it's only, I don't know, 75% of the way there if you want to slap a number on it, that's an unscientific number. But really the way we view it is it's a more wholesome, qualitative and confidence inducing approach.
Brandon Averill (07:34): Yeah. And I think it's a good point. Most financial firms are built to scale, and that's great. You need to put together advice for masses. And so this more cookie cutter approach is not, like you said, it's not bad, it's just the element of where they're at for our clients listening, that's the benefit of the multi-family office. A little bit more attention to detail with your specific situation. We're going to build a very customized approach to you because we don't have to do it for a thousand clients like a lot of firms do, and provide a very valuable service to that clientele, but it is something that does become afforded to you as your wealth grows and you're able to work with a firm like ours. So I think that's a good thing to mention.
Justin Dyer (08:17): One thing, just to wrap up the goals-based topic we're talking about here. I was actually in San Francisco last week meeting with some venture capitalists, met with one of them and was having this conversation, how do we construct portfolios? How do we allocate to venture capital, et cetera, et cetera? Pulled up our platform in which we do this and walked him through it. He's like, oh, wow, that's a lot more sophisticated than even he does it, his money management. So just a little bit of a teaser, know that, that there's a lot of thought, a lot of sophistication that goes into a more priorities driven, liabilities driven, custom tailor made approach.
Brandon Averill (08:54): And I think what it ultimately might be able to provide in a lot of scenarios is if you have a really good understanding of how your portfolio can be constructed, going back to the conservative where you need to be conservative, you have that right protective reserve in place, you can then maybe have some confidence to reallocate money towards higher expected returns. And you start to think about the compounding effect of that over time. If you have money sitting in, let's say treasury bonds, when that money could be allocated to the US stock market for a long period of time, and we're talking about exponential difference and millions of-.
Justin Dyer (09:31): Totally.
Brandon Averill (09:31): ... of difference-.
Justin Dyer (09:32): Over long periods. Yeah.
Brandon Averill (09:33): ... depending on the size of your portfolio. So it really does pay to get very sophisticated, and that's our job. That's not you guys listening and gals listening to this is, Hey, I need to know specifically how much to be allocated to, that's our job, to understand your priorities, interpret that, and then optimize that portfolio so you do get access to those returns that you deserve.
Justin Dyer (09:56): Well, and then hopefully in these conversations on this podcast and even one-on-one conversations, we give that the context to why the portfolio is built the way it is, and it hopefully gives you that staying power when we're talking about, or you're reading about, okay, are we going to be in a soft landing or a hard landing? Are we going to hit the debt ceiling.
Brandon Averill (10:15): Yeah.
Justin Dyer (10:15): There's all sorts of headlines around that. Markets typically do okay when there's a defined date, that's why you've seen markets rally. It's shrugged off this whole debt ceiling debate. I think that's a little bit more of a political gamesmanship, at least right now. But these are scary headlines and it's okay, it's natural to react to them. But if you understand and we really want to emphasize that, call us, shoot us a text. We gave you guys the number, ask the question so you have that confidence and understanding. We don't want you to be experts and be able to do this yourself. That's what we enjoy and what we love talking about on a day-to-day basis. But we want you to see those headlines and understand how it applies to your portfolio and give you that confidence and that staying power to realize those long-term returns.
Brandon Averill (11:06): I think that's a fantastic point, and I think as we look this week ahead, you're likely to see a lot of volatility because there's a lot of information coming, and we know that the markets, if they're functioning well, they're going to develop that or they're going to absorb that information, they're going to adjust prices to reflect the available information. So don't be surprised if you see everything bounce all over the place, but hopefully through this discussion and your discussions with advisors, et cetera, you have a lot of confidence in knowing that, hey, even when all hell seems to be breaking loose, or maybe not, maybe it's all great news-.
Justin Dyer (11:44): Maybe not. Yeah.
Brandon Averill (11:44): ... and everything goes up, or maybe it's terrible news and everything goes down. You have a financial structure in place that's very specific to your priorities and it allows for the best, most optimized return over time, which is ultimately your personalized benchmark of achieving your priorities because money's just a tool, as we all know. So we'll wrap up for today, but again, Justin just mentioned it. We've got that text, we got that phone number you can text with questions. I'll just remind it again, it's (602) 704-5574. We'd love to hear from you guys and we'd love to tackle some of your questions and topics in future episodes. So until next time, own your wealth, make an impact, and always be a pro.