Focusing on what Matters and Tailoring your Portfolio | AWM Insights #144
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Episode Summary
Your portfolio’s purpose is to be used to accomplish the goals that you value. This can range from lifetime spending, paying for schooling, buying property, and passing down wealth to future generations.
These goals all come at differing times and with varying levels of importance based on what you prioritize. Your portfolio needs to be built around these goals as money is the tool that helps you accomplish them.
This process is complex and involves communication back and forth, but it ultimately builds a financial foundation that gives you the highest level of confidence to achieve what you set out.
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Episode Highlights:
0:00 Intro
0:38 How do we actually allocate your portfolio
2:03 Your most important priorities are the foundation.
3:10 We focus on your needs and what actually matters in your life
4:35 Why off-the-shelf portfolios lead to returns being “left on the table”
5:37 How public markets generate passive income
6:43 How do we use your excess funds to generate the returns you deserve
8:15 How investing globally smooth’s out returns and leads to higher confidence in long-term returns
9:59 The stats behind experts like Jim Cramer
12:31 Integrating diversification and rewarded factors to your benefit
14:40 Text us!
+ Read the Transcript
Brandon Averill (00:02): All right, Justin, we're back for another episode here of AWM Insights and I think we got a good one. We're going to go back to the basics a bit today, talk a little bit about portfolio construction, but I think the most fun, we should add this rolling when we were sitting here chatting and preparing for this because it brought back a flood of memories of when I first got in the industry, and so probably some funny anecdotes to come. But we got this question from a client via one of our advisors just talking about how do we actually come up with asset allocation? And so, let's jump in. Let's just talk at a high level how we think about that, how we arrive at a portfolio, and then we'll try not get too far into the weeds today, but I think there'll definitely be some follow up that we can get into the nitty-gritty. But if somebody was to ask you this question that our clients asking, how do you actually come up with our asset allocation? Meaning how is my money actually invested at a high level? Where would you start?
Justin Dyer (01:05): Sure. So, point number one would be everything is custom. We've talked about that a lot on this podcast, but I don't want to forget about that in this conversation. It's really, really important. There's no one portfolio, one size fits all cookie cutter type approach. We take a client's unique circumstances, have those deep conversations, and think about this as a constant moving target, right? It's not set in stone, but essentially try and isolate and figure out what what's important to a client. That can be things that are both quantitative or qualitative. The quantitative things really do ideally go into a portfolio construction methodology. And where that starts or where that's first initially represented is on the fixed income side of the portfolio or the bond side of the portfolio where we're trying to cover those priorities, those shorter term priorities that are really, really important to a client's life.
(02:07): We don't want to take risk, we want to protect those, those are the terms we use quite often. And so, we start with that as the foundational building block, you can really think about this almost as a construction project where that is the basis of success in our opinion, of really putting together something that has staying power and that eventually gives us high likelihood or high confidence in long-term success. So, it really is that fixed income piece and we're not getting overly creative and taking a lot of risk on the fixed income side of the portfolio or the bond side of the portfolio. We are holding high quality, very stable assets to match your priorities, and then we'll match those priorities with bonds that mature at a very similar point in time. So, if you need liquidity a year from now, you're going to hold bonds that are going to roughly mature in that same amount of time. You're going to clip coupons or earn a little bit of yield along the way, but we're not getting overly creative. So, that's the starting point that I had hit on first.
Brandon Averill (03:12): Yeah, I think that's a good point. The client's listening, right? Most of them are pretty familiar with the customization process. If you just think about your sport, a lot of athletes listening is if I'm going to go about something, right? I'm going to perform at a high level. If I'm a lineman, I'm not going to look over at what the wide receivers are doing and I'm going to implement the same drills as those guys, right?
Justin Dyer (03:34): Exactly.
Brandon Averill (03:35): You're both high performing elite athletes at the very highest level, but it would be silly to put you guys through the same drills, right? And so, what we're ultimately trying to do is say, Hey, if you're the lineman, let's build the portfolio for the lineman. If you're the wide receiver, let's build the portfolio for the right wide receiver. And unfortunately, it doesn't work that way in our industry oftentimes, it's more that cookie cutter approach. You'll hear people, we've talked about this, Hey, you're young, you're making a lot of money and you're single or maybe you're married, you have no kids. We got a long ways to go. You kind of understand the markets, right? We'll talk about the basics.
(04:13): So, you're a moderate investor, we'll put 60% in stocks or hey, you actually really get the market, so we'll go 70% stocks, and then we'll put 40% or 30% into fixed income. And I think that's the message we're trying to tell you guys is that's just inadequate way. We want to customize that. So, that's great. So, we get to that high level, we figure out for everybody exactly how much of a split we should have there. So, once we take care of that bond piece, because that bond piece is your protective piece, right? That's what's going to provide for you in the short term. If you do a good job and you save your money, you have the ability, right? To then take some of those assets and put them in and people would say more risky. We would actually say higher expected return type area and that manifests itself usually in ownership or equity, right? With stocks, or maybe we'll get into the private side.
Justin Dyer (05:08): And the one nuance too I'd add, if you're an individual or a family that's no longer working, your fixed income portfolio might be a lot longer term oriented, right? If you don't have income coming in from other sources, guess what? Your passive income comes from your portfolio and you need to address or adjust your fixed income or the bond allocation accordingly. So again, it's custom. It's depending on who you are. But to your point-
Brandon Averill (05:33): Real quick, I do want to hit on passive income because there I can't let that go. But the most passive income out there, right? Is generated from the most passive activity, which is investing in the public markets, whether it's bonds or stocks-
Justin Dyer (05:47): All you have to do is hit a button on the computer.
Brandon Averill (05:48): I think everybody's brain goes to real estate. Anybody that is a real estate investor, a true real estate investor, will probably tell you it's not all that passive. There's an engagement there, so really good investment, but let's just not let that pass. This is the most passive way to invest and it's a great way to invest, so anyways back to you.
Justin Dyer (06:09): No, I love it. And we're being a little tongue in cheek here, but there's good reason. And what we're hoping to accomplish with this podcast is kind of cut through that noise, help you guys, all clients listeners, discern entertainment from advice and what the data actually supports as opposed to what these talking heads or what ads on internet websites or whatnot actually show us. But back to the topic at hand. So, once you have that solid foundation, the fixed income bond piece of your portfolio really dialed in, and again, it's not set in stone, priorities change, life changes, and you can adjust. There's flexibility built in, but then we can go towards assets that have higher expected return over longer periods of time. So, you hit on correctly, it is a higher expected return. This is typically company ownership, whether it's public or private, but there's also a longer timeframe. It's a pretty key component to that.
(07:05): And then we say, okay, well of that bucket that's custom to each and every client, how do we divide that between public markets and private markets? In the public markets, how do we divide that between US stocks, international developed stocks, think companies in Europe or Japan or Australia? And then emerging markets, think some South American companies. You need to actually take a quick step back and ask yourself, do we believe in this concept of diversification? We 110% do. That is what the data supports. You cans get plenty of noise out there, whether it be from Kramer on NBC or just random ads trying to get you to click on it, those clickbait ads that are there to do exactly that, get you to click on it and not necessarily provide any substance behind it. So, I want to make sure we underscore, excuse me, and start the conversation with the belief in diversification. So, when we start there, we say, okay, let's go to the public markets first.
(08:08): Well, a perfect starting point is the global market capitalization and what all that is saying, what's the total dollar of publicly traded stocks out there across all countries, and how does that break down from a percentage basis? The US is somewhere around 60% and it changes every day. But just to throw out some numbers for sake of conversation, the rest of the world is the remaining 40% and emerging markets is probably around 10% of that. And then international developed, again, think European countries and companies make up the difference. So, that's a good proxy for what global investors think of from an investing standpoint. They're voting with actual dollars. And that's a great place to point, why should we have any different knowledge or information from that aggregate investor base making a judgment call? That's the starting point. And then we start to like I said, ask ourselves those questions, does it make sense to deviate from that? And the short answer, and I'll pause here that for further kind of clarification, the short answer is we do think it makes sense to deviate, but there's logic behind it.
Brandon Averill (09:25): Sure. No, I think that's a good point. And with the public markets, just to reframe with everybody and make sure everybody understands what we're talking about is those publicly traded stocks, those publicly traded ownership in companies that anybody can go buy, right? As long as you have an internet connection, you can open up a TD Ameritrade or a Schwab account, you can go buy stocks. And so, that's where information is readily available to everybody. And the diversification call it's just smart. At the end of the day, and I laugh at the Kramer example because when I first got in the industry, and this is what we were laughing about before we started, the broker that Eric and I first went to go work with at Morgan Stanley, one of his first pieces of advices we were studying for our licensing exams is start watching Jim Kramer every single day. And I laugh because it's the most asinine thing I've ever heard now. It is true broker, big wire house kind of advice.
Justin Dyer (10:29): [inaudible 00:10:29] sound bites there.
Brandon Averill (10:30): Yeah, because we're reading, and this is the stat. So Jim Kramer, between 2017 and 2021, he made recommendations 12,564 individual recommendations on stocks. What's absolutely hilarious about this is that the analysis of those stock recommendations showed that he actually underperformed the S&P 500 by six percentage points. That might not sound like a lot, but anybody that's paid a 5% agent fee or whatnot, you actually know when that converts to dollars, it is massive.
Justin Dyer (11:04): That's substantial, yeah.
Brandon Averill (11:06): It is absolutely massive. And look, there probably is somebody out there that can make stock picks and all that kind of stuff. I'm sure there is. But for people that spend time in this industry, I've yet to see it. We've both been in the industry a long time. We've talked to a lot of people, it's just not successful. And so I think going back to this entertainment versus investing, at the end of the day, right? Investing, you want to be boring, especially on the public side. You want the highest level of certainty around achieving the outcomes that you set out to achieve. And if you start messing around with all this stuff, it just ends up putting you in a position where now you're trying to make calls to make things happen, and you're exposing yourself to too much downside. So yeah, diversification at the high level, I think that's great.
(11:59): And I know we don't want to go too far into the weeds today. We will in future episodes because even when we get to, and maybe you can tease it out and we'll wrap it up. But okay, great Justin, we get to this point. We know we want to put 79.2% into growth, higher expected return assets. Okay, great. We live in the US, you just talked about market cap, we're going to put 60% roughly of that money into the US and we're going to put roughly 40% into international. That's great. But then how actually how is it filtered down? What companies do those go into?
Justin Dyer (12:37): Yeah. Well, diversification rings true on that answer as well. And diversification in pure indexing, that's a great place to start. Again, we try and use what the logical approach starts with, right? Let's go to first principles. Indexes are great first principles. Index based investing is a great first principle place to start, low cost, diversification, all of that wonderful stuff. But then go to the data, okay the data actually shows us that there are parts of a broad market that outperform the index over time. So, you kind of alluded to it. So, value companies versus growth companies. These are cheaper, these are companies that trade at a cheaper valuation, hence the term value, and they typically outperform. I'm teasing it out there, and I'll stop for future episodes, but that's the general sense.
Brandon Averill (13:30): And I think the good news about that, and we'll wrap up here, is you get to, well, if you're doing it prudently, you get to perform or why our clients get to have that allocation of this higher expected return is because we customize things, right? You wouldn't probably want to go down this rabbit hole if you were just taking a cookie cutter approach. I would argue that you're probably putting yourself potentially in a position that you wouldn't want to be in because we are talking about time, right? And you've alluded to that. So, we'll get into this whole why we pick small, why we pick value, why we pick profitable companies to be invested into when we start to look at the ownership side in a future episode. But hopefully this was helpful today. We'd love to hear your follow-up questions. We can weave those into the future episode. A reminder, you can do that via text by shooting a text to (602)-704-5574. Comes directly to me and we'll address it on a future episode. And until next time, own your wealth, make an impact, and always be a pro.