Building Resilient Portfolios | AWM Insights #148
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Episode Summary
Markets rarely move sideways without fluctuations.
Although we may want a smoother path to success, fluctuations and volatility are signs of health in the financial markets and give investors the returns they seek over extended periods of time by weeding out short-term investors and “nervous capital”.
Our role as caretakers of your financial well-being is to create a portfolio that meets your needs, helps you achieve your goals, and weathers the market turbulence to come while keeping you invested and at peace.
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Episode Highlights:
0:00 Intro
0:48 Why we build portfolios to weather periods of volatility and give you confidence in times of stress
2:47 How creating custom portfolios that are tailored to your needs keeps you away from unnecessary risks that can be found in many cookie-cutter model portfolios
5:14 Why volatility in fixed income positions is not relevant with tailored portfolios.
6:54 How much attention should you give to your portfolio?
7:45 Why volatility isn’t always a bad thing
9:10 How we ensure that clients have what they need when they need it and are rewarded for what they defer
12:02 Why it is so important to be allocated properly
14:10 Text us
+ Read the Transcript
Brandon Averill (00:03): All right, Justin. Well, we're back in the market and the banking world and everything else certainly hasn't given us any pause and less things to talk about, that's for sure. So would love to jump in today. I think when I've been talking with clients throughout the week, one of the big things that just keeps coming up is, this seems like we're just going through a crazy time right now. It seems like my portfolio, the stock side of the portfolio and the bond side of the portfolio are jumping all around the place. And is it perception, is it reality? Should I be worried? All those types of things.
(00:40): So I'd love to just unpack some of that today, hopefully give our clients listening some confidence in the way that we build portfolios and how do we mitigate some of this volatility? And I guess cut to the punchline. Why are we not overly concerned about our client portfolios when we have this real short-term volatility. And volatility, let's define. When your part portfolio goes up and down and to what degree. Maybe we'll kick off there, Justin. I'd just love for you to talk a little bit about when you look into your portfolio on a daily basis, what should concern you, if anything, what makes you raise your eyebrows, but then try to remind yourself of the long-term vision?
Justin Dyer (01:23): Well, let me say first, you probably shouldn't look at it on a daily basis, in all honesty, just not good for anyone's mental health. But you said the answer, the short answer, but we'll unpack it. And I think I would even point people, hopefully you're listening to this podcast on a regular basis. We really hope it's beneficial to everyone listening, but we've gone through a series over the last five to seven episodes. I can't remember exactly when we started, really just unpacking how we think about building a portfolio, irrespective of what's going on in the market. And I think that's a really important point to highlight. We build portfolios as a cliche term, all-weather portfolios, because we know we have high confidence that periods like this will happen. Portfolios are built to deal with this volatility, this price movement.
(02:21): And as such, we are very much prepared. And so that's one reason why we don't worry about it. The methodology that we've discussed in great detail really, really gives us confidence that the portfolio can withstand volatility. I think one of the things to put a period on this too, is each and every portfolio we construct is unique to the client. Often in our industry, there will be a little bit more of a cookie cutter approach where not necessarily one size fits all, but one size fits most type approach where it's typically a 60/40 portfolio, 60% stocks, 40% bonds, 70/30, and it's all kind of dependent on your age and maybe like a questionnaire you go through, as opposed to really honing in on what's important to you. If we applied more of that cookie cutter kind of model base, more simplistic approach, I would be a little bit more concerned.
(03:19): It's a good solution to have a model portfolio, but if it's not specific to your needs and who you are as a family, as a person, then periods of volatility could give you some concern. Are you going to have the liquidity you need to get through spring training? We're wrapping up spring training for our baseball clients right now, and the answer for us is we've planned ahead for this.
(03:44): So kind of what the market's doing right now doesn't really matter for that specific priority, and we've planned for these other important priorities in our clients' lives, accordingly. We are not taking risk with something that needs to be covered, an expense that needs to be covered, within the short term. If it's an important priority, if it's an important goal for you, we're not taking risks with that. And then we take risks with capital that we can, that we're comfortable taking risk with, that is not going to need to be accessed for very, very long periods of time, if ever in the case of multi-generational families, which we deal with quite a bit. And so I think those are just some kind of higher level answers I would say to your question.
Brandon Averill (04:25): And I think it's a tricky thing right now because so oftentimes it's the stock market that will move up and down on a daily basis or a weekly basis, but we're actually seeing the bond market right now move quite a bit. And I think it's a good reminder to clients as you're listening, what Justin's talking about really how we build your portfolios. We know some people have some tax liabilities coming up. Yes, it's basically the reason why that bond position is moving in value when you look in your Schwab or your TD Ameritrade account, is because that's all based on replacement of that bond in your portfolio.
(05:03): But rather than worry about that, what we've done is we've bought that bond so that it matures, meaning that you get your money back from buying that bond plus the interest rate, right before you're going to have to make that tax liability payment. So that's for people listening, why Justin says, we don't really care about that short-term movement because we know we're getting our money back and we know we're getting the interest rate, that we were promised when we first put the position into place. And so I think there's a little bit of noise on the bond side of a lot of clients' portfolios that hopefully this helps to explain.
(05:38): And then on the stock side, we have built portfolios so that we can go through. That's why we get rewarded. And I think going back to your earlier point, looking at your portfolio on a daily basis, the stats don't lie. You look in your portfolio on a daily basis, you look at the stock positions, you're probably going to be 50/50. Flip of a coin, it's going to be up or down. The data has actually gotten a little bit better that if you look at it on an annual basis, you just look at it once a year, the odds are 75% of the time it's going to be positive for the year. 25% of the time it's going to be negative. And then you go out to five years and it goes to 90% positive, 10% negative, all rough numbers. But I think the point is, is that, we're not concerned about the short-term movements because when we build the right plan, we have a lot more certainty over the performance of things to meet our future obligations, our future priorities.
Justin Dyer (06:35): Right. I think it's important to revisit the long term aspect of this, or maybe that's the wrong way to frame that. It's not to say don't pay attention to what's going on. You should pay attention. We pay attention. We really want to ask ourselves, "Okay, does this make sense? Is there logic in what's going on?" And the unfortunate truth is there is, because history is chockfull of panics, of crises. And to your point, you hit on this, and this is what I want to really make sure we mention again and again is, if periods like this never happened, we actually wouldn't expect the stock market to give us such good returns that it has. Yes, it's not fun to go through and they're natural questions and you should ask those questions and we ask those questions and we get comfortable with that.
(07:31): The fact that, this is actually a normal, if you will, normal part of the cycle to give us confidence that markets are still working, markets are repricing, you could call it risk. They're repricing certainty or uncertainty, and they're trying to figure out what does the future look like. It's an unclear picture right now, but it's working itself out and that's really what markets do.
(07:57): And I think that hopefully that gives a little bit of sense on how we take periods of time like this and kind of digest it through both the lens of history but also the lens of, let's call it, financial science or financial math to say, "Hey, if we're taking risk with capital, this is part of that, 'risk,'" you should take risk where you can afford to take risk. And that's where the portfolio construction piece really comes into play where we're not taking risk foolishly, we're not taking risk with capital that needs to be spent next year or within the next three months or whatever it is or something that's really, really important to somebody even in a longer period of time. We calibrate everything according to very intimate, detailed conversations with clients and invest accordingly.
Brandon Averill (08:43): And I think that's a great point. I was talking with a client earlier this week and it was that exact point that, if markets were just roaring right now in the face of a bank failure and multiple banks on the brink and inflation kind of where it's at, that's when we would be concerned. That's sitting here going, "Oh shoot, this market-"
Justin Dyer (09:06): Yeah, this doesn't make sense.
Brandon Averill (09:07): ... this doesn't make sense. There's so much negativity out there. Why are things just absolutely roaring?" And I think this is a sign, it's difficult, but it's a sign of a well-functioning market. And I think the other part of this is disassociating feeling from fact or evidence, based on past history. I think about even our careers. I'm a little bit older, I'll admit that, than you, but not too much. So we all have lived through the same life events. But we look at the turn of the century. You had the dot com rise, all the technology came about.
(09:46): I was telling somebody the other day, I went to high school without the internet, which is fascinating and dating, but you have this rise, and then you get the dot com boom. And then right on the heels of that, unfortunately we have 9/11, and then we have a housing market crash, and then we have the great financial crisis, and then we have the European debt crisis, and then we have a pandemic and we've got inflation.
(10:07): You start to look back over the 20 plus years and you're like, "Man, have we gone through some just crazy times." And I would feel for the person that tried to move their portfolio through all those times. But what we do know, is that if you positioned yourself appropriately, appropriately, meaning you isolated the money that you actually could take a growth risk with and the money that you needed to make sure that was certainly there, you've been rewarded extremely well over the past 20, 25 years. And so I think that's when we're building your portfolios for those of you listening, that's what we're doing. We're giving you the best opportunity to take advantage of the best wealth building tool that's ever been created in my opinion, and that's the US and the world's stock markets, the growth in companies, we want to be exposed there.
Justin Dyer (10:59):
That's a great illustration or narrative over the last 20, 25 years where markets have faced a ton of adversity. It's easy to forget about those, especially if you're a new investor. It's totally common to forget about those. But there's this great quote that I like to use quite a bit, that markets climb a wall of worry. Now, they're not climbing right now, unfortunately, but that picture you painted is really that wall of worry? Over a long period of time, markets continuously go up and you can slice and dice market history over the last 100 plus years and see very similar periods of time. There's not actually a lot that's unique about the last 25 years.
(11:41): We've arguably had some actually more extreme booms and busts, but nonetheless, there are booms and busts that test market functioning. And to your point, you've been rewarded to be a patient, long-term investor if allocated correctly. I think that's the thing that I want to make sure we maybe conclude on too, is that constructing the right portfolio is critical to realize the benefit of that wealth creation tool.
Brandon Averill (12:09): Yeah, absolutely. And I think kidding on that point you just made is at the end of the day, it feels like we've been through a lot, and we certainly have, but when you look back at history, if you study financial history, these things happen. We never know what version or what's going to happen to lead to some of these disruptions. Nobody could have predicted a pandemic, nobody could have predicted the... Well, I guess some people claim to have predicted the housing crisis. But these things, it's going to be different every time, but we know that we're going to have more in the future. I would say that's the one thing that we do know.
(12:44): And so really honing in, building the portfolio, so that way you can withstand those period of times and frankly benefit from those period of times. And that's really going back to your financial structure, having the right protective reserve in place, having the right fixed income, so bond to meet your short term priorities and then allocating the rest of your capital in a very responsible way towards growth, so it can provide for your future opportunities and you get rewarded for all of this, and obviously doing this all in a very diversified way, which we've hit on in previous episodes.
(13:17): The last piece I just want to mention is when you are looking in your portfolio, also try to remember percentages and dollar amounts. It's quite striking sometimes for a new investor to look and see their portfolio down a hundred thousand dollars, but if you have 5, 10 million invested, kind of remind yourself that this is a normal move. If you ever have a concern about that, by all means we're here. We'd love to hear from you, we'd love to walk you through that process, make sure you have a good understanding. But it is all within normal. At least in the recent few weeks, it's all been within normal, even with all we've been dealing with.
(13:54): We'll wrap up for today, but as you know, you can always shoot us a text at 602-704-5574. We'd love to address any questions you have on future episodes. And until next time, own your wealth, make an impact and always, be a pro.