How Should You Build Your Portfolio? | Brandon Averill & Justin Dyer | AWM Insights #83

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Episode Summary

In the previous two episodes of AWM Insights, we covered when the best time to invest your money is and where to look for your investment advice. This week we continue by discussing how you should construct a portfolio to achieve the returns you deserve.   

Every investor deserves a portfolio tailored to the priorities they want to achieve. Very few are able to get that advice because they are stuck with biased and stale Wall Street solutions.

Liability driven investing matches what you want to achieve in your life with the systematic based investment to best reach the outcome. Taking smart and compensated risk is necessary, but so is protecting essential needs with the highest quality assets. 

Systematic active investing gives you a real chance to outperform the indexes in a structured and repeatable way over the long-term. ETFs, Mutual Funds, and Separately Managed Accounts can all add customization that achieves the results that are in your best interest and designed to meet their priorities in the financial plan.

 


Episode Highlights

  • (1:45) Earnings have so far exceeded expectations. This is supportive of the market even with the volatility of unemployment claims and inflation data.

  • (2:55) OECD countries have agreed to a global minimum tax. This is not a done deal quite yet but will have a big impact on global markets.

  • (4:00) A crypto ETF has been approved by the SEC. It is not holding Bitcoin but instead futures. This means it will not track the underlying exactly.

  • (7:20) Independent and integrated advice reduces conflicts of interest and does not encourage selling the products of the firm.

  • (8:40) Indexes have very strict and established rules on what they can do. When the S&P 500 had to add Tesla, the move was telegraphed to the market. Just being a passive indexer forced you to be front-run by other investors.

  • (10:00) Blending the world of active and passive can take the best of both worlds. It allows for smarter trading so that you don’t blindly follow an index.

  • (11:00) Favoring factors that have outperformed over the long-term can create a superior portfolio that increases returns and reduces volatility over time.

  • (11:30) Mutual funds vs ETFs and Separately Managed Accounts can all add customization that can achieve the results that are in the clients best interest to meet their priorities in their financial plan.

  • (14:30) Private investments can be high-risk high-reward but staying consistent to taking smart risk wins over the long term.

  • (16:09) Tilting the odds in your favor is the key to being a good investor. Having a plan and investing based on priorities in a structured way is simpler and more effective. 

  • (17:40) The odds of finding the next Tesla before they were popular are not in your favor. It's okay to buy individual stocks but you should not expect to outperform the market over the long-term. The data has proven this time and time again.

  • (19:00) Not all private investments are created equal. Access to the best deals matters the most in private investments. This is not like the public markets where you can open a brokerage account and buy great companies.

  • (19:40) Always ask why? Why am I seeing this deal? What value can I add? If I’m just there to write a check, probably not a good investment.

  • (20:15) Keeping the odds in your favor is like being in the house in Vegas. The odds are in your favor.

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Justin Dyer: LinkedIn
Brandon Averill: LinkedIn

+ Read the Transcript

Brandon Averill:

Hey, everyone. Welcome back to AWM Insights. I'm your host, Brandon Averill, along here with our CIO, Justin Dyer. And as you know, each week, we cut through the noise of what Wall Street is selling you, to bring you the knowledge, skills, and access that you need to invest like a pro. And today, we're going to tackle a kind of the third leg of a topic we've talked about: Where you actually need to get your advice from? When is it a good time to invest? And today we're going to talk a little bit about how you actually go about building the professional portfolio. But as we always do, before we jump into that, let's recap a little bit, what's going on in the markets.

Justin Dyer:

So, some good news coming out on the economic and earnings front; jobless claims last week hitting a new pandemic era lo. Continuing claims, I believe also hit a new pandemic era low; so both moving in the right direction. Again, I'm sure we've mentioned this time and time again; these types of statistics bounce around a lot. It was a couple of weeks of jobless claims that were moving upward. We're seeing a turn, it was a pretty positive turn, in terms of magnitude.

Justin Dyer:

On the flip side, inflation is still stubbornly high. We've talked about that a number of times on this podcast. Along with inflation, and largely could be argued that this is driving inflation, the supply chain headaches are still very much in place here.

Justin Dyer:

And then again, on the flip side here, we have earnings coming out. We're kind of hitting our stride with earnings, and it is shaping up to be another pretty strong and positive earnings season. Expectations were pretty high. So far, actual results have out-performed expectations, for the most part, so that could be a continued driver market performance. We don't have a crystal ball. Who knows. So, take that with a grain of salt.

Brandon Averill:

You mean inflation is not going to totally crash the markets this next week?

Justin Dyer:

Ah no.

Brandon Averill:

That's what I'm hearing.

Justin Dyer:

Well, let's put some money on it.

Brandon Averill:

Yeah. Right. Okay. Well, if everybody else is gambling, we might as well too. Right?

Justin Dyer:

There you go. On the labor front; so we talked about jobless claims, but there's some stirring up, if you will; factory workers for John Deere. They went on strike last week; trying to get higher benefits as they always do, and really participate in the growth that companies like John Deere are experiencing. So, see how that works out, on the flip side, from a labor perspective.

Justin Dyer:

This is, I think pretty big. We've touched on this, and it still is a long story to go, but it's been a long time coming. The global corporate tax rate looks to be in an agreement amongst what are called the OECD countries. It's an organization of wealthy countries, they call it. They've agreed to a 15% floor on the corporate tax rate. Ireland was the longstanding hold out there. And there is a tenet of agreement there. Now, countries have to go and approve it, so there still is a plenty to unfold in front of us. But that is, it's pretty big, if this actually does come to fruition, which we got another step closer to actually making that happen.

Justin Dyer:

LeBron, on the sports front, LeBron sold a big stake in his media group to Nike, RedBird, and the Fenway Sports Group. I think it valued at around $750 million bucks. So hey, kudos to LeBron.

Justin Dyer:

Then on the Asian front, LinkedIn is shuttering its platform in China. Not the first social media platform to do so, but basically, just kind of throwing up their hands at this point and saying, "It's too hard to do business with all the requirements and whatnot."

Justin Dyer:

Then lastly, on the news front, just wrapping up things up here, so probably as this is going to air, it looks like it's likely that there's a Bitcoin Futures ETF. That's going to start trading. That's big news. That's one of the reasons Bitcoin and a lot of other crypto have been spiking recently. I do want to underscore, though, it is not holding Bitcoin directly. This is a Bitcoin Futures ETF. The price will not move in the exact same way as the underlying asset. And it's really, really important for folks to understand that. There are a lot more, very efficient ways to hold cryptocurrency, if you're so interested. And we've talked about some those in the past, but a Bitcoin Futures ETF, in my opinion, is not the best way to go, if you're interested in that speculative marketplace.

Brandon Averill:

Well, I think, Justin, that's a perfect transition, right? How to actually invest like a pro, and not fall to the marketing of Wall Street. We've seen these types of ETFs pop up. And I think fortunately, unfortunately these ETF structures have also become synonymous with index-type approaches as well. And a lot of people don't understand the actual underlying instruments, and what they're actually investing in. And so, I think it would be fun for us today to dig in a little bit into, "Okay, great. Now I've determined... Where am I going to get my advice?" Okay. "I'm not in the massive affluent. I don't have all of my savings sitting in a 401k program. So going to the big wirehouses, probably isn't in my best interest."

Brandon Averill:

And we certainly would argue, it's probably not in anyone's best interest. However, I certainly understand the need for a multifamily office, or a family office structure if I have any significance of wealth going on. A good benchmark, right? If I'm at all worried about these potentially changing estate tax legislation that could happen, we should get as far away from the Goldmans and the Merrills and the Morgans, and all these wirehouses you possibly could.

Brandon Averill:

So we've tackled that. We've tackled, "When is it actually a good time to invest?" Markets seem like they're doing extremely well at times; we're towards market all-time highs, valuations seem high, et cetera. That natural feeling of, "Is now a good time, or should I wait?" We know. "When's the best time to invest?" Now. You should always be invested, right, with the money that you should be investing. I think we went over that in the last episode.

Brandon Averill:

But jumping over to the, "How we should actually invest in building that truly professional portfolio?" Right? I'd love for you to hit on for us a little bit. We've talked, we certainly have beat down the active management argument. We know the evidence is strongly against that; but what we haven't talked a whole lot about is the indexing approach, right? And the potential pitfalls there. "What is an ETF? Are all of these things constructed in the same way? Should we just be indexing, or is maybe there a better way?" If you could maybe jump into that a bit, I'd love to hear your thoughts.

Justin Dyer:

Yeah. Well, it's a meaty topic, so we'll try and stay super high-level here. But within a multifamily office approach, I think I want to highlight that the two most important facets of that approach are integration and independence, with respect to this conversation.

Justin Dyer:

So independence: we're independent of Wall Street. We say that time and time again; we're not producing product that the big banks are producing, and then having their advisors, their financial advisors then sell that to their clients. We talked about, what was it? UBS, I believe it was, offloading their Evergrande bonds to-

Brandon Averill:

It was Credit Suisse.

Justin Dyer:

Credit Suisse. Credit Suisse. One of those Swiss banks, offloading their Evergrande bonds to their actual clients, knowing that they were too risky for them to hold on, right? That is the independent nature of what we do. We are not beholden to any single entity or product out there. We can really, truly build a portfolio that is in your best interest.

Justin Dyer:

How do we go about doing that? So, Brandon, you mentioned passive. We've talked about active. We know the pitfalls there. There are also some pitfalls with respect to passive investing. You can invest passively, following an index, S&P 500 as being probably the more common one. You can even buy products or mutual funds or ETFs that track the NASDAQ. The list is amazing nowadays. But there's pitfalls with going that route; an index is a very kind of very tight, rules-based construction, or rules-based basket, if you will. And what has to happen... So the investors, and those that are trying to track an index, is these index providers need to very clearly state what is going on with their index.

Justin Dyer:

A perfect, relevant, recent example is the S&P 500 adding Tesla to that particular basket of stocks. And what happens is, it's called reconstitution. Somebody has to fall out of that index, and another company has to go into that index. They are literally telegraphing to the market, what has to happen. And if you are an index tracker, you have to buy Tesla on the day that it enters the index. And that's just a silly activity to participate in, right? And what you see is, people are smart enough to buy Tesla ahead of that date, and take advantage of that spike in price, because they know they're going to have willing buyers on that date. And it's just silly.

Justin Dyer:

So, you basically take the best way to kind of, let's say, blend the world of active and the world of passive, is to take the rules-based approach, the systematic approach that index providers provide. Sorry to be redundant there. But be smarter than them. And don't participate in these silly reconstitution days, when a company gets added to, or subtracted from, a particular benchmark or index.

Justin Dyer:

And trade smartly. So, there are studies that show, you are giving up performance relative to the index, just by blindly participating in that actual event. There are other things you can do about trading smartly and patiently within the marketplace, not just when there's a liquidity event, or need for liquidity. You can take advantage of things that are called momentum and whatnot. And I'm really trying not to go too much down a rabbit hole here, but there are ways in which you can focus on parts of the market that have historically outperformed, relative to the benchmark. We say small and value companies throughout this podcast. Those have tended to outperform the benchmark as a whole. So let's favor those, relative to what the benchmark does.

Justin Dyer:

And then, we talked about the actual vehicle: mutual funds versus ETFs. And the short answer is, they can all be good, for a given situation. Add in there a separately managed account in certain situations. We aren't beholden to a specific product or a specific vehicle type. We will do what is truly in the client's best interest, and do it in a customized way. So what dictates how the actual portfolio looks at the end the day, is your unique financial plan: using your priorities to tell us, "How much do we want to have in very high quality stable assets? How much can we actually put at risk in the market? How much do we then want to put at risk in the public markets, versus how much do we want to put at risk in the private markets?"

Justin Dyer:

The private markets is a completely different ballgame, to an extent. Being active there, having specific access, focusing on out-performance even more so than we do on the public market side, makes all the sense in the world if you have the asset base; which, within a multifamily office structure, most of our clients do. And I just want to add... And I'll stop, because I'm going on a rant here, but within that private market space as well, you need to be very cautious today. You mentioned that valuations are maybe high on the public market side of things. There is so much money chasing after private assets today, because people are looking for alternatives. Interest rates are low, equity market returns have been very good. What else is out there? And so, prices are being bid up into the private market space, because returns have been quite good there.

Justin Dyer:

And people are just throwing money, good money after bad. Just because it has the label "private" slapped on it, doesn't mean you're guaranteed to have out-performance. Access is critical. Patience is critical on the private side of things. So, that, I think, in a nutshell, is how we go about thinking about investing, really from a say $30,000 foot standpoint. It customized, it's integrated, it's independent. And it's very thoughtful, around how we're deploying capital; but we are deploying capital, because it makes sense to invest in markets how they are. You can't control the market you're you're investing in today, and you don't want to miss out on those long-term returns.

Brandon Averill:

No, I think that was a really great summary. And I'll hook onto your private example, here. I was just spending the weekend with some venture capitalists and it's fascinating when you sit around with these folks, and you hear about their process, and the deal flow, and how many opportunities they look at; and what they get right, and what they get wrong, and what the odds are. And then you start to contrast that with maybe a client that sees a couple of deals, or somebody sends them something; and you just quickly realize that unless you're immersed in this, unless you really are getting that deal flow, absolutely ridiculous it is to think that you can have the foresight to see an opportunity. You might get lucky. There's no doubt about that. But the odds are, right?

Brandon Averill:

And if we're going to be successful, professional investors, we invest with the odds. And the odds are, is that you're probably not picking that up. So, it's really interesting. I was with a high profile employee at a pretty big growth company. And he was talking about, "Yeah, I get these co-opportunitites. I write a $100,000 check here, a $200,000 check there." And before you know it, he's got this small portfolio of stuff that really doesn't have the proper due diligence. Now, that's money that fortunately, he could probably just walk away from, and it's going to be okay.

Brandon Averill:

But if you want to be a successful, professional investor, it does go back to that structure and that plan. And that's something I talked to him about is, "That's great. And now you feel overwhelmed, because you have all this stuff you don't know." But what would have been a heck of a lot more successful is if we would have sat down, and gone through your priorities and said, "Hey, here's the money that you need to bulletproof your family for the next 50, 75, 100 years. Here's the part that we've got to keep liquid, for all of your important priorities. Okay. You want to go work on your multi-generational wealth, which is the specialty of working with a family office. Now, here we go with the private side, and let's do this in a way that is the most successful."

Brandon Averill:

And I think everybody gets really excited about the private deals, but even in that example, it was just peeling back and going, "Well, we're talking again about the absolute weeds, here. Let's go back to your overall structure, but then, like you said, Justin, from a public investment standpoint, right. We know active is worthless, but just really even looking and saying, "Okay, what is the most successful piece here? How do I stack up my odds?" And then don't get all caught up in the emotions of reading tea leaves, and this and that. And trying to figure out "Oh, who is going to give me the advantage here?" When we know that the information is actually pretty efficient. So, how you go about this stuff is actually fairly simple, when you break it down, right? It's diversification, it's global. It's being in the right investment vehicles.

Justin Dyer:

Yeah. I think that the thing to underscore here, the comment you made to underscore is, the "how" here, is stacking the odds in your favor. And it is simple, and any good outcome should be a simple version of a very complex system. It's not to say investing isn't complex. "Is it confusing? Are you inundated with noise? Are you inundated with these bright, shiny carrots, if you will?" Yeah, we all are. You want to go after this private investment that your buddy has access to, whatever the case may be. There are so many examples of this. On the public market side, it's, "Hey, I want to find the next Tesla." But the odds of doing that are very, very, very low.

Justin Dyer:

Can you do that with a small portion of your portfolio? Yeah. By all means, right-size those entertainment plays. But if you truly take a step back, and think through, "What's important? What are your priorities?" And then look at the data. It's incredible how much data we have in front of us nowadays, both on the public market and the private. It's way better on the public market side. We understand that marketplace a heck of a lot better than we do on the private side. But we do know that access, that the top tier on the private side, outperforms over and over and over again. Now, if you don't have access there, it's just not worth it. Just don't even try, kind of to what Brandon was talking about earlier.

Justin Dyer:

On the public side, active doesn't really make sense. Going all passive, generally doesn't make sense at all. It's a better outcome, it's a better way to go; but you can be smarter, you can implement through what are called factor-based investing lenses, to be smarter than the index; be like the index, but be smarter than the index. And you're stacking the odds in your favor. If you think through your priorities, build your portfolio to support those, thoughtfully allocate to public markets, make sure you can get access to sound private market investments, whether that be in private equity, venture capital, real estate debt, so on and so forth, really ask that.

Justin Dyer:

I was listening to some venture capitalist talk last week, too. He said one of the first questions he asks himself, and he's relatively successful, not a bulge bracket, a Silicon Valley firm, but plenty of... great track record, plenty of a strong track record. He said, "Why am I seeing this deal? What value am I able to provide to this? And why am I actually getting an opportunity to take a swing at this?" That's an incredibly important question to ask yourself. If you're just there to write a check, you should probably say no.

Brandon Averill:

Yeah. I think it's fantastic. And I think a good summary of this whole conversation, after listening to you talk about that is, "Do you want to be the house? Do you want to be the one dropping the ball in the roulette table? Or do you want to be the guy that's picking numbers?" Right? Everybody hits the number once in a while. Everybody gets lucky. But you would never, no rational human being is going to go into a casino and be like, "Oh, that guy's hit 36, 3 times. He's a genius. I should put all my money with him." No. We all know that the house is the way to go. Even when you get caught up in the excitement of hitting the number, you pull yourself back out. It's no different than investing. You want to stack the odds in your favor.

Brandon Averill:

You might, if you guess, you might hit a stock. And that's what kind of fuels this whole thing, I think. But if you're one of these people listening to this, you have the wealth that we're talking about. You understand the value of family office. It's getting out of this product-driven sales culture, and really putting together a sustainable plan for multi-generational wealth. That's the point here, right? The point is to manage your money in a way, your wealth in a way, so that you can make impact far beyond your lifetime, hopefully for future generations; maybe in your family, maybe community, maybe the whole world, depending on your resources. But go find yourself a family office that is a good fit for you, because that's where you're going to find the advice to build a portfolio like we're talking about, and truly invest like a pro.

Brandon Averill:

So we'll wrap up here, but head on over to awminsights.com, sign up for our newsletter. We shoot out some good stuff there, I think would be really applicable to anybody looking for a family office. And then we also have a download there, that actually goes into the value of a family office. So, we'd love to send you those resources. But until next time, own your wealth, make an impact, and always be a pro.

Brandon Averill:

The information in this podcast is educational and general in nature, and does not take into consideration the listener's personal circumstances. Therefore, it is not intended to be a substitute for specific, individualized, financial, legal, or tax advice. To determine which strategies or investments may be suitable for you, consult the appropriate, qualified professional prior to making a final decision.