Ep # 40: Mid-Year 2021 Investment Review

Benjamin Haas |



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Benjamin Haas  00:02
Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! And we're back. Hi Adam, how are you today?

Adam Werner  00:30
Fantastic. How are you? 

Benjamin Haas  00:33
Good. Good. Officially in July. Crazy to believe that we are just speeding through the summer here. So, you and I thought it would actually be a good opportunity to take a little pause from all the financial planning conversations we've had and remember that investments are really important too. For as much as we were so laser focused on everything that was happening in 2020 with investments, it's kind of felt like an uneventful year when it comes to investments thus far but that doesn't mean there aren't things to talk about. So, let's call this, I don't know, mid-year investment review. What do you think? 

Adam Werner  01:17
Yeah, that sounds great. Let's start with the review part, so I guess as you alluded to, there's certainly been headline news. There always is, it's always catching attention. We're always having conversations around the investments and should we be doing this? Should we be doing that instead? But yeah, since we've gotten on the other side of the election is the big mile marker for volatility, or at least expected volatility of the market. The stock market in particular has been fairly quiet and tame for these first six months overall. 

Benjamin Haas  01:56
Yeah, I've often framed that in the sense of market pullbacks. We define as like 5% coming down from a high point. We haven't had one this year, we actually haven't had one since the election which is the longest period of time we've gone without having one of those since the end of 2017 going into 2018. So yeah, just from a historical context, we had 10, 5% pull backs last year. A lot of them occurred after the bottom of the market and, again, it's all relative at that point. It didn't really feel that volatile after falling off a cliff in March, but to your point, there just hasn't been a lot of movement back and forth kind of seesaw effect like we typically see in a given year. 

Adam Werner  02:43
So even acknowledging that in just looking at performance, how have stocks and bonds actually done up to this point, now we're up at the midway point. There are still pockets where some even within just stocks in general, not everything is created equal and we've certainly seen that I feel like. We talked about that in a recent investment focused podcast that the difference between a large stock and a small company stock at this point, are there still wide divergences between what they're actually returning. You throw in international in there as well. There's just a lot of moving pieces that you see the headline news, it's the S&P 500, the DOW, we've seen the NASDAQ, we seem to be hitting all-time highs with regularity here lately. But under the surface, not everything is necessarily at that all time high. So even just pulling back the curtain a little bit the difference between large growth and large value, which the idea behind once the vaccine was announced and approved back the end of last year? 

Benjamin Haas  03:55
Yeah, November.

Adam Werner  03:57
Value took over the leadership from growth. So when COVID happened, large cap growth companies just continued to soar. That's your Amazon's, your Apple's, your technology-based companies and since the vaccine that has ebbed and now switched to value - your financials, your utilities, the things that didn't quite do so well in a COVID-induced shutdown. But now even saying that, these last couple of months that has equalized again to value is still slightly ahead, but it's much more evenly split, I think, than anyone would have expected at this point, thinking that we're in a pretty early part of this recovery.

Benjamin Haas  04:44
Yeah, and I guess that's the hard part to wrap my head around because we do you think like recovery, everyone's talking about the economy reopening. People are going to be busy for the summer. A lot of the headlines we still see is now it's not unemployment is a problem. It's about 9 million jobs that are being filled. People are quitting jobs either because of stress, not enough pay, childcare, any number of reasons do yeah, there are going to be these hurdles, I think within the economy and getting that recovered but if we add the perspective of how have investments done through all this turmoil, the S&P was up close to 30%. In 2019, it was more than 16%. Last year, we're hovering right around 14-15% year to date. It seems crazy that we've had all that return in the broad market and we're still trying to move ourselves forward economically. But I guess that's why even certain headlines here and there, whether it's unemployment, whether it's inflation, even certain things that don't feel great (cyber-attacks and is there another strain of COVID). These are things that aren't disrupting the market because they're probably still is so much economic recovery to come. 

Adam Werner  06:02
Yes, that's absolutely the case. 

Benjamin Haas  06:07
Okay, I think we're done here. I guess the point being, when it comes to looking backwards, there have been these headline things but we really do see, to your point, volatility has been pretty low. Growth in the market has started to feel more widespread, not just part pockets and we're not reading a lot of things that would give us pause for the second half of the year. 

Adam Werner  06:33
Yeah, I had this conversation two days ago that we had a client ask the question and I'm switching gears a little bit. But client asked the question of, if headline news right now, to your point, we haven't really had a lot to talk about other than inflation is the biggest one. I know we just did a podcast on this recently but his point was, well, if we think inflation is going to become a problem, interest rates are extremely low. Why are we still continuing to hold bonds in my portfolio? Should I not just start to divert towards stocks if you think stocks are going to be okay. And while fundamentally that thought may not be flawed, we as fundamental investors take the approach that we're going to stick to diversification. Even though the bonds themselves may not be adding to your return potential, they still have a critical role in your portfolio to be the ballast, to be the safety net that if at any point, something comes out of left field, that you're not now overweight or taking on way more stock market risk than you could stomach. Because, again, I think we've seen this before, right? When times feel good and you made the point, the last three years' worth of returns now have been double digits, plus, it feels very easy to just say, hey, I'm just going to go buy some stocks and they're going to go up 15% at any given year. Yes, that has happened the last two and a half years but will that happen the next two and a half? I don't know, nobody knows is I guess the point so we're going to continue to remain diversified. We may skew here or there and we've had that conversation too. Tweaks that we make are minor as opposed to let's just change our risk profile on a wholesale level. 

Benjamin Haas  08:22
It's such a good conversation because I think you and I and our team talks about this more frequently than our clients probably understand that we do because while we're not making a lot of changes, it's a very conscious decision not to make those changes and part of that is just having to stick to your guns. We are running hot and I think we've talked about this in other ways. You have to start with the target allocation and we build that off a financial plan, we build that off of risk return parameters that are appropriate, not only for that plan but for how people feel about risk. So if we're targeting 60% in equities right now, those allocations are they're pushing 65, 66, even 67. It is a conscious choice to say, we're definitely overweighting stocks right now but yeah, we can't be the team that goes well, let's just forget about bonds. We know we're not going to make a lot of money there. So whatever, everything in stocks because you know how that goes, that'll be the day.  I liken that to I just read this morning and I know we did a conversation about the fear of missing out before, not too long ago. Certain cryptocurrencies that became very popular and headlines. As one example, if you were to buy something that starts with bit and ends with coin, on April 1, thinking, oh my gosh, this is the next craze. Look how much money it made in the first quarter like 100% return. It's down 40% in the second quarter. So I think these bandwagon jumps from one thing to the other, it's a very dangerous thing. I get it, it's a recency bias. The stock returns have been so great but even though we've seen really strong stock market returns and we really believe that is going to continue. To leave bonds for most people, just wholesale leave bonds, it's not appropriate. 

Adam Werner  10:18
Yeah. Yeah, I agree, obviously. 

Benjamin Haas  10:24
Another thing I did want to talk about: the volatility index. I think if we're going to make comments like, hey, we don't see certain bad things coming in the economy and we're not here to predict what happens next. But I think certain people that we advise and maybe on different podcasts, we've talked about the volatility index so indulge me for a moment. There is a way the market does try to gauge what is volatility, what is perceived volatility in the future going to be and the way that it does that if you and I are going to place a bet on something, we have to know what we're at risk of losing. And the options market, not going to get into those details but it's a way of trying to gauge how much risk is associated with this one stock if I'm going to either buy it or have the option to buy it in the future. So long story short, when those option prices are much higher, it's because there's perceived to be more risk in the future. The volatility index is at 15 today or in that range. 18 as historical norm. It was 37 back in January. It was in the 80’s last March. It's not to say that things can't change tomorrow but as certainly if the options market as a way of projecting where volatility is going to go, we're not only at historical numbers, we're actually below it. 

Adam Werner  11:56
I obviously follow that. That's something I look at but I am absolutely guilty of the recency bias and you sharing that even back in January, it was still in the 30’s. Just again, like the last three months are in my head of just seeing the number just slowly start to come down, come down, come down and I've seen it below 20 here recently. Hearing that it was 30’s again in January, it just didn't feel like that at the time and I guess that's the other thing to think about, too. Just because that volatility index may show a higher or a lower number doesn't necessarily translate to the day-to-day market movements. But it certainly hasn't felt like we've had higher numbers in that volatility index even at any part this year. 

Benjamin Haas  12:49
Yeah, and if we just kind of relate that back to the uncertainty of last year when we were talking about investments. It felt like every day with our clients, almost like we had to pivot from being financial planners on a daily basis to psychologically, what's going on, how you thinking, how you feeling? Stay the course, stay the course, stay the course. These are big picture things. When is the economy going to reopen? Is there going to be a vaccine? What's going to happen with an election? What does that mean for policy? There were many things that felt like it was going to move the market and what do we have right now? inflation I guess a little bit. Our cyber-attacks on energy companies and meat companies going to be more of a regular thing. It's not to belittle it but these do feel like little ripples coming from like a little stone than some sort of tsunami, like I felt like last year. There's not a lot right now that I think should lead people into feeling panicked in any way, shape, or form. We'll stick to the plan.

Adam Werner  13:52
Yeah. So then on that front, we'll talk about outlook moving forward, kind of talked about how we've gotten to where we've gotten to this point, right, returns have been good for the stock market, for the bond market returns have not been so great this year. And I feel like we've talked about that recently, too. Interest rates are still the Federal Reserve is still extremely accommodative. Their policies are meant to stimulate the economy and also support riskier assets, such as the stock market. So that low interest rate environment hurts conservative savers. You're not earning anything at the bank and in a savings account or a CD. Bonds, their yields are coming down. So just owning a bond, you're getting paid less and less over time here as interest rates stay essentially near zero and now the looming threat of inflation, whether it comes to fruition and sticks around or not, is neither here nor there for the here and now of owning a bond fund. Essentially the 10-year Treasury, you went out and bought a 10-year Treasury right now and it's yielding one and a half percent. If inflation is around 2%, you're actually losing that half a percent in any given year. You're safely losing your money by having it in a in a safe position so it's all part of the Federal Reserve's job to try to stimulate growth. Get the economy back and running and have the stock market kind of be the recipient of a lot of those flows of dollars. So, from that standpoint, looking forward, that has tempered a little bit but I think back to your original point, right, we believe in diversification, we're not going to abandon bonds. It's just that the outlook right now is not there. They're not going to be an adder to your return base but then what does that actually mean for us moving forward? I think it is just sticking to a diversified investment portfolio based off of your situation. What does the financial plan tell us how you should be invested? How do you feel about risk in general and let's stick to that plan. 

Benjamin Haas  16:04
Yeah, so I call that just resetting expectations and maybe some of that is the fact that if we really wrote a plan that we were going to stick to in 2017, saying, hey, if we can get on average, a 5-6% rate of return. You've probably done way better than that but if that does mean, then that maybe you're borrowing some of those returns from the future, if at some point here, the stock market is going to level out and interest rates are going to be where they're at. These expectations of double digits returns are not going to run forever. So I think it just does come back to stay within your lane. What does the plan say? Trust us to make some tweaks on your behalf to make sure that we are managing these things effectively if there are going to be little things that need to move but yeah, mid-year review, we're not looking to do anything drastically different here. 

Adam Werner  16:55
Yeah, exactly. 

Benjamin Haas  16:56
I think the headlines probably will be continued to be focused on economically are things really recovering? Maybe it's more of a focus on individual company earnings and quality companies. They're still going to be policy conversations. I think that's going to happen but you haven't that, we've seen the headline is $4 trillion dollar infrastructure bill that gets negotiated to like a million. Policy ideas do not always come to fruition. I think as we get deeper into the year, moving into what will be another mid-year election year, next year. You can see people jockeying and political parties jockeying for another round of elections so who knows how much negotiating goes on the beginning to the middle part of next year.

Adam Werner  17:49
 Yeah, exactly. So the other part of that in my head is the old saying: a rising tide lifts all boats. Is that the flipping a switch of turning off the economy back in March of 2020, somewhat reset the business cycle, even though it was unlike anything we've ever experienced before. So here we are, how many months, 15-16 months now removed from that initial shock to the system. And even just talking about stock market returns being essentially almost doubled from the market lows at the end of March of 2020. Here we are in the S&P 500 almost up 100% from the bottom. It's hard to fathom but my point is, it seems like once the economy seemed like we were able to weather that storm and get to the other side, those easy returns, right, where you can pretty much just pick any stock in the at the end of March of 2020. And it's probably been really good these last 16 months. That period seems to be waning where now fundamentals are should start to matter, again, to the stock market. You said it's the earnings of individual companies should start to actually factor in which is silly to say it should always matter but it should seem moving forward that that will be a bigger driving component of what does the market actually do. How is it reacting to the outside influence where hopefully we get back to actual relying on fundamental data and not just necessarily emotional headline driving news. 

Benjamin Haas  19:31
Yeah, and all the more important not to just chase what seemed to work the quarter before. If you came into the year and went, oh, gee, I didn't really own growth. So now I'll own more growth. I'm just looking at like 401(k) statements where it shows you like the last quarter the last year, if you just don't always end up chasing the thing that was best, the last quarter, and you're going to be zigzagging all over the place. I think it's even more important now to recognize, yes, returns have gotten into a really great spot after what felt like mayhem last year. Be diversified, stick to the fundamental asset allocation. Yes, you probably own some international that's only got two thirds of the rate of return of the equity markets here in the United States but you still need to hold that because over time, there's going to come a time where the valuations there and the returns, they're going to be better than here. You have to do it. 

Adam Werner  20:28
So on that front, I did some looking at numbers there too and a lot of the commentary we're hearing, seeing, and reading, is that the US as a whole is leading the charge out of the bottom here. We're in maybe not necessarily the first but we are leading when it comes to vaccinations and is reopening the economy, there are still many pockets of Europe, especially in the Asia that are not quite at anywhere near the vaccination levels that we are. So the thought being the US has outperformed pretty much any global market that you can pinpoint and that's a big reason. But now moving forward, if we start to plateau because we've hit maybe critical mass when it comes to the vaccine rollout. Other countries still have room to reopen, ramp up that should bode well for more global investments. We'll see if that actually comes to fruition but that's like you said, that's the reason why we don't necessarily want to try to be super tactical to get out of the US. And now we're going to move international. No, same reason we didn't just get out of international and just move all the money to the US. We believe in diversification. So that's why you don't put all your eggs in one basket. So hopefully over time, you are rewarded for owning a little bit of everything. 

Benjamin Haas  21:47
Yeah, and I guess if there's one key takeaway from this, that's it. And we would have come into the podcast saying that we're going to leave the podcast saying that. All these things are going to happen, headlines are going to happen. We're going to look back on returns and say, woulda, coulda, shoulda and at the same time, be very happy for what has happened. But it's not to change how you approach things moving forward. Stay diversified. I think volatility will pick up. It almost has too just because pendulum swings to it's been too quiet for too long. There'll be some panic button pushed on something and hopefully it's not a big deal but expect it and stick to the financial plan. That's really where asset allocation needs to be sourced from, certainly when it comes to people we advise. 

Adam Werner  22:32
Yep, yep. So people are going to stop tuning in and listening to us at this point, because they're going to say, well, they never say anything. They just say stick to your plan. 

Benjamin Haas  22:40
That's right. 

Adam Werner  22:43
We can just start every podcast episode with that.

Benjamin Haas  22:47
 And they don't sign on to look at our faces. I know that. No, but look, I think, I hope that when there are these key headline things that this it still becomes a reoccurring theme of confidence can be built by saying, yes, we paid attention it does this need to change our plan. It is a conscious decision. It's always a conscious decision to do something massively different and be able to talk about the time when it does need to change so as it pertains to 2021, nothing big yet.

Adam Werner  23:21

Benjamin Haas  23:23
Yet. Alright. Anything you want to add? 

Adam Werner  23:26
No, sir. 

Benjamin Haas  23:28
All right. Appreciate your time. Let's hope the second half of the year is much of the same.

Adam Werner  23:36
I agree. Thank you.

Benjamin Haas  23:39
Catch you soon. Thanks Adam.

Adam Werner  23:40
Bye. See ya.

Benjamin Haas  23:50
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening!

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