Ep # 61: 2021 Year End Investment Review

Benjamin Haas |
  • Our investment process - 3:02
  • Importance of trends and having a long-term outlook - 4:31
  • Managing the emotions - 7:33
  • Managing risk - 10:06
  • Emerging markets - 11:07
  • Bonds - 12:00
  • iBonds - 15:54
  • 2022 Outlook - 17:53




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Full Transcript:

Benjamin Haas  00:03

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!


Adam Werner  00:26

Hey there, Ben.  How was your Thanksgiving?


Benjamin Haas  00:31

That feels like while ago already. It was great.


Adam Werner  00:33

It was only a week and a half.


Benjamin Haas  00:36

Yeah, well, it's been some long days. All good. Speeding right into the holidays.


Adam Werner  00:43

It feels somewhat surreal and a little bit stressful that yes, we are barreling towards the end of the year here and it's going to be here before we are, at least for me, before I feel even remotely prepared.


Benjamin Haas  00:58

It's alright, we're used to it. Time flies as they say.


Adam Werner  01:04

Yeah. Everyone tells you when you have kids. Oh, time flies when you have kids and it's astonishingly accurate unfortunately.


Benjamin Haas  01:15



Adam Werner  01:16

So, topic today. Not one...


Benjamin Haas  01:19



Adam Werner  01:20

It's not that bad. It's not one that you love to talk about but it is an important aspect of our job. So let's talk about it. I think it's been probably six months since we've talked about investments. Where we're at, our outlook, and give that State of the Union address if you will and our approach to investments here towards the end of the year.


Benjamin Haas  01:53

Yeah, I know, I crinkle my nose because this is a CFP podcast. We are dedicated to financial planning and I just I don't want to bait people into listening to something thinking they're going to get like a secret sauce here. So again, free and fair disclosure, we're going to talk about process. We're going to talk about relevant things but at the end of the day, there's really not anything new and exciting to share other than maybe just making sure that people have the right context.


Adam Werner  02:25

I think if people know us well enough by now and certainly if they're clients, they should, if they're listeners to this, they probably do know that our investment philosophies are relatively fundamental. We are not a stock picker; we are not a stock broker.  We believe that investments should be relatively boring. It doesn't mean you just set it and forget it and let it run its course. But yeah, when we make changes, we often refer to that as you know, you're adjusting the light with a dimmer switch and not just turning things on and off.


Benjamin Haas  03:02

Love it. So process, process, process, let me give like, I don't know, the 30 to 60 second process on how and why we bring this up at the end of the year now and then let's just jump right into the context. I think you said, well, where are we today? What does that kind of mean? And where are we going from here? So the reason that we don't emphasize investments in every conversation that we have is it all comes back to financial planning, right? You base what you're recommending to somebody based on a risk and return profile. What we want of that allocation and then we need to recognize that allocation is just going to move, right, that might be one zone doing. Taking money out or putting money in, it's clearly market movements, economies changing. Just because you put money in these eight buckets doesn't mean it's going to stay perfectly allocated piece by piece. So what's our job, it's to monitor those movements to not get too risky and outside of somebody's comfort zone or what's appropriate for their plan. And on the other side, make sure that if things are moving in a big way, that we're giving ourselves the opportunity to take gains when we can or put money back into those things that may feel like a better buying opportunity. So baseline allocation, things move we need to follow that but that doesn't always mean that when we're following it, we're always going to react to market.


Adam Werner  04:31

Yeah, so that last part that you just said oftentimes, you know, when we meet with clients and this most recent volatility that happened, Black Friday, right after Thanksgiving, driven by the new variant, oftentimes, our decision-making process and all of the time and research and reading and back and forth discussion often leads to inaction. I think to many people that feels underwhelming, but that, ultimately, because we do have that fundamental investment process and we are more strategic, meaning we are a longer-term investors and not like the short-term traders, where certain headline moves may matter to people who only want to own a stock for a month or two months. But for us, and the people that we work with that do have that long term view, the short-term market movements are just that. They are those short-term market movements we’re more focused on, if there are longer term trends that we feel we either need to get out of the way of or we want to take advantage of, then we'll start to factor that in. So going back to my earlier comment, that's why oftentimes, any adjustments that we make to portfolios, usually are relatively minor and not wholesale changes to the way that we approach investments.


Benjamin Haas  06:02

I'd liken it to our own health in a way and I don't know why this analogy is popping into my head because I'm pretty sure I've never used it before but the whole point of having the process is to continue to take temperature checks, though. And I'm just again, thinking as a parent sending three kids to school every day, a little cough, check the temperature, check the fundamentals. There's a difference between that little cough, little allergies, and oh, my God, this is COVID. It's not to overreact to things, always take the temperature, make sure the fundamentals are okay and as long as that's the case, it's just then tracking that allocation to make sure it's not swinging too far, one way or the other.


Adam Werner  06:44

So then on that note, let's transition into kind of that broader context to how did we get to where we're at now? Or just where are we at now, knowing that the last three well, more than the last three years, but the last three years specifically for the stock market, have been exceptionally good. We are well above historic stock market returns, especially the last three years or and that certainly can lead to that portfolio, that allocation to stocks being skewed. If stocks are growing at a much greater pace than our bond investments, then that allocation can start to get out of whack a little bit where you are taking potentially more risk than you intended.


Benjamin Haas  07:33

Yeah, I think that's the context we want to share because as much as we want to focus on financial planning, we understand that a big part of our job is managing people's emotions and liquidity, and the things that they're going to need to have coming out of that financial plan, right, recreating their paycheck. So yeah, the last three years, I actually did a little math, we would have to lose 22%, from where we are right now to get below a five-year average return of double digits (10%).


Adam Werner  08:05



Benjamin Haas  08:05

If we got five straight years of 10%, going back to 2016, we'd have to be 22% lower than where we are today so the key there is we don't know where things are going. We can tell you that everything we read in follow suggests that there's really no major panic on the time horizon whether it's another variant or not, whether there's economic slowdown or not. But within your financial plan, is there any reason for us to really have a knee jerk reaction to a market going down 10% next year? 20% next year? I don't know but probably not.


Adam Werner  08:42

Yeah, probably not and I think part of that is just the human nature, right of the recency bias, what have you done for me lately. We met with a client in probably middle of last week and it's still just felt like it, timeline does not feel like we are that far removed from March of 2020 when the market was in the throes of just the 30% downturn in three weeks of trading. But since then, the way things have rebounded and as strongly as things have come back, it really puts that out of your memory very quickly and I think that's part of our job. As you said, it's managing the emotions and making sure that we're not necessarily forgetting those events but just making sure that we can use those as education because it's going to happen again. Maybe not in the same way. We like to say history may not always repeat itself but it often rhymes. So we may have some other events, some other headline that may lead to that and for the majority of our clients, 99%, if you were able to survive the market in March of 2020. We hope that gives you the confidence to be able to weather a very similar storm if and when it ever happens again.


Benjamin Haas  10:06

Yeah, manage emotions, it is our job to manage losses. That's why we diversify and the other context we want to give. We are abundantly aware that right now in most allocations that we would have for our clients, we're owning things that we truly believe in our hearts are not going to keep up with US stocks right now. But that's not their objective; it's not to maximize full potential of a portfolio, manage emotions, manage losses, manage liquidity. We need to make sure there's often for our retired clients and pre-retired clients, there's access to those things that are just more risk managed as opposed to return seeking.


Adam Werner  10:51

Yeah. So on that front, we like to say or it's somewhat of a joke that at any point in time, if you are properly diversified, you're probably not going to be happy with at least one of your holdings.


Benjamin Haas  11:03

Yeah, your bonds stank this year. Sorry.


Adam Werner  11:07

Yeah, and if you own emerging markets, that is also not done well. You're actually negative. If you've owned an emerging markets mutual fund or ETF, so this goes to a deeper point, just kind of the broad context, in certain asset classes, stocks being a broad one, not all stocks are created equal, right? It's U.S. versus international versus emerging markets. They all respond at times similarly, but ultimately, over those long periods of time, different variables, different factors influence their performance. So it's even hard just to say, well, I own 60% in stocks and 40% in bonds, someone else may own that same allocation but the way that they get there underneath the service surface, gives a completely different experience through that process. So yeah, bonds this year have been flat to slightly negative and part of that I think, was because we had such an outperformance the last few years within bonds, we certainly wouldn't have expected 8, 9, 10% from our bond investments in any given year. We have low expectations on bonds. Typically, if we get 3 to 4%, we're happy. So the fact that we were well above that expectation in the last two years, it feels like a lot of this year's returns and maybe even next year's returns were pulled backwards into the past or what was then into the present.  We're somewhat tempering our expectations moving forward because of that.


Benjamin Haas  12:51

Yeah. So where do we go from here? And within this context, within our commitment to diversification, is it to completely just abandon bonds? We're not going to be that group that does that, right? Because no, again, it's not to maximize growth in every different way within a total allocation. There has to be some management of risk, management to make sure liquidity can be met, right? If somebody is trying to take some money out, where do we usually take it from? Maybe you carve some gains from stock? Sometimes it's the go to the bonds because they haven't moved a whole lot. So we have to stay committed and diligent to that process, even within the context of - we just know bonds are probably going to stink next year again.


Adam Werner  13:34

Yeah, yeah.


Benjamin Haas  13:40

Can we go a little more granular, though? Sure. Talk maybe a little bit about the high yield space and we're getting some questions and ibonds too.


Adam Werner  13:49

Oh, man. So yeah, I'll take that first angle the high yield bond side of things. So as I said, not all stocks are created equal. Same thing with the bond side but there are so many different subsets of bonds. You have your government issued bonds, you have your treasuries all different time periods, you have corporate bonds, the high yield bonds side of things usually falls into the corporate side and like every person has a credit rating. So do corporations. They are they are rated. And when they issue debt, they issue bonds, they have that rating gets attached to that. So think of it like, if our credit score is low or if a company has a lower credit rating, then you pay a little bit more in terms of an interest rate for that debt. So those are the companies that it seems why would we want to own them if they have maybe a somewhat substandard credit rating. It's for that very reason. They're paying more interest. Therefore, if you're the one owning that debt. You are receiving a little bit higher compensation in form of have a higher dividend, a higher yield for assuming some of that credit risk as part of that process. The way that we view that to be okay with taking some, maybe a little bit higher level of credit risk is that's usually tied to economic performance. The economic output of our country and if we feel good about the economy, then that usually bodes well for high yield bonds. And I should take a step back and say, we are using that within our portfolios but it is still a minor sliver of our overall portfolio and even just a small subset of our bond exposure. And that's really just the bond environment right now is just as you said earlier, it's a tough time for conservative investors that aren't necessarily comfortable with a whole lot of stock market risk.


Benjamin Haas  15:54

Yeah. So there's a great example, thank you for going through that on a specific choice that can be made within a broader allocation. To try to, I'll use your words, move the light dimmer a little bit, maybe increase some yield and do it in a way that doesn't feel like we're material adding a lot of risks to the portfolio. We've also gotten questions and ibonds. ibonds are tied to an inflation rate. Great. So these are government issued bonds that because inflation is a little higher, right now, congratulations to everybody that's going to get a 6% increase in Social Security next year. Sounds great. It's allowing people on a shorter-term instrument directly through the Treasury to collect a little bit of a higher interest rate. Base rate is like zero right now but the variable rate tied to inflation is what 6, 7%.


Adam Werner  16:43



Benjamin Haas  16:45

Which sounds great. Here are the couple of the catches, you can only put $10,000 in per individual and of course, it has to be directly through the US Treasury. It's not through your IRA. It's not through an LPL Financial, like where we custodian most assets. So the key here is that there are little things again, you can do to try to improve your positioning within that bond space. But again, no matter what type of investor you are, you're capped at $10,000.


Adam Werner  17:13

Yes, this only moves the needle so much.


Benjamin Haas  17:15

That's correct. So yeah, but I think two good examples to kind of hit on where we are today and maybe what that's going to look like for next year.


Adam Werner  17:24

Yeah. Anything else on that front?


Benjamin Haas  17:28



Adam Werner  17:29

So then let's talk outlook?


Benjamin Haas  17:32



Adam Werner  17:33

Where we see things going and certainly we hinted at it...


Benjamin Haas  17:37

Hold on, one second. If we're going to go outlook, I want to grab my crystal ball. Hold on.


Adam Werner  17:42

Oh, okay. I'll filibuster while you're searching for that. Did you find the magic eight ball at least?


Benjamin Haas  17:50

Try again later is what it says.


Adam Werner  17:53

So I am certainly seeing a lot of the investment providers that we follow - it's the Blackrock, the JP Morgan's, LPL zone research, there are tons, Vanguard, that we follow and we aggregate a lot of that into our process. But a lot of their 2022 predictions, let's call them are starting to trickle out here in December but I think the most recent volatility that happened, again, right around Thanksgiving with this new variant that just swung the market very quickly and here we are, again, a week and a half later. At least the headline that I saw the Dow Jones has completely erased all of those losses already. So anybody again who overreacted or at least took action in that short term, may be regretting some of that and part of that is just the unknown. We've talked about this before, the market is going to react to those unknowns more often than not in a negative fashion. To be able to digest, we just need time to be able to digest this information. So this most recent variant seems like the initial research is showing that it's more transmissible but maybe not more severe in terms of the infection and the result of that. So I hate to say it but it does feel like that's at least a best-case scenario, knowing that these variants are going to happen. JP Morgan actually had an interesting take on that whole thing which was for the entire world, our country included, to get at what feels like out of this pandemic, at some point. We need everybody at some point, is going to need some sort of immunity, whether that's coming through vaccinations, which is hopefully the less painful way or it's through the natural immunity, meaning you have to catch COVID, you have to survive it and now you have that immunity built up. Their argument was if it's more transmissible but not as severe, then that may speed up the process of getting out of the pandemic getting to the other side where most people do have some immunity and where it does feel like it's in the rear view. So I thought that was a very interesting approach just to COVID in general right now that at some point, we hope it is in our rear view and it's not driving everyday life, but their argument was this may speed that process up which for us and the economy, that means any even short-term hiccups now is just delaying growth to the future. So it's not necessarily erasing growth; it's just delaying it, or vice versa.


Benjamin Haas  17:57

Yeah, this just feels like one more example of when we talk about the market, we're talking about that as a weighing station to so many different things and so many different inputs, and in our mind, headlines, real life COVID, it feels like that should be driving things a lot. And if anything, it's been humbling over the last year and a half to kind of see how the market was well ahead of maybe how we were feeling emotionally about our lives and shutdowns and things that felt really heavy. So it just once again, goes to show all of those commentators, all those institutions that we aggregate data from, if they all told us, hey, we really think next year could be a rocky year. We still wouldn't be making dramatic changes to our portfolio.


Adam Werner  21:26



Benjamin Haas  21:26

Because we just, nobody can know, those are still predictions so whether they're telling us, hey, we're going to continue to see growth or we're really concerned about this. Here's the whole key, the context is, we're happy for how great things have been in the market. We're going to take some of those gains when we can but it's not to overreact one way or the other.


Adam Werner  21:47

Yes. Well said.


Benjamin Haas  21:50

And when you find the crystal ball, let me know and let's throw a couple bucks on whatever it tells us to and take an extra vacation next year.


Adam Werner  22:04

Oh, okay. Sure. Let's do that.


Benjamin Haas  22:06

Kind of feel like I need one. Anyway, yeah. The Santa's rally maybe came early this year but let's see where the next couple weeks ago but for no matter when you listen to this, it's been another banner year.


Adam Werner  22:18

So then let me just recap kind of the outlook side of things it for and I think I said it earlier on the bond side, our expectations are tempered, we feel like we can, if we get zero to slightly positive returns that's our view right now. But their job, as you said earlier, is not necessarily to add to the total return at this point, it would be to dampen any volatility that we would see in the stock market. On that front, there's no way for us to know what the stock market is going to do but fundamentally, things underneath the surface, companies are still profitable. They've been able to deal with all of the supply chain issues, the inflation, the inflationary pressures seem to be subsiding slightly, and there is expectation that that should continue to slowly work its way out of the system. Inflation is probably here much higher and to stay a little bit longer than I think we've, at least during my adult lifetime, that we've really seen or felt. But that usually is still a good sign for stocks. And at the end of the day, it really comes down to, are company's profitable and as the economy growing, usually if those two things are happening, then the stock market usually can climb that wall of worry and higher.


Benjamin Haas  23:36

So all joking aside, we don't need a crystal ball. The point is to just follow those fundamentals, stick to the plan and do our best to take those temperature checks as we need to on a regular basis but just stick to the plan.


Adam Werner  23:50

Yep, and on that note, do your planning the three-bucket theory, have all of your fundamentals in place so that you can weather the storms in the market when they happen because they will at some point, and to whatever degree we don't know but as long as you have that plan to be able to ride that roller coaster, you'll be rewarded over time.


Benjamin Haas  24:13

Perfect. Bingo, my friend, thank you so much. What do you say we get back to work.


Adam Werner  24:20

Sounds great.


Benjamin Haas  24:21

All right.


Adam Werner  24:22



Benjamin Haas  24:35

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information owner 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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