Is it time to switch gears? (Part 2)

Speaker 1 (00:08): Hi everyone, and thanks for joining us for your Thriving Practice. I'm your host, Dan Corcoran. This is part two of our conversation on Staying the Course or Shifting Gears on the 60 40 portfolio with Matt Estes and Charles Rotblut. So let's get back into it. I'm gonna ask both of you to put yourselves in the shoes of a financial professional. You have an investor who's calling you frantic about what they should do with their portfolio. So do they continue to follow the 60 40 split? Do they allocate differently? Will this happen again? There are so many questions. So what advice do you give a financial professional that has had or will have these discussions? Charles, first to you.

Speaker 2 (00:52): Yeah, I think first of all, just sit 'em down and, and start talking to them about their goals. Asking 'em why is money important? What are you saving for? And get them to start envisioning what they want to do with their money. And hopefully that calms 'em down. But I think if you do have a client or you're working with an investor who is just really nervous and really wants to do something, work with them and see, can you create a window within their portfolio that they can move around a little bit. If they're really nervous, they can perhaps lay off the gas pedal, so to speak, and go a little bit more conservative. And, and I think it goes back to what Matt and I spoke to about earlier about adjusting for risk tolerances. And in this case, you might have to carve out a section of the, of the portfolio where the client perhaps knows, okay, if I'm nervous, I know this part of my portfolio I can take less volatility with and I know that we are agreeing to do this.

Speaker 2 (01:42): So it's really about trying to find that middle graph. They're really nervous. You're not going to convince them by going over the long-term data and their goals. You have to give them some type of outlet, but trying to figure out how much of an outlet can you give them? And what it looks like is that they're allowed to just pull back a little bit. Is it more frequent rebalancing and just have that conversation with their clients. Here are some options you can do that'll help calm your emotions, but will still allow you to reach those goals that you're telling me are really important for you.

Speaker 3 (02:11): Yeah, I totally, and I would say, Charles, you nailed it. Sort of like managing that end investor expectation, right? Kind of just keeping them emotionally on track. But I would say, you know, an answer to the part of the question, Dan, about do they allocate differently? Look, I would say the following, if their risk tolerance or their end financial goals haven't changed radically, right? If, if there's still a certain risk profile that that client fits and we've agreed on what those expectations are, then I think you stay the course, right? You continue to follow the plan that you put in place. You try not to let one outlier year, one exogenous event completely disrupt the plan. You wanna have that kind of longer term view, and I think you want to try to stick to that.

Speaker 2 (02:57): You know, I said one other thing, and it's not always feasible for every advisor, but see if you can get your client out of the office, you know, meet 'em for coffee or have 'em go for a walk, get 'em somewhere out of the environment where it's all about financing. And maybe that also just allows 'em to calm down a little bit and, and it may not work. But again, just getting them out of the environment when they're thinking about investing, they're thinking about markets. Sometimes just giving that little mental break can sometimes do a lot of wonders. And I would just say even for advisors or, or investors who are listening, you know, if you really feel your emotions running rampant and you wanna make a change to your portfolio, go outside, go play with your pets, go, you know, watch your favorite TV show. Sometimes all you really need is that little break to reset your mind. Because our minds have really evolved to deal with a very different environment than what we're dealing with now with the constant influx of financial information, economic information, headlines, et cetera.

Speaker 1 (03:51): We can use that lesson basically anywhere in our lives. I think Charles, yes. But Matt, what would you tell a client who's looking for some signs of something like this happening again?

Speaker 3 (04:01): Yeah, so you know, I would say, Dan, our, our base case, at least for the kind of short uh, intermediate term is the catalyst that sort of drove markets in calendar year 2022. I don't think that those are the big forces that are sort of impacting or shaping markets, you know, over the next couple years or so, or said otherwise. I don't think we get this rapid spike up in inflation that was, you know, in some cases driven by supply chain bottlenecks, a war in Eastern Europe, rising geopolitical tension. So bottom line is, I, I don't think that's the, the immediate risk. However, there's always the possibility that could resurrect itself. I think for some clients, you know, thinking about ways, thinking about investment strategies, vehicles that can bring in more stability, that can provide more ballast in client portfolios may be appropriate for those clients who do still maintain or do still have some of those concerns. So whether that is some type of a guaranteed product or an insurance product, that may be a possible solution for those clients that are expressing some of those concerns.

Speaker 1 (05:04): And just looking at recent news headlines, now obviously the talk is heating up again about debt. We could be heading for a recession, but Charles, what does that do to this strategy?

Speaker 2 (05:15): You know, if we do have a recession, you obviously, you tend to see a flight to quality in that situation towards more stable companies, towards more investment grade bonds. And that aspect of 60 40 would hold up and the bonds would actually offer some buffer if there's downward volatility in the market. But I do think it's important to realize that predicting that timing of recessions is very hard. The market has gotten it wrong several times. Market strategists, uh, and economists have probably gotten their forecast wrong even more times a at the same time. We do have to look at the Fed. And when you look at what's happened past rate Ike cycles, the Fed does not have a very good track record of achieving soft landings. So none of this is to say whether or not we'll get a recession, but if people had their portfolios properly allocated and they do have some assets in their portfolio that might hold up well during a recession such as blue chip dividend paying stocks, they should be okay to ride it through because recessions are normal part of the economy.

Speaker 2 (06:17): Most recessions do not turn into depressions. Similarly, most market corrections and even most bear markets don't turn into mega bear markets where you have those drops, say 2008, where you got down close to 40%. So I think for a lot of people realize there is a certain level of uncertainty you need to embrace that there is a certain level of uncertainty, but also understand that your portfolio should be positioned against a variety of markets. But if you are obviously really concerned about recession, you can't perhaps feel a little bit more conservative in terms of having more quality on a stock side, more quality on a bond side to perhaps protect yourself if you're really convinced there could be a leg down in the economy and that it could affect particularly the equity markets.

Speaker 3 (07:01): Yeah, I think that's a great point. Like if you think that we're headed into a recession, you know, historically your higher quality bonds have typically, you know, done a good job of providing a little bit more ballast and a little bit more of a hedge than again, what we saw in 2022. And, and to Charles's point, I think you wanna go up in quality. Also, probably on the equity side, you know, I would probably be a little reluctant to hold a lot of cyclical or cyclicality in the portfolio. I wouldn't wanna hold a lot of high beta exposure. Again, I'd probably wanna maintain more of a defensive posture in that component of the equity allocation.

Speaker 1 (07:33): And another thing that's top of mind right now, Matt, is that we have a presidential election next year. So what are your thoughts on that? And is there something to be looking out for next year?

Speaker 3 (07:42): Yeah, well, you know what, I would say that's a tough one to handicap. And I don't necessarily proclaim to have a an insider edge in terms of what's taking place in D.C. but I would say the following, managing to an election or an election outcome is really, really difficult because what you're doing is you're dealing with basically a binary outcome and, trying to predict or know if with certainty, which way that's going to go and wanting to place a lot of your bet in one direction or the other is a bit challenging. So, you know, I would say when you do have periods of uncertainty, probably trying to play it a little bit more down the middle of the fairway is a more prudent approach.

Speaker 1 (08:23): Charles, you agree?

Speaker 2 (08:24): Yeah, absolutely. And I think it's important to realize a lot of the big things that drive the marketing economy are often not really apparent when the new occupant of the White House gets elected and not necessarily completely under the control either. Uh, we can look at Clinton ‘92, he obviously benefited from the.com boom, you know, second George Bush, George W. obviously he had the housing financial crisis in 2008. That wasn't on anybody's mind even when he got reelected in 2004. And then you look more recently with former President Trump when he ran across Hillary Clinton, nobody was talking about a coronavirus spreading across the world. So, and people always think, you know, I'm gonna vote for this person who's gonna have a massive impact on economy. But reality is there's a lot of things that happen once they're the White House that can be predicted at the time they're elected. And I think also with this current election, we're looking at a Republican field, which we really don't know who's going to merge from it. And we also have the Senate in play. And while the geography of the Senate map isn't favorable to Democrats, that doesn't guarantee that Republicans are gonna take control of Congress either. So as Matt alluded to there, there's a lot of uncertainties and you are better off playing it straight down the fairway than assuming a binary outcome in either direction.

Speaker 1 (09:43): We're talking about a lot of different topics in this discussion today, but let's get back to the heart of it. From what we've heard in this discussion, it sounds like 60 40 is a good solid investment strategy. So Charles, what are some common arguments from investors who may not be so bullish on it?

Speaker 2 (10:01): I think one of the most common arguments I've heard over the last several years is really about returns on bond interest, particularly from individual investors who are pretty aggressive with their asset allocations. Their arguments is why should I hold bonds if I'm investing for the long term? And historically, stocks have realized the highest return are very high return, but they also have a very high volatility. And if you're going to take that type of allocation, you need to be certain that you don't have any short-term withdrawal needs. You also need to make sure you have the emotional backdrop to withstand that volatility. Uh, and that's not a decision you make when the market's doing well. That's a decision where you look back at during past bare markets, what have you done with your portfolio? I think the other argument I've heard from people is that the upside in bonds is limited.

Speaker 2 (10:50): And then certainly, uh, right now, as I alluded to earlier, if we are at the end of the rate tightening cycle, we are looking at the Fed cutting rates. Again, the upside is much less than we saw, say in the early eighties when Volcker really jacked up interest rates. You don't have that long runway where bonds are gonna appreciate by large margins. On the other hand, they are ahead and they do help dampen volatility. So if you think about your liquidity needs, think about your needs for diversification and particularly your needs to control the volatility portfolio. You know, a strategy like 60 40 can work well and whether it's 60% of stocks, 40% bonds or some other mix, that's a whole other conversation. But I do think it's important to realize that 60 40 has held up well compared to a lot of different asset allocation strategies. And for a lot of people it can work really well.

Speaker 3 (11:42): Yeah, and I would just build off some of those comments that Charles made and you know, I think for someone that, you know, maybe was not an advocate of 60 40 because they were worried about the level of, of income available in bonds, you know, again, I think we're working in a higher interest rate environment today. And you know, I think this is a really important consideration for someone that may be getting closer to retirement or perhaps in the early years of retirement. And, you know, to say, I'm gonna just completely forego bonds altogether, and I'm gonna ride it out in an all equity strategy. For those of us that have been around in the industry for a while, we were all started in the business and probably heard about the importance of dollar cost averaging, right? You sort of buy into the market over time’.

Speaker 3 (12:25): You get the opportunity to buy in at the lows, maybe you buy in a little bit higher, but over time that strategy plays out. The opposite's true if you're kind of in the de-accumulation phase, right? If you're at the point where you're actually starting to take money out of your investments, perhaps for your retirement, if you choose a strategy that's really volatile and you're taking out large withdrawals from your portfolio, when the portfolio value has fallen by a substantial amount, instead of calling it dollar cost averaging refer to as dollar cost or averaging. So I think for people who may be reluctant to move into 60 40 portfolios because of the bonds, again, that ability to maintain the ballast is really important, particularly as you get closer or in the early years of your retirement.

Speaker 1 (13:09): As we said, we've covered a lot of ground today. So Matt, your final thoughts for someone listening, what do you want them to take away from our conversation?

Speaker 3 (13:16): Yeah, look, I still think that a 60 40 portfolio can be a viable strategy for a broad range of clients, again, based on their own individual goals and suitability. But again, I think we're in an environment where financial market volatility is likely to be higher. I think inflation runs at, at a higher level than what we've become accustomed to. And I think an ability to incorporate strategies within your 60 40 portfolio, right? Some of the things that we talked about around flexibility, the ability to be a bit more tactical, again, perhaps incorporating things like alternatives. You know, I think those play a really important role on a go forward basis because again, vanilla stock and bonds that just worked so well over the last 10 or 15 years, I don't necessarily think that's the playbook for a go forward environment.

Speaker 1 (14:04): Big picture thoughts from you, Charles?

Speaker 2 (14:05): Yeah, I'll build on what Matt says. I think 60 40 is a good baseline allocation that you can work off of, but I, even if it's not appropriate for you, I do think you do need to think about, uh, you know, how you allocate within that allocation. So you do obviously have the high level allocation, in this case, 60% stocks, 40% bonds, but on other equity side, there's certainly room to diversify there on domestic side, think about small caps, think about tilts perhaps towards value are if momentum's more your flavor along those lines. But then on the bond side, I think perhaps don't go with long-term bonds. Think about intermediate term bonds. If you have cash flow needs, think about short-term bonds and obviously if you wanna be more tactical, some of the things Matt talked about, you can do as well.

Speaker 2 (14:50): But also I would encourage people on both the, as particularly on the equity side, think about international as well. There's certainly an argument I think for considering that on the bond side as well, but not thinking that 60 40 means large cap stocks, long-term bonds. I think that model itself, it doesn't have to be that the big thing is that 60% stocks, 40% bonds, and then diversifying within it and, and certainly there's a lot of room and flexibility you can't have within that framework. And I would encourage people to think about that framework and what can they do besides just having that very basic portfolio. And even if somebody wants to keep things simple, I think it's important to realize you could still buy five or six ETFs, have that 60 40 portfolio still be very simple, but still have a lot of diversification within that model and within that framework.

Speaker 1 (15:41): Well, this has been a great conversation, great insights from both of you, and certainly a lot to think about moving forward. Charles, Matt, thank you both for being here today. And for our listeners, find us on Apple, Spotify, and Google Podcasts, or at yourthrivingpractice.com. I'm Dan Corcoran. Thanks so much for listening.

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