The Market Is Uncertain… Here’s What You Should Be Doing.

Market chaos. New opportunities. Hidden risks.

In this episode, we unpack today’s uncertainty, explore alternative investments, and share what you need to watch out for in the current financial climate. 

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Transcript

SPEAKER_01 0:00

From Wall Street to managing hundreds of millions in client money, Nick and I use our alphabet soup of credentials to discuss the investing and tax strategies that actually work. Oh, and we played Division I college football together, so strap in. This one hits hard. Let's go. All right, Life Gull Nation. Uncertain times could be the understatement of the year, right? We don't know what's going on in Iran, how long we're gonna be there, how much impact that'll have on the oil markets, how much impact that will have on our stock market. But I think the reality is as you rewind the hands of time, uncertainty is not a surprise or a new thing. Uncertainty is the absolute norm. And so what we need to start thinking about is stop trying to predict where things are gonna go and instead prepare for the inevitable uncertainty that is going to face you as an investor. So, Nick, these are some hysterically funny statistics that we're gonna share right now. Let me hand it over to you to kick things off.

SPEAKER_00 1:06

Yeah, we're just setting the table here in terms of some stats around in investment performance and investors themselves, how they view the view themselves. Uh, 93% of investors describe themselves as above average financial decision measures, uh, which is statistically impossible. Um at the same time, the average equity investor underperforms the SP 500 by roughly 3.6% annually. Uh and you can almost all of that can be attributed to behavioral mistakes uh driven by reacting to predictions that you got wrong or right. And then um I think over the long term, the estimates are uh on a 100k investment in the SP, the average return over 30 years, if you just bought and hold was about 3.7 million. The average investor behavioral gap turns that into about 1.1. So huge missed opportunity for compounding uh if you're trying to jump into the mark out of the market uh or making very concentrated, aggressive predictions on what's gonna play out.

SPEAKER_01 2:17

The the funniest statistic of all those to me is that 93% consider themselves above average investors. To your point, that is statistically impossible. And you know what I would find more interesting if we broke that down male to female as well, because there is tons of statistical data out there that shows that women over the long term are far superior investors to men. And a lot of it comes down to the kind of psychological aspect of the difference between a man and a woman that men tend to be overconfident and make decisions with more breakneck pace. And that tends to be a bad characteristic when it comes to investing. So you go from there, Nick, on to the fact that 3.6% underperformance. Now, what what that references are folks that are investing in stocks. So it's not like, oh, this is someone that might have some stocks and might have some bonds, et cetera. No, this is folks that are invested in stocks underperforming the benchmark index of the SP by 3.6% per year. I'll couple on another interesting statistic that I've seen from JP Morgan in the past to say that in 2022, the average investor in stocks was down 39%, which is an absolute bloodbath, down 39%. And it gets even worse when you have the realization that the SP was down 19%. So clearly, what folks are doing are jumping into and out of the market at all the wrong times. What is it they think they know? What is it they think they're getting ahead of? And I think that's where the prediction aspect of investing is so, so overstated in someone's ability to predict with any sort of certitude or any sort of consistency. And I think that we need to start to shift that landscape from prediction to preparation. So, Nick, let's deck on prediction just for a minute before we get to the preparation stage. One of the funniest things is when the experts start to predict, right? So it's not just the Joe Schmoe investor, but it's also the folks that are analysts that are built to be the best in the business at forecasting what's coming in the market next. So every year at the beginning of the year, the S P 500's group of analysts will put out forecasts to say what they think the market will do in that coming year. And as you look back at them, some of them become just as laughable as the statistics we just gave you. The experts are no better. Nick, hit them with these stats.

SPEAKER_00 4:47

No, the uh this is Wall Street consensus scorecard, right? So we're aggregating at the beginning of every year, Wall Street, all the different firms publish their SP 500 year-end targets. Um, they're these are some of the most well researched uh uh teams on the planet. They've got infinite resources almost uh uh almost, and uh they have billions in infrastructure to to try to assess what's going on in the economy uh and where the market is heading in in 12 month time. Um the the track record's not great for them either. Uh you you you look down, look at 2020 consensus, the market was going to be flat to modestly up. Reality, we got a 34% crash in March. We were up 18% by the year end. 2022, everybody was kind of cautiously optimistic. The SP 500 was down 19%. Worst year in 14 years, big miss. 2023, most people were mildly bearish, was kind of the median forecast post-2022. The SP 500 was up 26%. So three for three here in the most recent years were directionally wrong. Um, and these are some of the self-proclaimed best forecasters um in the business. So it doesn't matter whether you're an individual or an institution, predicting the future uh is incredibly difficult to do.

SPEAKER_01 6:04

So I'm gonna give a pass to one of those. 2020 was a year that no one really could have seen coming, right? Literally, the government around the world, governments around the world, caused our economies to shut down, right? So you couldn't have foreseen the fact that we were gonna have this virus outbreak, bang, COVID, everything shuts down, boom, the market is scared to death, gaps down very quickly. And then subsequently, the market just gets puked stimulus into it via monetary stimulus, fiscal stimulus. You remember everyone was getting a PPP loan that owned a business, everyone was getting a STIMI check, all of that. So that's what caused it to come surging back after that initial gap downwards in 2022. But as you look back on things and you go, okay, well, that was 2020 rather in COVID. You look back on things and you look at 2022, after the world started to digest all of this underlying stimulus that got pumped into the system, what caused that downside in 2022 that no one saw coming was all of that stimulation caused inflation to really rear its ugly head. And as inflation took off, stocks and bonds commensurately came down. And so that's also a very rough environment in 2022 where you not only have the stock market selling off 19%, right? The average investor sold off 39%, which is crazy. But also you had one of the worst years, literally the worst year since the Revolutionary War in the bond market. So there was no reprieve there. So at the end of the day, Nick, I think your comment is totally fair just to say that, like, listen, you can't look at the experts and have them direct you how you should be invested. Because if you rewind back to the beginning of 2026, the experts were wildly, wildly optimistic, right? And it's still up for debate as to where we end the year, don't get me wrong. But I don't think anyone had on that bingo card of theirs that we were going to move into Iran and disrupt the oil markets, and you're gonna see a massive sell-off in stocks in a four-week period of time. And where does it go from now? Who the heck knows? But we're down four weeks in a row and we've taken some pain here. And that was nothing that was on anyone's forecast coming into the year. So again, it just is behoo of every investor to stop trying to predict and top stop trying to take outsized bets that the market's gonna do great or the market's gonna do terrible. It's gonna be somewhere in between, and you have to be prepared for both underlying scenarios.

SPEAKER_00 8:33

Without a doubt. And I think there's um there's there's a balance to strike too, right? Where you're you're taking that information in. But again, I think it's how you build out your portfolio uh around that and making sure that you you're not too concentrated on one or two predictions absolutely coming true in order to determine your your financial success for the year uh or or or long term. So it's it's those that that information is is good to bring in to store, but you you want to make sure that you're not putting all your eggs in uh in a handful of baskets there.

SPEAKER_01 9:07

Yeah. And it's not even just okay, what are we predicting? Because a lot of times you can predict something playing out. As we got closer and closer to the Iranian invasion, we did see troops starting to move to that Gulf district and the probabilities started to pick up, right? But then when we actually have that invasion, what would you anticipate something like gold to do? You would anticipate gold if we're invading another country and oil prices are gonna shock higher being an inflationary driver, we're gonna start spending a ton more money because we're building missiles and rockets and firing them. That's another inflationary impulse. So, what is one of the best assets in history when we're in an inflationary environment? That's gold, right? And gold has recently just puked on itself. So, not only do you need to be able to predict the future, but you also have to predict how assets are gonna react as a result of that. And it doesn't always work out the way you want it to. And so that's again, the prediction game is just a game that, hey, Taylor, Nick, we get calls all the time. Where's the market going? And it's like, what are we doing here? Like that, that that's not at all what we do. We build portfolios and we're gonna get into some of that construction process here in a few minutes, but it's not a game of, oh, we know with some sort of certitude what's gonna happen over the next month or so. Is it gonna rally back? I I don't know. We don't know how this Iran war is going to play out. And that's gonna determine a lot of the underlying outcomes that that we'll see over the coming months here. So, Nick, the other thing that comes along with these predictions is hey, should we sell out of the market now? Is it gonna go down further? Right. And so I think this is an important kind of concept to start to understand. If you decide you're gonna jump out of the market, it's not just okay, when are we getting out? It's a two-sided decision. It's not when are we getting out, it's when are we getting out? And then what is gonna be that determining factor for us to get back into the market, which I think is even a harder decision than it is when to get out. So most of the time when folks are getting out, it's at that point of capitulation where their stomach just can't take it any longer and they say, all right, enough. And they puke out whatever it is, they sell their money, they get their money back out of the market at a 20, 30% reduction of where it was. And that's when the market finally hits that bottoming point and bounces. That's statistically when most people are selling, to state the obvious, that's how pricing works. But the other side is then when are you comfortable enough to get back in? Even if you were to see things coming prior to any downside being experienced, the period of time that you get that level of comfort to hop back into the market is probably when it's far above whatever that decision was when you were trying to get out on the other end, regardless of whether your timing was perfect on the front end or not. So it's that two-sided decision that it is to sell out of the market that really is a tough equation.

SPEAKER_00 12:01

Yeah, you're uh you're you're doubling the the amount of variables there and you're with your exit and entry point there. But it's um, you know, just missing some of the best trading days, single days uh over the last 20 years, um is really been a costly, costly mistake. And and you know, if you if you missed just seven of the best 10 days uh over the last 20 years, uh you've left almost 50 percent uh of the returns on the table just in the S ⁇ P 500. Um and you know, if you're you're looking at when those best days occur, seven of uh of those of those best ten happen during a bear market. Um so it that again, it's very difficult. If you are gonna jump out, the best time to jump back in is gonna be extremely uncomfortable. Um, because it's it you're still kind of on the on that downward trend. Um but again, over the long term, uh it's it's nearly impossible for for for folks to uh be jumping in and out with with any level of consistency.

SPEAKER_01 13:06

You're 100% correct. So, okay, we've gotten this prediction thing really well you know fleshed out here in the fact that no one can predictably uh predict what's going on in the market with any sort of consistency over time. So now we need to start to shift a little bit away from that prediction to preparation, right? And this is not us making the case that you should only own stocks and close your eyes and hold on to them forever. That is that is not the case we're making here. The case is instead of trying to predict, it's the preparation. And it's the preparation of what's in the economic pipeline that we need to start to think about. Because the biggest thing that determines when downsides of the market, persistent, sustained downsides in the market take place is when we go through some sort of economic indigestion, right? Our economy starts to falter some. That is when you get the pickup in downside movement in things like stocks, right? So let's just take a second and assess the different areas of the economic cycle that someone needs to be prepared for.

SPEAKER_00 14:14

Yeah, so there's the kind of the classic two by two macro regime that folks are looking for. So if you're thinking about this as four boxes, on the x-axis will be inflation. Inflation's lower, inflation's higher, and then on the y-axis, you'll have growth, weak growth, strong growth, right? So if you have strong growth and low inflation, that's typically called the Goldilocks environment. This is uh a really good situation for a the underlying economy, uh, and typically tends to be uh a very good environment for both stocks and bonds and a variety of other asset classes. Uh when you have high growth but inflation is high, that is typically categorized as an overheating economic um uh regime. Um and then the areas that you really want to avoid are a deflationary environment, which is weak growth, but you also have falling inflation. Uh and the one that we're we're I think everybody's a little nervous about right now um is uh a stagflationary environment where you have weak growth but high inflation. This is a very difficult economic and an investing uh quadrant to be in. So those are kind of the four major uh uh economic regimes uh that the folks are are classifying things into. So though those are the different stages um of economic regime change and and uh regime change. I'm thinking of the Iran War here, uh of uh uh of economic regime classification. Um and I think when you're building out your portfolio and looking though at those, it's important to recognize that different asset classes are are are gonna perform differently in different parts of the cycle. So, Taylor, what are how do we think about that part of the process in our portfolio construction there?

SPEAKER_01 16:05

Yeah, so that's kind of broadly defined as growth, inflation, stagflation, recession, right? Those are kind of the four main areas of the economic cycle. And the reality is no one can predict exactly where we are at any given juncture or where we're going next. So I think to your point, you need to have the understanding that I have pieces of my portfolio that are going to work throughout each part of that economic cycle, right? Ray Dalio calls it an all-weather tire, right? Or all-weather portfolio, but all-weather tire is how I like to correspond to folks with because again, rain, sleet, snow, hail, heat, and everything in between. So when you think about it, most people are really, really, really well prepared for the growth stage of the economy, right? And that's stocks. Stocks in that Goldilocks, when it's high growth, low inflation, the stock market is going to be your best friend. And you know what, take it one step further, probably add a little Bitcoin and a little crypto on there, and you can really rock it. Um, when inflation picks up, when inflation's modest, stocks are still gonna do fine. When inflation starts to pick up more meaningfully, that's when stocks start to struggle. And we saw that play out in a 2022 environment, right? So we'll get to inflation in a second. But from a stagflationary, that's when you're starting to see growth start to slow and inflation staying persistently high. That's an environment where some bonds may perform well because what you're getting there is inflation is not necessarily a productive thing for bonds. Inflation usually beats bonds up. But when you have the counterbalance of, but you also have the economy weakening, that's a positive for bonds. So when you slice and dice the bond market, there are areas of the bond market that are gonna perform well during a stagflationary environment. And that's typically what you're looking for when you start to have that kind of inflationary pressures remaining relatively high and you have the weakening growth. Bonds are typically gonna do well in that environment. When you go to a recessionary environment, that is where bonds absolutely excel. Everyone looks for a flight to quality. They say, hey, I don't trust the stock market. What do I trust? I trust the US Treasury market, right? And so that's when you're gonna see typically a significant movement higher in bonds. And so, what are stocks gonna do, on the other hand, in that recessionary environment? Obviously, they're gonna get beaten up. And so you look back to a 2008 type scenario, the SP draws down 55% peak to trough. Now, if you look at the broad bond index, the broad bond index in a 2008 environment's up a little over 5%. But if you look at the extreme case of long-term treasuries, they were up 34% in 2008, right? So I think a lot of people look at their portfolios and it's some blend of either all stocks or stocks and bonds, so 60-40, right? And so what you're relatively well suited for there is growth in a growth-based economy, your stocks are gonna hold up well. In a recessionary-based economy, your bonds are gonna hold up well as your stocks get beaten up and there's kind of your counterbalance. But I think what people are grossfully underprepared for is that inflationary environment. And whether that's coming with um high growth and the inflation coupled with it, or low growth and the inflation coupled with it. Inflation is really a pervasive problem for most people's portfolio construction. And what we look at a lot of times when it comes to inflationary environments and how do you protect against that? That's that alternative suite of products that we pound the table on all the time. So, what the heck is an alternative? It's it's a lot of different things, but you can have everything from real estate to infrastructure. Both of those should hold up really, really well in an inflationary environment. And you ask why? Well, with real estate or infrastructure, you've got concrete in the ground, steel in the ground. You've got a hard asset that you're backed by there, right? So that's something that's really productive there. Now, typically during an inflationary period, you're also gonna have hard asset commodities doing well. Inflation is often caused by a movement higher in oil prices. So clearly, that hard asset of oil is gonna do well. Gold typically holds up well during a period of inflationary, um, kind of pervasive nature. Uh, farmland, something that we own for most clients of ours, and most people don't even know that's an investable asset. But farmland is something where, again, a hard tangible asset during a period of inflation is typically gonna hold up relatively well. And so at the end of the day, when you kind of take a step back, you say, Hey, I need to know in my portfolio what each position is going to do regardless, or or more importantly, what each position is going to do during each period of the economic cycle. And you need to have a very ingrained knowledge of that because you don't need to have a situation play out where everything's selling off at once. If you're an equities-only investor, you're in a growth stage, you're great, you're in any other environment, you're typically really struggling. And thankfully for you, for the past 10 years, it's been, you know, a persistent growth-based economy, but it won't always last that way. So, Nick, um, feel free to kind of round out any edges there, but I think it's important to understand that you have the different pieces to prepare, not predict. To be clear, this is a preparation, not a prediction of where the economic cycle is taking us.

SPEAKER_00 21:12

Yeah, I mean, this is it's it's really a form of risk management, right? And um you just want to make sure that you're not overexposed to any one part of that that economic cycle. And it's been really easy to drift into a portfolio that is really designed for that high growth, low inflation, gold Goldilocks type of environment because that's what we've experienced. And if you look back historically, I think it's about 68% of the time here in the US. Um, going back over the last 50 years, we've we've been in kind of that that quadrant. So it's been easy for uh for investors generally speaking to drift into asset classes, stay overweight, those those typical you know, stocks and bonds that have done well in that environment. Um um and and kind of neglect some of these other asset classes um that are that are really gonna hold up and and better diversify, prepare your your portfolio uh for for an evolution um and and uh a rotation into one of these other quadrants whatever it may be um so it's it's something that I think investors uh you know really need to to think about because it's it's been easy to skate by get get away um with with having a portfolio construction that that just does really really well uh in in in one of those economic regimes yeah I the only time that people have experienced that significant downward movement on a stock and bond portfolio recently is a 2022.

SPEAKER_01 22:41

And 2022 was literally one of the worst years of all time for a 60-40 blend of stocks and bonds the worst year since I think it was 1937. Right. So in 2022 kind of we already touched on this a little bit what you had was a massive pickup in inflation because of the economic stimulus that was pumped into the system post-COVID and also an invasion of the Ukraine by Russia. And so that snarled the supply chains a lot of the things that we're seeing play out with Iran right now, but at a bigger scale. And so that caused that persistent inflation to pick up and that stock and bond portfolio when inflation went to 9%, which was the highest inflationary rate we had seen since 1981, I believe, um, that really caused stress on that stock and bond portfolio. And it made people realize hey maybe there's another asset class that we need to out here that that is out here that we need to be considering. And it's funny because although the retail or mom and pop um that goes through a financial advisor type client hasn't realized the use of the alternative or private markets as much, when you look at the institutions, the the smart money if you will the institutions have been utilizing the alternative space in a massive way for decades and decades. Whether you look at Harvard Endowment, Yale Endowment, University of Texas, like those are the three biggest endowments in the world they have been huge proponents of the use of alternative assets. And Barron's interestingly just ran a survey in the past year and it spoke to family offices. So this isn't institutions. These are family offices over$50 million in assets family offices currently own 41% alternatives in their overall asset allocation and for context the net next largest percentage of their portfolio was in equities. So 41% alternatives the next were in stocks and that was just 29%. So I think that's eye-opening for folks to say, okay this really smart high-end money is really preparing for things differently than trying to predict what's to come next and therefore just you know looking at the rearview mirror and saying well stocks have worked in the past I'm just gonna stick with that kind of working horse that got me here. And reality is it's just um that's not the probabilistic way to invest. And that's what investing is all about is putting yourself with the highest probability of successfully attaining whatever the goals that you have are.

SPEAKER_00 25:01

So I I I think in uh another important aspect uh when we're we're talking about portfolio preparedness um and what that allows you to do is it can make volatility an ally and not necessarily your enemy which uh may not sound like a ton of a ton of sense right and right now especially if you're looking at your your your account values and they're they're moving all over the place and it doesn't necessarily feel good.

SPEAKER_01 25:26

But I think for a long-term investor investor that that has discipline um this provides buying opportunities uh you can rebalance and it forces you to buy things that are that are down sell things that are up in a systemized contrarian kind of kind of way um that over the long term I think really benefits uh uh in investors yeah yeah talking about volatility as a good thing is is not necessarily something that someone wants to hear when the volatility's all to the downside right now but um and that's all asset classes right because in times of stress in the market what you have is correlations come to one so typically if you look at the market landscape it's not stocks bonds gold everything moving in lockstep together now the only thing that's kind of bucking that trend right now is oil which is moving counter right which is causing a lot of the distress in the market right now but right now it seems to be that everything is kind of directionally moving um downward right and and now the alternatives that we talked about before is is also another asset class that is not moving downward depending on what it is you own the alternative space, they're holding up really well right now. But Nick, I think your point is really well put because I think there's a couple different ways to think about rebalancing right if you're a typical kind of retail oriented investor that's not doing things in an overly sophisticated way, I think the rebalancing on a set schedule is very smart, right? Especially if it's not in a taxable account, if it's in an IRA slash 401k, whatever, where you don't have to worry about the tax implications of a movement. I think that timing things out on a rebalance monthly and monthly is probably too much, rebalance on a quarterly basis, et cetera, is is a really good kind of thing to aspire to do as that will allow you to okay stocks really got smacked badly right now and bonds held up better. Well I'm gonna rebalance back and that's gonna have me adding more stock exposure on periods of weakness. It just helps really create a solid level of discipline. Now you start to take it to the next level and do things in in kind of a more institutional manner or sophisticated way of trading and and and then it's not on a set time frame because you know reality is making decision because it's March 31st really doesn't make a ton of sense either. But it creates discipline right that's why I I say if you're not someone that's in this and paying attention to it every day, that's a really good methodology. But what you want to do is you want to put risk bands in place and you want to use market volatility to dictate when the portfolio is being rebalanced not a time or a date of the year. So what happens is you have those risk bans in place hey I want XYZ exposure to things that are in this underlying category growth oriented assets, inflation oriented assets, whatever it is. And so as asset prices move and they go up or down, those risk bands may be tripped. And once those risk bans are tripped, that's when the portfolio needs to be rebalanced. And that's how you do it from more institutional standpoint. Hey in a 2008 environment you have growth assets coming crashing down and stocks are are are falling precipitously but we already talked about on the other side bonds are doing incredibly well in that 2008 environment what you want to be doing is you want to be trimming from bonds during that period of strength to add two stocks on that weakness in 2008 as they're getting absolutely pummeled. Right. It's not a comfortable thing to do yeah let me sell my winner to buy a loser right but at the end of the day we all know what happens to stocks in a period of a recession they go down like a coiled spring down, down and then bang they erupt higher. So what you're trying to do is very systematically move from that asset that's gone up in value to add to that weakness in stocks because you're never going to catch the bottom perfectly the only person that catches the bottom is a liar right so the reality is what you're trying to do is build around that bottoming process and increase your exposure during that period of weakness. But to be obvious here to state the obvious you need another asset class that is doing well when stocks are getting beaten up in order to be able to add to stocks on that weakness. So you really need to understand when the different assets you hold are going to do well and poorly during the economic cycle and you need to start to combine those players on the team if you will in order to protect each other's weaknesses and allow you to take advantage of dislocation in the market.

SPEAKER_00 29:56

Yeah without a doubt and and if you look over over the long term uh right the SP averaged about 10.6% annually uh if you're buying when equity inflows are the highest right so the the and generally speaking the market will will have been moving higher uh maybe getting to a peak typically your annualized three the annualized three year returns from that point is about five percent when equity inflows are the highest when equity outflows are the highest conversely and you're putting money to work in the S P 500 your annualized returns for the next three years tend to be 13.6% or north of the historical average of the SP 500 and that's it you know sounds like common sense for for investors you know be be greedy when when others are fearful and and fearful when others are greedy but it's very difficult to do in practice especially if you're not diversified properly you don't have a bucket enough buckets to pull from to go add to stocks in that environment and you've already seen your stocks uh get absolutely ripped and everyone else is heading for the door psychologically it's a that's a very difficult environment to be in and again having having a portfolio that's prepared for those type of environments I think helps you better step into into that weakness uh when everyone else is heading for the door uh and make the right investment decision for the long term so Nick basically my takeaway for this entire podcast is don't pay attention to anything except for equity flows and when they're out start pummeling money back into it now I obviously that's oversimplified but at the end of the day like that's that's what you want to be doing.

SPEAKER_01 31:33

You want to be do you want to be buying at times that are scary, right? You want to buy when there's blood in the streets right alongside Warren Buffett, right? He's buying when the equity assets are seeing massive outflows. Um but it's it's it's so counterintuitive because FOMO is so real in the investing game. It's everything in our life is is fear and greed, right? That's what basically you know caused our evolution along the way was being able to you know take advantage of things when times are good and then run fast when there was a uh you know a Loch Ness monster chasing us in the other direction. But that's the reality of how people think about investing too is FOMO is very, very real. If you see everyone getting rich and you hear everyone hey I I just bought three Bitcoins you know two years ago and they're at 24,000 now they're 125000 like it it's really hard to stay out of the way of that vein of chasing. And uh but that's that's exactly the opposite of what you're supposed to do. So that's that's interesting context next I I never heard that uh that statistic around inflows versus outflows and how counterproductive it is when everyone's putting money to work to be putting money to work. That's when you should be taking it out. You should be adding it as people sell out of their assets.

SPEAKER_00 32:40

Yeah man I and I and you know I think uh in in addition to that right we're we're when you're you know not not necessarily timing those moves but um you know when you when you are making those rebalancing decisions again volatility can be your friend if you're you're positioned right and I think the other the other part of portfolio construction investing in general is the fact that you're you're not going to be right a hundred percent of the time um and and so you you want to make sure that you're you're sizing your your your positions properly um and and I think that's something that you know we're going through in building portfolio that's something that we're very focused on and and want to make sure that we're again building out positions that are going to be able to provide performance in in each of those different economic cycles and and um you know I think that's one of the other benefits of our of our process and and using things like like alternatives, right?

SPEAKER_01 33:35

So yeah. I I it's funny that you say that because one of the biggest things when I just talk to like friends that that you know just hey Taylor but you know I I thought about buying this this and that and I kind of oftentimes ask them they may tell me about this great trade that they had and I say to them you know kind of okay well what percentage of your money was in that trade and they're like you know 5% 10% and they made a 100% return or something like that. And I'm like well that's great. And that's five to 10% of your assets like where's the other 95% and they're like well I, you know, obviously I wasn't going to put it all in that basket and I'm sitting on cash with the rest of it. And it's like that that that's the opposite what you're doing is you're taking a very high risk flyer on one and I know that they've gotten some wrong but they only tell me about the ones they've gotten right. So I'm hearing about the good ones and they have a five to 10% exposure and then they're sitting on cash with the rest of it that's just a completely unproductive asset. Right. Especially during a period of inflationary kind of times you you just have that degradation of that cash every single day as it, you know, the purchasing power starts to go away. So instead what it is and what we talk to our clients about is hey we want as much of your capital invested at all times as you don't need for an emergency. Right. So like yes we're not saying don't have an emergency fund on the side or if you have a purchase that's coming in the near future, let's not you know invest that money, et cetera. But otherwise all of your assets need to be invested in productive risk assets, risk assets to be clear you want to be taking risk with all of those assets. But you want those risks as we keep talking about to be complementary to each other. So not everything is doing well at the same time or everything doing poorly at the same time. But every risk asset is going to outperform cash over time. There will be periods of time where cash outperforms other risk assets but there's no risk in cash. So the reward comes along with risk and what you need to do is align that risk and get all of your assets to work in a complementary fashion so you're getting a return a productive return on all of your assets rather than sitting on 90% in cash or something like that.

SPEAKER_00 35:39

Yeah 100% and I think um you know kind of as we go through that portfolio construction process um another aspect that people want to keep an eye on is is the cost, right? And we want to be efficient in the way that we're we're we're building a budget for the investments that we're going to be putting our money into. And you know there's there's efficient parts of the market there's inefficient parts of the market and and so it's important I think uh for investors and something we think a lot about uh is kind of how to spend that budget uh in in accessing these these different markets um across equity fixed income and and the alternative space yeah no doubt about it to your point the efficient areas of the market is where you want to strip out almost all cost right if you're buying US equities there's probably a way to do it almost darn near for free right um in an efficient area of the market.

SPEAKER_01 36:36

When you're buying global equities maybe I don't want to own every Chinese stock. Like call me crazy for that right but if I'm buying a global index I am going to own every Chinese stock. Right. And maybe that's an area where I start to shy away from just the absolute lowest cost approach. You want to be cost conscious with everything. You want to use the least expensive tool for the job but that tool needs to be the best tool for the job too. So um that's it's it's a it's it's a really well put point and it's something that um you know we think a lot about the alternative space is one that is inevitably more expensive, right? And it's not to say that you shouldn't use it because it's expensive. We obviously are big believers in that it's it's always not okay what is the expense ratio of that underlying product it's what's the risk adjusted return it's provided for that expense ratio. Right? That's really and a lot of times it's as simple as just asking you know you look at something like private equity and it's okay the expense is X. What's the return after the expense? Net of that fee. Is it better than what you can get elsewhere? Yeah okay well do we want that expense to be as low as we can? Absolutely but we're not going to get any lower than that because there's nowhere to buy it that cheap in the market. You can't buy it at Vanguard ETF rates in the private equity space. But the performance has been better net of that fee. So that's really the important driving factor there.

SPEAKER_00 37:54

And there's there's been a and interestingly there's been a couple folks uh that have rolled out private equity ETFs um so they're claiming low cost investments into uh into shares of private equity those things have gotten absolutely rolled performance wise um you're you're getting what you pay for uh again it's the wrong vehicle for the wrong asset class so you know you got to be careful uh if you're you're going for always going for the low cost provider uh there can be uh a lot of risk in there especially once you start delving into some of these more inefficient parts of the market.

SPEAKER_01 38:30

Yeah well and at the end of the day like I understand why retail focuses as much as they do on that cost because at the end of the day if you can't discern really differentiating factors between one investment and the other there's one very easy thing to point at this one's higher cost than this one. So I'm gonna buy the lower cost one. But again that that comes with maybe just a lack of knowledge around a lot of the other aspects of an investment that you should be considering when you're thinking about building it. So anyway, um well listen Nick I I think as we kind of wrap things up here at the end of the day the big takeaway from this overall conversation is like listen we're in uncertain times right now. There's no doubt about it. But I think that when you look at history it's more often we're in uncertain times than we are in certain times. And trying to play the game of prediction is one that is not successful over the long term. And that is the game that most investors have tried to play, which is why returns have been as shoddy as they have been relative to just the broad markets. So at the end of the day, it's not about prediction it's about preparation. You know uncertain times are going to present themselves and the portfolio needs to be able to prepare and navigate through all of the geopolitical nonsense and all of the economic cycle that we will inevitably continue to experience going forward. So appreciate the heck out of you guys today uh we'll be back next week on Wednesday thanks so much talk soon. Quick ask if you're enjoying the show hit the follow and drop a rating it helps more folks find our podcast thanks so much in this video is for educational purposes only and should not be considered investment in taxes or financial advice investing involves risk including possible loss of principle always consult a qualified financial professional before making any investment decisions.