Is Your Portfolio Stuck in the Past?

The classic 60/40 portfolio has been a go-to strategy for decades—but is it starting to crack? 

We break down what’s changed, why it’s under pressure, and whether investors need a new playbook for today’s market. 

Want a free Portfolio review? Feel free to schedule a call with our team today-

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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 strapped in. This one hits hard. Let's go. All right, Nick, we got an interesting backdrop from an investing perspective. We have moved into the Middle East. We have seen blockades in the Strait of Hermuz. We have seen oil prices shock higher. And now investors are fearing an inflationary environment. And I can assure you, from my opinion, an inflationary, or worse yet, stagflationary environment is one of the toughest environments for a retail investor to invest through. We'll talk about some historic analogies and times that we've seen experiences in inflation and stagflation in the past. And then we'll also talk on here about some solutions of where investors can go to find some shelter during these tough, trying times. So, Nick, what are your thoughts on this inflationary backdrop we're currently facing?

SPEAKER_02 1:07

You know, we've been thrust into an environment. I think the the biggest concerns for U.S. investors specifically was coming into the year was valuations, right? Was we had a very concentrated market. The Mag 7 was really leading the way. We started seeing a little bit of rotation out of that. Um, and with the the breakout of the conflict in Iran, man, that things have been shifted pretty dramatically. And the big fear that the market has right now is that we are heading into a stagflationary environment, meaning slower growth, lower growth, uh, and higher inflation. And that has historically been the most difficult economic regime for investors to invest in. Um what's typically been your your diversification has been your bonds, right? But this kind of environment with inflation, that's that's that's gonna be putting a lot of pressure uh on that port of your portfolio on top of the volatility that you're experiencing uh on the equity side of the of the ledger, too.

SPEAKER_01 2:07

Yeah, it's interesting that you framed it the way you did there, because coming into this year, outside of valuations, there was nothing that anyone could see negative with the economic backdrop, with anything that could possibly happen. You had analysts that were off to the races with their forecast of you know stock earnings, et cetera. Um, but yeah, so so now we've had that change, that that little shift in paradigm. So let's talk about some of the exposures in the past during an inflationary environment, because one is very recent, it was very nasty, right? So if you rewind back to 2022, you've got this Russian invasion of the Ukraine that's coupled right alongside with the US and the rest of the world coming out of the depths of COVID. And COVID depths came along with stimulus checks that went to everybody, came along to PPP loans that got lent out to every business, which was a completely forgivable loan. And so you have money slashing around the system, and then Russia invades the Ukraine, supply chains get disrupted. And Nick, what's a 6040 look like in 2022? And and and for for the record, when I talk about 6040, I think most people are familiar, but that is the old school traditional build out of 60% stock and 40% in bonds. How'd that fair, Nick?

SPEAKER_02 3:17

Not so hot. It was actually the worst year ever uh for a 6040 portfolio. Um, your your stocks got crushed and and your bonds absolutely got smoked when it turned out that uh the inflation that was supposed to be transitory was was was not transitory at all. So the Fed really got behind the curve curve. It was the fastest uh they've ever raised interest rates, uh, and and your bonds really, really paid price for it.

SPEAKER_01 3:43

Yeah. And so let's not confuse fastest with highest interest rates we've ever experienced. We have experienced higher interest rates back in the 80s under Paul Volcker when he yanked interest rates higher. What was that a result of? The oil embargo in the Middle East. Now we are in a different environment these days because we are now a net exporter as the United States of oil, versus back then when we were a massive net importer and so, so, so dependent upon Saudi Arabia. So when they said the spick it's off for you guys, you started to have gas lines and inflation just tore higher, right? So let's just talk a little bit about kind of the construct of a portfolio. Because when you think about a 60-40, 60% in stocks, stocks do well in what type of environment? So if the economy is growing and you're experiencing relatively low inflation, stocks are really anybody and everybody's best friend. That is the best asset class to be in in that environment. And if inflation starts to pick up to a modest degree, stocks do fine, right? They can handle that inflationary pressure, they can pass costs through to the consumer and have them pay a higher price at the end of the day, and corporations and profit margins maintain that wide nature. Where it starts to get nasty is when inflation starts to get more meaningful. And that's what we saw back in 2022 in stocks to end the year in 2022. You had the SP down 19, you had the darling tech sector down 33%. And that's when you start to say, All right, I get that my stocks are down, right? They're gonna experience volatility, they're gonna see drawdown from time to time. This is when I'm really gonna lean on my bonds. And really, the bonds came up short there and massively short for context. That was literally the worst year for the bond market since the Revolutionary War. Now, bonds are a lower risk asset class, so they weren't down 19 or 33, but they were down to 13%. That stings. Your low risk asset class is down 13%, right? And so uh let me give a little context and a little education as to how bonds work in an inflationary environment. So a traditional bond has a fixed coupon. So think about like a 30-year mortgage. Whatever your 30-year mortgage rate is, that's effectively what you're paying, right? But as the bondholder, you're receiving that income out of it. So if interest rates are low, say that the environment is warranting a 4% yield on the 10-year treasury, right? And so the 10-year treasury is gonna pay you that 4% coupon. Well, what happens is is when inflation backs up, when inflation goes higher, interest rates go higher and that treasury yield curve shifts higher. So now maybe that 10-year treasury is not yielding four. When they're issuing new treasuries, they're yielding five. And everyone goes, hey, screw that. I'm not gonna buy this 4% treasury. When there's a new 5% treasury that's issued, I'm gonna sell that 4% treasury and the price retreats. And so that's why inflation is the biggest driver of the yield curve. And the yield curve, as it steepens out when inflation picks up, that is when bonds start to take it on the chin. So, Nick, round out any edges there if I puked on myself, which I probably did, on my bond explanation.

SPEAKER_02 7:03

No, I think that's that's a a pretty digestible way to understand that. Um, and I think it's, you know, there's there's when you're looking at interest rate risk in in a portfolio, that's measured by what they call duration, right? Which is just a measure of a bond's sensitivity to the movement in interest rates. The longer your duration is, the more your your bond is the price is going to move when interest rates do, right? So um I think a lot of folks in this kind of environment have been opting uh to try to shorten up duration, to try to take some of that interest rate risk off the table uh by using shorter maturity bonds, you know, typically one to five years versus something like a 10-year treasury or 30-year treasury um out in the marketplace. So uh there's there's a lot of different different different metrics, but I think you gave uh I think you nailed it in terms of the uh the description there.

SPEAKER_01 8:02

Well, I'll take all the lies. Um thank you. But I will also tell you that like when you talk about shortening up your your duration, right, and and having shorter term bonds, maybe a one, two, three-year bond, as opposed to a 10, 15, 30 year bond, there is a double-edged sword there. Where if you the economy actually goes into a true outright recession, and what I mean by that is the economy starts to literally contract, right? That's when interest rates go from an inflationary environment, is when interest rates are going up. And you don't want that interest rate risk. In a in an actual outright recession, what you have is interest rates falling. And the longer duration bond that you have, the more pop. Think about a dog wagging its tail. The end of the tail is long duration bonds. And so, yes, they're the most volatile, but they also provide the most insurance against a recessionary environment. So if interest rates are falling, it's typically because of a recessionary environment, your stocks aren't doing well. So then your bonds, if you're longer term in their nature, provide more ballast. So there is kind of a give and take on this, right? If you run everything short term in nature, you aren't going to get any pop out of it in a recessionary environment. So um, you know, again, I think that it's it's always when interest rates are backing up like they are right now, everyone looks at themselves and they're like, who on earth would ever buy a long-term bond in this environment? You'd have to be an absolute moron. And we haven't seen a true economic recession since 2008, right? And so that therefore, long-term bonds have been everyone's biggest nightmare. And I'm not making the argument to go out and get over your skis and long-term bonds. I'm just trying to draw out here the portfolio construction and and how you know there's a give and take to anything. There's no free lunch.

SPEAKER_02 9:52

No, a hundred percent. And um, and and people have been wrong on that before. You know, we were when we first came into the industry, we were talking about rising interest rates, and we at at the firm I was at were actually selling a negative duration bond fund. So that this strategy would actually make money in the event that interest rates were to go up. The issue was the market sold off that year. There was a bit of a gross scare. We had the European debt crisis pop off. So now instead of having a true bond, right, which has typically has two components the credit risk, right, which performs, which behaves much like an equity, and the duration, which is why you buy bonds, the at interest rate sensitivity, people lost money. They're they were down five, six percent in that particular strategy because they only owned essentially equity risk. So um, you know, there's a lot of smart money out there, and uh, when everybody else is running away from longer-term bonds at this point in the environment, I think they're they're probably looking to add.

SPEAKER_01 10:50

Yeah, yeah, interesting. So let's talk, let's kind of shift the paradigm here. So we talk about how in an inflationary environment, and by the way, towards the end of this, we're gonna get to okay, do we actually think that an inflationary environment is here and going to persist, right? So we will talk about that, but we know it's a rampant fear in the market right now. Um, every headline is about gas prices surging, et cetera, and inflation and CPI just came out last Friday, you know, three trading days ago or whatever, and it popped a massive degree, one of the largest pops we've seen in years. And that was a direct function of oil prices and gas prices moving higher. Gas is in everything that we have, right? Or oil is, whether it's plastics, whether it's your car, literally gasoline, whether it's transportation of goods, everything has some sort of energy component built into it that is generally oil-based. So, anyway, let's get into a little bit of okay, what does actually work during an inflationary environment? Because I think that that is an underowned sector of the investing landscape. And I think it's so crucial for folks to realize, okay, there are components out there that do work. Maybe I'm just not owning them or aware of them.

SPEAKER_02 11:59

Yeah, absolutely. The the first and and most obvious is commodities, right? I think that's typically the best performing uh sector when we get uh uh uh inflationary environment, you know, whether it's uh with low growth or with high growth, energy sector and broad commodities are typically going to going to do well. Those are very volatile spaces, right? And if the the dynamic changes, uh you can you can kind of get caught off sides in that particular trade. But there's things like uh, especially particularly in the alternative universe, things like farmland infrastructure that that all do very well. So, and I think those are asset classes that most retail investors are aren't allocated to uh in a significant way.

SPEAKER_01 12:41

Yeah. Yeah. So let's let's talk about farmland because it's so easy to think about farmland um mentally and draw that picture, but no one owns it. They don't even know it's an investable asset. Um and at life goal, full disclosure, almost every one of our clients owns farmland in some way, shape, or form. Um, farmland, and I'll get to kind of the inflationary aspect of it, but farmland, I often say, is is a play, an investment, on what I call the most predictable thing on planet earth. And the most predictable thing on planet earth is population growth. And you may say, ah, Taylor, what are you talking about? If you grow, if you pull up a chart that shows global population growth from 1960 until today, it is a perfect 45 degree line from lower left to upper right. And so we had 3 billion people on planet Earth, now we have 8.2. And every person I've ever met eats food. There's your demand. Boom, demand increasing very systematically every single year. On the supply side, it's everyone lives somewhere, right? And so as the population of the world gets bigger, cities get bigger, they get pushed into suburbs, suburbs get pushed further out into rural territory, and all of a sudden they start developing farmland. So that's just the supply-demand dynamic that takes place structurally over the long term. And as a function of that, farmland's returns have been incredibly, incredibly consistent. Yes, also through inflationary periods. So farmland has the knee creef index, and it goes back to 1991. So that's the time frame that you can look at the broad index of what farmland has done, and you can compare it to the SP 500. The annualized returns from 1991 until today are 10.6% per year. Now, when you look at the stock market of the last three years, you're like, ah, 10.6, man, you're a loser, right? Well, when you look at it from 1991 until today, 10.6 is directly in line with what the SP 500 has been. But there is one huge, massive differentiator. Farmland has never had a down year. So every single year from 91 until today, outside of actually last year it had a negative year last year because of the tariff kind of influx, et cetera. But outside of that, from 91 to 2024, farmland's been positive literally every single year. And through that time frame, I think you have eight negative years out of the SP 500. So I like the idea of having positive returns every year and netting the same average return as stocks, but not taking on all that risk.

SPEAKER_02 15:09

No, and that's something you can add to your portfolio. And it's not like, hey, this is going to work only if inflation continues to rise, right? This is this is a long-term asset class that's provided consistent performance. And you know, from a correlation standpoint, a diversification benefit, looking at how it's, you know, over the last 20 years, going back to 05, you know, the correlation between publicly traded stocks, both here in the US and internationally, as well as the bond market, are both very close to zero, uh, slightly negative in both cases. So again, another another form of return that you can put in your portfolio that's not dependent on the stock market, isn't dependent on interest rates, pretty indifferent to what's going on with inflation, that's the kind of asset class you want to get into the mix uh to help smooth out those returns in more volatile asset classes.

SPEAKER_01 15:57

Yeah, and I'll pile on a statistic on correlation. So correlation, by the way, when you are building a portfolio, as a professional like we are, the number one statistic you need to understand is the correlation of the assets that you are putting inside of a portfolio. The correlation measures how much they interact similarly. So if something has a correlation of one to something else, that means they go up and down in lockstep. So what Nick just referenced is that farmland has an outright negative correlation with the S P 500. So at the end of the day, your job as someone who manages a portfolio is to give the highest level of return coupled with the lowest correlation. Right? So if now you look at farmland up 10.6, you look at the SP 500 up 10. That is like the holy grail, right? And I'll add another statistic on correlation on top of that, like I said. The correlation from farmland to CPI, headline inflation, is positive 0.67. So what that means is as inflation goes higher, so does the underlying value of farmland. Right? So now all of a sudden, let's think about this. If your safety was bonds historically, now let's think about this other asset class. So bonds over the long term have averaged at about a 4% return. Farmland's done 10. But also, farmland is not susceptible to the biggest risk that presents itself to bonds. And that is an inflationary environment that we talked about before, really beats up the price of bonds. Farmland in 2008, the ultimate bloodbath that any of us have ever seen, any living person that was actually living and at the time, it was like there's no one around from the Great Depression. So anyone living today, or if they were, they were four years old, they don't know. But if they are living today, the worst environment any of us have ever seen is 2008. The SP 500 got cut in half, peaked at trough, down 55. Farm loan was up 15%. Like that it really is a truly incredible asset. So not only is it protecting against inflation, which is a huge risk to the portfolio, but it also protected against recession on the other end.

SPEAKER_02 18:12

Yep. Yep. Very, very versatile asset class. And again, something that the average 60-40 portfolio out there has got zero exposure to.

SPEAKER_01 18:21

Yeah, and let's talk about something else. I I'm I feel like I'm really on a high horse right now when it comes to farmland, but let's keep it going. Um, so the other thing that we always get asked is like, hey, there are some ETFs out there that are in in the farmland space. Let's draw some caution, right? So let's think about there are two types of ETFs that fit in the farmland space. One, and everyone loves an ETF because it's easily accessible. They can go under Robinhood and click bang or Schwab or Pershing or Fidelity, whomever, and just click bang and buy it. But the reality is there's two things that make up the ETFs. One is things like that are farmland related, but not farmland whatsoever. So they are John Deere, they're C. H. Robinson's stock, they're caterpillar stock. Those are all underlying stocks. They aren't literally owning dirt, right? The other aspect of it, and so therefore, you talk about all those correlation statistics that we love farmland for, those go out the window because you just own an underlying basket of stocks. So the other scenario is that they own farmland, they own some actual acreage, but what they also own is about a 40% cash buffer. And so let's think about this now. If you are in an ETF, the value of an ETF is that you can buy and sell it all day long, every day, 30 seconds apart, you can buy it and then sell it. Well, think about farmland. Like, think about putting your mind, literally, we're talking about a thousand acres in northern Indiana. I used to live out there, these blinking red lights going from Chicago to Indiana. It were crazy that the wind turbines, uh wind turbines had blinking red lights, you feel like you're in the middle of an alien kind of invasion at night. But anyway, during the day, you can see it's just all farmland. So think about that, right? That's what you're buying. Well, if you're buying that in an ETF structure, you, Nick, myself, and then 10,000 other shareholders, we're pulling our money and going out and buy, having the manager buy that underlying asset. Well, in an ETF, we can all say we want our money back today.

unknown 20:14

Right.

SPEAKER_01 20:14

Right. And at the end of the day, farmland, very clearly, if you're thinking about farmland, picturing it in your head, is not a liquid asset. You can't buy a thousand acres and then flip it back onto the market in the same day. So you have to really be careful about your vehicle selection. When you're buying farmland or something like farmland that is an illiquid asset, you probably want to not buy it. You definitely want to not buy it in a fully liquid day-to-day traded asset. You actually want to give up liquidity, which is kind of a weird thought. Like, hey, uh, you know, I'm locking my money. That is the type of investment that is very, very, you know, a reasonable thought to say, hey, let's lock up this investment.

SPEAKER_02 20:53

Yep, 100%. And uh, and I think real assets, generally speaking, uh, are gonna follow that that mold, right? And I think that's that's one of the big themes that's out there is kind of this uh the halo theme, right? Um for investors out there.

SPEAKER_01 21:10

Heavy asset, heavy asset, low obsolescence, yeah.

SPEAKER_02 21:12

Yep. I think it's gonna be difficult for for for Claude and Anthropic to go in and and uh disrupt the farmland in the in the foreseeable future as well. So there is that that angle on the on on that that that uh that asset class as well. Um, but I think in in in terms of other real assets, I think infrastructure is another one of those asset classes that most retail investors don't have a ton of exposure to, and it's something that does very well in an inflationary environment. And I think the fundamental case for it going forward, whether inflation is high or low, is is really, really strong.

SPEAKER_01 21:45

Yeah, I totally agree. So let's think about so we just talked about farmland. We talked about commodities, things like oil. Now we're gonna talk about infrastructure. So when you think about the commodity as well as the farmland, which is the production of food. Those are oftentimes literally the drivers of inflation. So it's so logical that those underlying investments are going to do well. When food prices go up, inflation goes higher. Well, guess what becomes more profitable when food prices go up? The farm on the back end, right? And so when oil prices go higher, it drives higher inflation. Well, the oil producers are oftentimes more profitable in that environment. And so that leads me right into the next thought. If you look at your month-to-month bills, one of the largest inflationary components you've seen, not just in the last month since we've been involved in Iran, but literally over the last 18 months, the fastest pace of inflation you're going to see of any line item is your electricity bill.

unknown 22:40

Yeah.

SPEAKER_01 22:40

Undoubtedly. Undoubtedly, that is going to be the largest increase in inflationary pressure that you've experienced as a homeowner, is that electricity bill. And what is that a function of? That's a function of AI, right? So AI is this grand new thing that we all are using and it is making us more productive, right? That's at least the theory. And you are having these massive build-outs by Anthropic, by OpenAI, by Google, by Meta, by Microsoft. They're all spending scads and scads of money. Some people would refer to this as drunken sailor type behavior, but they are building out these massive data centers. These data centers, like to put some context on it, the data center that Meta is building in Louisiana is the size of seven. Seven full-size football fields. And it's aware, like I can't even conceptualize that. Nick, we both played football. Like it took me, uh or it took, you know, we were both not the fastest person in the world, right? So to run from one set end of it to the other probably took us 15 seconds. Now you're doing that seven times over. Like these things are just absolutely gargantuan, right? And so with that, inside of them to compound this problem, everything is very tightly compact, and they are stacks and stacks and stacks of computer servers. And you know, when your computer just like you got too much going on, and it just sounds like it's a spaceship that's about to take off. That's what all these servers are doing. They're running full steam ahead all the time. And so the electricity meter on the outside of that building, like it literally can't keep up. It's mmitting so fast. So what I'm getting at at the end of the day here is the fact that these data centers and the build out continuously strip electricity off of our grid that used to go to Nick's house and my house is now going to an electricity or uh, I'm sorry, a data center. And so that is causing inflation to move higher. But what we're now seeing is that you're getting more and more construction of electricity facilities that sit sidecart to these data centers. Yep. And that is where the investable asset is. And and Nick, you can you can kind of talk a little bit about how the actual contract is structured because inflation is built right into the contract.

SPEAKER_02 24:54

No, and that's and and that's another reason we we love this asset class. It's extremely versatile. Again, the correlation, the diversification benefits you get from private infrastructure uh are very meaningful to begin with. Your your correlation to bonds is just about at zero to the stock market, pretty close to zero. So again, you're not dependent on the stock market going up and down or the way that that interest rates are trading. Uh you've averaged about a 10% annual return going back to 2004. So over the last 20 years, again, pretty similar to farmland, pretty similar to the SP 500's long-term return profile. But if you look when when we do have periods of market stress, right, you go back to 2008, market gets cut in half, the SP 500, private infrastructure was down 23%. You fast forward to COVID, SP is down 21%, private infrastructure is only down five. Um and the way that these contracts are structured, there are typically inflation riders built into the deals, right? So in the event that we do see an extended period of inflation, you're protected in these investments, typically outperforming bonds and stocks in that kind of environment. So again, very versatile asset class. Historically, I think the fundamental setup setup for it is uh is probably the highest return per unit of risk that you're taking that you can get out in the marketplace right now. Um and because because power is really going to be the gating factor for the continued expansion of AI and the trends that we've seen in the equity markets are are going to be reliant uh on this space doing its job and getting up and running.

SPEAKER_01 26:37

Yeah, totally agree. And I think that when you think about, you know, what we're clearly preaching here is diversification. Use different asset classes that do different things inside a portfolio. But oftentimes when we talk about diversification, what rings a bell in people's head is lower returns. Right? Well, we're talking now about asset classes with low correlation. Low correlation immediately means diversification, right? Use those two things synonymously in your head. Low correlation equals diversification. So now we're talking about low correlating, diversified assets that are doing 10. That is what the stock market has done. Right. And so I also think that even bonds, we're not, we're not making the case that bonds should not be a piece of the portfolio. They should be. Like that is when hell freeze is over, economic recession sits in, you know, these assets that we're talking about. Now, granted, farmland has been positive and that's that's a unique one. But infrastructure, as Nick just gave you there, like may see some downside as well, albeit significantly less than something like the S P 500 or publicly traded stocks. But bonds really typically in that true recessionary environment really hold up well. But I think when we talk about diversification, especially with younger investors, they think, ah, you know, nah, I'm good. Like I'll just, you know, concentrate bets and take all the risk in the world and I'll be better off for it in the long run. I think that when you think about diversification, another word for diversification is opportunistic. So when you think about if you are cornered all into equities and even one sector within equities like technology, like so many people are right now, yeah, it might have great long-term performance, but you're literally just on a roller coaster. So in 2022, when a lot of those tech stocks in 2022, by the way, Facebook was down 70, I believe. I believe NVIDIA was down 78, Meta was down, Facebook is meta, right? So, but those big techies were down 50, 60, 70, 80 percent, right? And the Nasdaq index, broadly speaking, was down 33. So if you're just riding that train, then you're just you're just down right in line with it. But if you have diversification, right, that means you have an asset that likely has gone up in value or at least treaded water, as some of these underlying stocks are down 40, 50, 60 percent, then what you do is you take from that strength opportunistically to buy on weakness, right? And that is the value of diversification. It's not just limiting downside, which it does, but it also gives you that dry powder to fire at the market at a period of dislocation. We all know stocks in a recessionary environment, they go down like a coiled spring. Down, down, down, down, down. That coiled up spring goes bang and it erupts higher. Well, you want to be adding to your exposure in stocks in that period of dislocation before that bang comes along. But you need that asset with low correlation that's diversified in order to pull from to make that add.

SPEAKER_02 29:31

Yeah, the required rate of return, if you are down 70%, just to get back to even is 233. That's that's what you got to make from that that point in time, just just to get back to where you were. Um, so it's you know, on on the way up, that that strategy feels really good. Uh, when things are working, it can be a very painful and very prolonged experience um if you're if you're not using forms of diversification with with the way that you're money managing money. Uh and and the other thing to your point about having dry powder, it's you know, it's very easy. Everyone knows the the Warren Buffett line about being greedy when others are fearful and and fearful when others are greedy. Uh if you look at fund flows and the market returns, if you're looking at when equity inflows, when investors are putting the most money to work into the S P 500, the three-year annualized return from that point in time is 5%. Right? If you're buying when everyone else is selling, when when outflows are the highest, your returns are 13.3%, 3% a year better than the average of 10 and a half for the SP 500. But that it's very difficult to step into that part of the market psychologically for anybody, even if you are diversified. Um, but if you've just experienced a 50, 60, 70% loss, getting more capital and going back in at that point in time, you know, very, very difficult to do.

SPEAKER_01 30:59

It's so easy to talk about buying low and selling high. It's it's it's it's fundamental to success over the long term, and everyone knows it. But it's scary when things are low. So just rewind back um uh two, three weeks ago. Three weeks ago, I think the bottom uh two and a half weeks ago, the market bottomed in this, you know, and it's not to say that it's definitively have already bottomed with this Iran conflict. But at that time, what you have is the United States at war with another country with the very real potential that we put troops on the ground into a, you know, the sandbox of Iran that has been dug in and preparing and preparing for this for over 20 years. You have Trump saying that we are going to end a civilization. You have Iran responding with firing missiles at tourist locations where Americans they think are in foreign countries like the UAE, like Qatar or Qatar, whatever you say there, et cetera. You have them then going directly at where the biggest oil production is happening and trying to decimate scorched earth to the oil facility that is so fundamental to the overall globe's success. Yeah, let's go ahead and buy then. Right? And you should have been, you should have been, but it is a tough, tough, tough pill to swallow at the time because it's scary as all hell. I can tell you that, you know, thankfully, we've we've trained, you know, it's that sounds so bad like when training dogs like that. That's not what our clients, though, we've educated them well enough over time that we weren't getting calls. But I'll tell you that people that don't talk and educate on diversification, or worse yet, don't diversify, and all of a sudden their client portfolio is down 12% a month ago, and then they pull the ripcord at that point, and the market bounces right back. That's how you wave goodbye to a client at the end of the day.

SPEAKER_02 32:56

Yeah, no, it a hundred percent. And and again, I think I think the the client reviews that we've had uh over the over the last month, I people are been extremely uh pleased with the performance we've provided again and seeing the benefits firsthand uh of how this diversification works within their portfolio when things start going sideways, right? So um I think if it's it's not something that you're doing, if you are running concentrated equity portfolios, it's it's worth taking a look at some of these other asset classes and the benefits it can it provide to your portfolio from a risk-adjusted standpoint.

SPEAKER_01 33:34

And it's it's so interesting, Nick, that you bring that up because we had someone that came to us recently from another financial advisor. And so they came to us from another financial advisor, and when they came to us, they were simultaneously interviewing one other financial advisor. So they knew they were leaving their current and it was gonna be us or someone else. And what they said was, hey, let's see the performance. And they were showing the performance of the underlying advisor where they were also interviewing them. And what you saw was that long-term results by that advisor were very solid. And so over the past 10 years, like the more risk you've taken, basically, the better your returns have been, right? And so when we popped the hood, though, and you actually saw the flows to and from the advisor, the advisor got absolutely decimated with outflows. The 10-year track record looked really solid, but when you zoomed in, the downside risk was so prevalent that they gapped their clients down. Their clients pulled the ripcord, they lost half their assets in one year because of these concentrated equity bets that they were placing. And so that pop on the other side, although the performance did pop and the long-term average was actually solid, you had the realization that while they took on far too much risk here, the client couldn't stay with their butt in the seat through the roller coaster ride, and they lost half their clients after a really bad year. And then the clients didn't experience the really good year that came thereafter with those concentrated bets. So it's it's such a psychological game that that that we play and that all investors play at the end of the day. So stripping some risk out at the end of the day and having yourself some dry powder to get opportunistic in a nasty time is really, really indicative of what long-term success looks like.

SPEAKER_02 35:18

Yeah, 100%. And I think it and I think it can help on the tax efficiency front too, with all those all those different asset classes. But there's there's there's a a long list of benefits that having these these types uh of securities and asset classes can have for your portfolio, no matter what the economic environment that we're we're going into is. Um, and it's it's something I think all investors should should really be considering when they're putting together a portfolio.

SPEAKER_01 35:43

Yeah. So at the end of the day, I will also make this comment that like our base case as a firm is not that inflation just absolutely tears higher from here, but that is just a fear in the market. So what we wanted to do is address that on this podcast. There are asset classes out there that work really well. It's all about something that we beat a dead horse on here. It's diversification because you won't get over your skis and see more downside than you're comfortable with. It'll allow you to have the dry power to fire at the market at the right time when stocks really get dislocated. It really just keeps people's butt in the seats, keep their long-term compounding schedule in place. And we all know that compounding returns, the eighth one eighth one of the world. The last thing I'll say on inflation, real quick, is just that over the long term, in the short term, when oil prices shock higher, like we've just experienced, inflation moves higher. But over the longer term, as counterintuitive as it sounds, high oil is actually a deflationary pressure because what happens is high oil leads to high gas prices, leads to high food prices, leads to high input prices in all corporations what they produce. So when that goes higher, it drives up the cost for things. People are spending more money on things like gas, on heating their home, et cetera. And they cannot afford to buy as much goods in the marketplace as they would have in the past. And it in turn winds up being a deflationary pressure. So I think you have to look through the short term. Oh my gosh, everything got expensive really quickly, and zoom out and realize that as counterintuitive as it is, high oil prices typically is a deflationary pressure.

SPEAKER_02 37:27

Yep. No, I think it's it's um again, having a longer term perspective always helps when you're when you're making investment decisions and you don't want to be too impulsive. But um yeah, we'll we'll we'll continue to monitor and see how this this situation plays out. I think uh, you know, hopefully the ceasefire uh resumes and uh we can get a get a resolution to it here. Um, but we will see. Every market's watching it closely, and and and so are we.

SPEAKER_01 37:54

Absolutely. Well, guys, thanks so much for listening. Uh, we'll see you in a week and we'll chat next Wednesday. Thanks so much. Quick ask if you're enjoying the show, hit the follow and drop a rating. It helps more folks find our podcasts. Thanks so much. The information discussed in this video is for educational purposes only and should not be considered investment, tax, or financial advice. Investing involves risk, including possible loss of principle. Always consult a qualified financial professional before making any investment decisions. Past performance is not indicative of future results.