now please welcome your presenter brian perry cfp and cfa brian hello how are you today i'm doing awesome andy how are you i'm very well happy spring it's so nice to actually start heading in the direction of not having cold weather i mean it is san diego so it's not that when did we have something that wasn't spread you mean last summer we have spring and summer well that's true yes we might have to toughen you up a little bit we don't have winter here yeah that's true so um yeah i guess it is spring spring has sprung and uh markets like it apparently markets have been going up looking forward to seeing you all in person hopefully it won't be too much longer but we'll see we're still keeping everybody nice and safe and masking up and limiting the people in and out of the office but hopefully the day's coming a little bit sooner if we all get vaccinated where we can come in and see each other in person for those of you that are near one of our office for those of you that are uh a little bit further away we still love seeing you over camera and that's a growing percentage of the people that we talk to um anyway i want to cover a couple things today i wanted to make this we do a lot of these market updates and talk about what's going on in the world and we'll do some of that uh kind of the second half of this webinar what i wanted to do to start though is talk a little bit more about how we look at investing a little bit more at a fundamental level and really kind of go back to basics just a little bit of um just really talking about our philosophy a little bit and so what i'll do is i'll start there and again if you have questions on any of this let me know and i'm always happy to join in a meeting as well if you want to have a little bit more of a one-on-one dialogue on anything we talk about here today or anything at all just let your advisor know i'm always happy to jump into a meeting and have a chat with you so for starters it's like okay let's go to the video board here and let's go the other way because i'm going the wrong way what i want to do here is talk a little bit about how we think about investing and at the beginning how we talk about how we think about stocks and bonds right and how we think about risk because at the end of the day there's a saying that portfolio management is risk management and you all want to make money you all want your portfolios to grow but you all i'm assuming you want to sleep at night as well right and so our goal is always to take the least amount of risk possible in order to get a certain amount of return right and so as a starting point we base all of our investing off of financial planning we are a financial planning and investment management firm right that's why we're always going through cash flow planning with you to figure out what kind of return you need in order to meet your goals from there that suggests what portfolio mix might be appropriate for you and then it's like okay there's lots of different choices about kinds of things to invest so how do we determine what investment to put you in what mix of stocks bonds etc and i'm gonna walk through a simplified exercise here to show you kind of how we think about this i'm to give you a couple caveats first of all i'm going to use round numbers here and some of the percentages that are going to come out might seem kind of commonplace or boilerplate um they're not anybody's mix they're not a recommendation or anything they're just round numbers because that's the way the math works in my little example here the second thing is that uh for those of you that have met me before or seen me um i actually flunked second grade handwriting uh got a d minus and so that's with a pen and paper i'm writing here with my finger or stylist on a screen so it's not going to be pretty but you'll get the concept so how do we think about stock and bond investing here's a way to think about it let's pretend that there are two kinds of uh that there are two kinds of stocks there are large company stocks and there are small company stocks and you can buy either of these and let's pretend that hypothetically you have to choose which has more risk i think most of us would agree that the small company stocks probably have more risk they're a little bit more volatile you would never want to buy just one small company or for that matter just one large company you'd want to buy a basket the entire basket if you go out and buy a thousand small companies they're not all going to go under right but they're going to be more volatile they're going to bounce around a little bit more and whatnot and just to clarify when we talk about small companies we're not talking about mom and pop operations an example of a large company would be mcdonald's an example of a small company would be denny's right so still large companies let's pretend that over time you look at it and the large company stocks have gotten you eight percent and the small company stocks have gotten you 10 right those aren't the actual figures that they have gotten um but from an order of magnitude or degree it's about what these um these have done all right and let's pretend you've gone through your financial planning exercise and it's been determined that you need to get six percent from your portfolio in order to meet your financial goals right so there's lots of different mixes you can use to get to six percent i'm going to limit your options here for the moment and say you've got two choices you can put it in these large company stocks or you can put it under the mattress right if you put money under the mattress the good news is it's not going anywhere you're sleeping on a bed of money the bad news is that it's growing in a big fat goose egg right you don't get any growth when the money's under the mattress so if you're going to put some of your money in stocks getting you eight percent and some of it under the mattress getting zero the question then becomes what percentage of your money would need to go in these stocks in order for the whole amount of your portfolio to get you six percent so here we flash back to third grade math with fractions and it turns out that about 75 so three-quarters of a to six seventy-five percent of your money would have to go into these large company stocks twenty-five percent would be left to go under the mattress that mix that 75-25 would be expected to get you six percent over time so you've met your financial goal all right and again these large company stocks not as volatile as the small company stocks let's run the same exercise though and say what if we bought these slightly more aggressive higher growth but more volatile stocks right well here you're getting 10 percent on those you only need to put 60 percent of your money in those stocks in order to get to six percent which leaves 40 to go under the mattress right so again either one of these portfolios will get you to your required rate of return the difference is that these stocks right here are a little bit more volatile these stocks are a little bit more conservative however here's the key point i might very well want this 60 40 portfolio instead of this 7525 portfolio in order to meet my goals because goal number one is don't run out of money right so you need to get six percent either of these will do it goal number two is to sleep at night i think this portfolio could be more allow you to sleep better at night because it's got more money under the mattress here's a way of looking at that let's say you've got a million dollars and again i want to caution there's no magic to 60 40.
In the financial industry some of you have a 60 40 portfolio some of you have 10 in stock some of you have 100 in stocks it varies depending on your needs it's customized the only reason this is coming up 60 40 again is because the math works that way if you were 60 40 you would have six hundred thousand dollars in stocks that's an st stocks and you would have four hundred thousand dollars under the mattress we'll go m for mattress well what does that mean well let's pretend that you have a million dollars now you need four percent of it each year to live on so you need forty thousand dollars a year in distributions well if i need forty thousand dollars a year and i've got four hundred thousand dollars under the mattress i do some math and that equals ten and you know what ten is in this example ten is the number of years of your spending that you have under the mattress right so think about it this way somebody comes to you and says hey that was a crazy uh coronavirus collapse we had last march oh man that election season was insane i'm worried about midterm elections i'm worried about inflation i'm worried about coving i'm worried about the this and that right you know what you say you say i don't care talk to me in a decade because you know what i have the next decade of my spending needs under the mattress i don't need to worry about what's going to happen tomorrow next week next year next month i've got my decade of spending under the mattress and so that's how we think about combining stocks and bonds is that one kind of stock or one security may be a little bit more conservative a little bit more aggressive than another but we look to combine them so that a the portfolio is expected to meet your required rate of return and b the portfolio will have as many years of spending under the proverbial mattress as possible so that you sleep at night so that you have money to distribute to yourself to withstand market declines you know again of course these are hypothetical numbers and you don't literally put the money under the mattress that might be high quality fixed income and the like but again conceptually this is how we think about building portfolios let's go to some slides here when we talk about investing in that mix of stocks and bonds the one reason that we want to have this mix of different assets is that you sleep at night the other is that at times different types of investments are doing better or worse right and what i mean by that is that reversion to the mean is an extremely powerful influence in the financial markets look at this chart here what this shows is that the performance of these different sectors in the stock market during the worst of the pandemics so from the end of 2019 until november and then from november to now right so you can see that the gray at the bottom online retail home improvement i.t those sectors did phenomenally groceries they did great during the shelter in place era right because you couldn't leave the house if you can't leave the house you need to shop online you might as well make your house nice with some home improvement you still need to eat so groceries right so those sectors did great and then you can see that since then their returns have been much more muted conversely energy did awful during the collapse so did airlines you can't fly why would an airline stock do well right uh reits real estate investment trusts on the on the retail side you can't go to the store cruises and hotels didn't do well you see the losses there during that period but then you see that they're what has done the best more recently as the economy's reopened so again that reversion of the mean that what did best last month or last quarter or last year may not do the best going forward and vice versa right and if you want more proof of that look at this chart and this is a really popular chart in the financial markets and so as we look at this what i would say is that as on this chart you've got a um stack ranking of all the different asset classes so these are the different years 2006 through 2020 all right and then stack rank are the different asset classes from you know best performance or worst each month you know my old eyes are struggling to read this your eyes are probably struggling to read it too no matter how young you are but what i would say is can you tell me what pattern you see and it's a trick question because there is no pattern the reality is that in any given year what did best may do best again it may do worse it may do somewhere in between the different sectors different asset classes their performance tends to be random from worst to first and everything in between and then what you look where that line is going through that's a diversified portfolio thrown on here and what you see is that it's never the best but it's also never the worst and that's another key fundamental the way that we think about this right is when we suggest that a client diversifies we know that the best way to get the maximum possible returns or maybe not the best way but the way to get the maximum possible returns is to take all your money and put it in one investment put all your chips on black for a way of saying it right however that also brings the most risk right so as you diversify you reduce the possibility of hitting a home run you lower your ceiling but what you also do is you raise your floor you raise the range of possible outcomes right and for most of you and for most of our clients as they look at retirement having those middle returns not having to get 20 or something like that but removing the possibility of owning the worst performing asset class only is very acceptable right so we're trying to get that fat middle when it comes to portfolios which is really what diversification does it lowers the ceiling but it raises the floor and for most people saving for or entering into retirement that's a pretty good place to be all right let's talk a little bit about academic research so when you talk about investing there's really three different ways to look at it three or four right so you can go out and you can try and predict what the future holds you can say hey you know i'm going to read this report in that report and look at this indicator and that indicator and then try to speculate on what's going to happen that may or may be possible to do some people are successful for a period of time but it's really really hard to do and a lot of times it's expensive to try and what happens in most cases is that somebody's right for a period of time they build a track record they accumulate a reputation maybe accumulate some followers or some assets and then it tails off from there right so the second way to do it is that you can index you can just go out and try to replicate the universe and that's part of what we do and then the third part of what we do is that we build around it we hold factor based funds that overweight parts of the market that according to academic research have tended to do better so looking not to buy a single best security but rather the best kind of security and in order for one of these things to make sense to us there's like 300 odd factors that academics have found it needs to have a long track record right if it's just worked last year last couple years it could be a product of its environment it's worked for 50 years well then that starts to tell you something if it only works on let's say utility companies maybe that's not as meaningful if it works on all kinds of companies and if it works not just in the united states but abroad right and then so we want these long persistent track records across a variety of places we also want there to be logic it needs to make sense to us right and so when we look at that we boil it down to three four five factors that we think makes sense and i want to talk about a couple of them if you looked back in history and the data goes back to about 1929 or so and you can divide the market really into a couple different quadrants here that i'm going to do i'm going to up at the top here put large companies and at the bottom i'm going to put small i'm just going to abbreviate over here on the left hand side i'm going to put values so these are companies that are a little bit less expensive um they may not be growing as fast it may be in a stodgy industry but you don't pay as much for it and then over here on the right hand side i'm going to put growth and these are companies that are rapidly expanding uh but you pay a lot for that growth think your amazons or your teslas or something like that right and if you look if you the data goes back to 1929 and if back then you had a thousand dollars and you put it to work here's what would happen if you bought all the big companies so you don't try to pick the win or the loser you just buy all the big companies you would have about 600 000 today right which is really good that's a tremendous rate of growth okay but over time it turns out that value companies have done better than growth companies right and that makes sense when you look at value companies think about it in a real estate example if you're looking at two different um apartment buildings and they're very similar in most regards have a lot of the same characteristics both will rent for let's say a thousand dollars a month and one is selling for five hundred thousand one selling for four hundred thousand well all else being equal you're going to get better returns from the one that's four hundred thousand right so what we do is it makes sense that value companies should do better and when you look at the math if you put that same amount of money into just the large value rather than all the large companies you'd actually have about 1.3 million so about twice as much money so over time value has done better than growth again not all the time but over time so it's like all right well what about large versus small well on the previous um when i was drawing a few moments ago i talked about how over time smaller companies have had a little bit higher returns and it turns out that if you measure it and if instead of buying all the large companies you buy all the small companies you'd have more money and that makes sense too right there's more room for let's say um i don't know for denny's or to grow as opposed to mcdonald's right there's mcdonald's on every quarter there's a lot of denny's but there's not one on every corner yet it's a little bit easier trees don't grow to the sky right so if you look at the smaller companies instead of six hundred thousand dollars you'd have about 2.7 million so about four times as much so now we can say that small outperforms large right well if small outperforms large and value outperforms growth what do you think happens if we combine those two and we focus on small value well as you might imagine it turns out pretty well so if you focus on small value you'd actually have about 7.8 million and it's about 13 times as much and again this is over time and it's not every time but this is one of the reasons why we spread positions around and we lean portfolios in the direction of small and valued companies is because the evidence is really compelling and so is the logic the returns are higher plus you get more diversification there are times when small value is doing great there are times when mid-sized companies are doing well and there are times when large growth companies are doing well 2018 2019 was a time when large value companies were doing well particularly large tech small value is struggling since then you know things have changed right and so what we want is we want to have some holdings in each of these positions because when it comes time to generate income what's the number one rule in finance it's sell high buy low well when you're retired if you need money whether it's because you need to live on it or because a required minimum distribution is coming out you no longer have a choice about whether or not to sell you need to put money in your pocket right so what we do is by having diversification you need to sell something you can choose what to sell large growth is doing well sell that small value is doing well sell that mid-size companies are doing well sell that you can get back to selling high and buying low we think that makes a ton of sense over time these companies have done better smaller more value but not all the time and so as you look at it this is the value premium so this looks at rolling five year periods going back to the early 1930s through 2019.
when it's blue that means that value is outperforming growth when it's red it means that growth is outperforming value and i would point out a couple things one is there's a lot more blue than red it makes sense right we just talked about it the other is that the last five or ten years have not been a very good time for value right growth has tended to outperform over most of the five-year periods more recently which as you can see is historically unusual but not unprecedented right when we look at growth companies when we look at um small versus large right the size premium everything to the right everything in blue is a year in which small companies outperformed large companies everything in the light gray is when large companies outperform small right and what you can see is the dark blue cell highlighted 2019 which is when this goes through was a year in which large companies outperformed small but you can see that there's a lot more years in which small outperformed large including more recently small companies have been on fire over the last six or nine months but again these things vary here's more recent so the top left hand column and again there's a lot of numbers on here looks at the 10-year performance and what you can see is that large value companies did okay up about 11 small value did okay up about 10 percent but large growth beat them all up about 16.
So in the last 10 years you would have been better off with all your money up in the large growth but you'd still have done pretty well in some of these other spots now look at year to date so this is over the last three months or so you can see that large growth companies are up a little bit under one percent mid-sized growth companies are actually down 0.6 but now look at the value on the small companies right large value is up 11 small values up 21 so far this year so significant outperformance by small in value over the last three months or so maybe even the last six or nine months which is great right the portfolios again they're a little bit tilted in that direction we like to see that um doesn't mean it's going to continue we don't know necessarily what the future holds we just know that it makes sense to spread these things around all right that's a little bit about how we think about investing um kind of at a fundamental level i want to um switch gears and talk a little bit about the outlook for stocks going forward but before i do andy do we have any questions so our first question comes from roland please address whether we should front load tax recognition this year in anticipation of higher taxes next year you know so our view is that taxes are going higher um at some point right if not this year then at some point uh it's possible i mean i think it's worth considering and again everybody's situation roland is going to be a little bit different so you'd want to kind of look at where you're at right now from a tax perspective where you might be in the future if taxes do go higher um we know for a fact taxes are scheduled to go higher after 2025 the way the law is currently written there's been a whole lot of talk about in washington about raising taxes and frankly with the deficit where it is and we'll talk a little more about that in a minute um taxes almost have to go higher so yeah it could make some sense um again it depends on your individual situation but i think it's worth a conversation with your advisor for sure and the next question is from john when the government lifts the moratorium on foreclosures will we see a real estate crash uh that's a good question i don't know the answer to that um you know i'm not i know real estate and i own some rentals but i'm not an expert i tend to think not i i mean i i don't know that the idea would be that they're not gonna re uh undo the moratorium until such time as covet is mostly done it seems like the economy is doing pretty well unemployment's falling a bunch um i'm sure there'll be pockets so if you you know if it's real estate in an area where let's say the main employer shut down or went out of business because of covid um yeah and that in that scenario you could see some suffering in the local real estate market but all real estate's local i don't see why necessarily that one move would uh would cause a rampage in real estate yeah so well i'm going to say what i my understanding what rolling means i don't want to speak for roland i don't think that's fair but my understanding of the question is that basically let's say that you had a opportunity either to do a roth conversion which is going to cause some taxes in the near term in order to save you taxes down the road or potentially you had something in a taxable account where you had some capital gains that you need to recognize at some point and you could recognize them sooner rather than later my understanding of the question would be that you know all else being equal i mean a lot of people like to kick the hand down the road with taxes as long as possible but if you think taxes are going higher maybe it makes sense to realize capital gains or to do a bigger roth conversion this year while you have certainty around the tax level as opposed to waiting till next year and beyond where a the tax rate is a little bit more unknown and b it could be higher um and for a lot of people it could make sense to it i think it makes sense for almost everybody to at least look at that possibility and see whether there are moves you should make today while for the moment at least you know what the tax rates are i want to shift gears and talk about a few more topical things including the idea of what's going on in the world in the national debt right we get this question periodically this chart looks at the national debt um going back to 1940 through uh it's projected out to 2030 right this is as a percentage of gdp and you can see back in world war ii we had a huge spike in the debt from 40 percent of gdp up to about 100 a little over 100 and then we paid it off gradually it kind of flattened and then starting with the financial crisis it did nothing but go up up up first after the financial crisis and then um kind of flattened out a little bit and now it's gone up a tremendous amount and there's a lot of concern right we're at 107 of gdp is that something to worry about and what i would say is a couple things one is i don't think in the near term it's a significant issue for financial markets right markets can generally only focus on one or two things at a time and most things aren't an issue until there's kind of like um what's that malcolm gladwell book a tipping point or whatever where there gets to be enough people worried or focused on something and then it becomes a thing and i don't think we're there yet with the national debt um so i don't think it's going to cause markets to fall or anything in the near term longer term it needs to be paid back right or at least moderated and the ways that you reduce a debt you grow your way out of it which is the best way right the economy grows more which gradually reduces the debt you could default i don't think we're going to default on the debt you can inflate your way out you have a little bit higher inflation or you can tax your way out right and that's one of the questions circling back to roland and stuff that's one of the reasons taxes could go higher a there's things that the administration wants to bring into place that would need revenue to pay for and so they want to raise taxes and b um over time in order to reduce the deficit you need revenue and one way to get that is from higher taxes right the other is from inflation right and so if you look at inflation things have gone up over time and so the cost of living since world war ii has increased right this chart looks at the consumer price index since world war ii and what you see is it's going up gradually but it is going up and over that amount of time it's about a 13x increase right so if it used to cost you a dollar to go to the movies let's say back in the 1940s now it's 13 bucks right so things have gotten more expensive over time and there's lots of debate over whether the consumer price index or any other inflation measure is accurate whether it understates inflation whether it captures somebody's particular cost of living i'm going to set aside those debates it's not designed to represent any one person right and we can all debate how accurate it is or isn't um but i will say that in most environments the more cpi is rising the more inflation generally is going up because it is a measure of at least in one way of the cost of living right and recently it's been relatively muted although again over time potentially a higher deficit um could lead to higher inflation but what you see here is going back to the early 1970s you see the big spike in the 70s into the 80s and then a moderation and relatively consistent inflation for the better part of the last 30 years honestly south of let's say five four five percent um you know and the one thing i would say with inflation is it's a little bit like the boogeyman right it's often feared but seldom seen uh very few people have actually experienced significant levels of inflation in the last three or four decades um but many people do remember the 1970s and double-digit inflation and how much of an impact that had on the economy and there's a behavioral finance bias in finance called anchoring and what happens is that if you become accustomed to something like let's say 12 inflation that becomes kind of quote unquote normal and then you're always comparing everything to that so if inflation's lower you're waiting for it to go back to those levels or you're worried that it's going to go back to those levels my personal view and again this is speculation is that i don't think inflation's going back to double digits i could see it going higher over the years you know if you think out over the next five 10 years i could see it running higher than it has been but i don't think it's going back to those apocalyptic levels i'll also say this is one of the things that we focus on in the portfolios is and in your planning is how to protect against this right and there's a few ways one is that when you look at it it's like okay let's talk about inflation we run inflation in financial plans at 3.7 percent that's the hundred year average but it's higher than it is right now right now inflation is closer to two percent so we build in a margin of error that if cost of living increases more than expected there's a measure of protection for still making it to and through retirement without running out of money and then the big concern is what happens to financial markets if inflation increases and there's a ton of numbers on this chart but what i would say is if you look at it you see four different quadrants the top left is high and rising inflation so inflation's pretty high and it's going higher the top right is inflation is high but it's falling the bottom left is inflation's low but going higher and then the bottom right is inflation is low and heading lower right so four different environments um the one in the top left has happened 10 times this goes back to the 1980s the one on the bottom left has happened four times the one in the top right six times and the one on the bottom right 13 times so consider the sample size but what you see is that in any of these scenarios most of these different asset classes have done okay in fact the only real environment is if you have low inflation and then it falls further commodities tend to have produced negative returns other than that you see that everything in here has had positive returns across different inflation environments for the last 30 years right and i think that's important to keep in mind when you look at our portfolios we know that inflation is one of the things that you need to protect against and so we work on doing that right and so there are really of several different broad categories of investments in the portfolio and i'm going to call them u.s stocks international stocks bonds let's call it real estate and then nr for natural resources well when we look at this most good companies have some measure of purchasing power and most companies have done okay during inflationary environments and what i mean by this is if tomorrow we wake up and inflation goes from two percent to ten percent everything's going to do poorly but inflation gradually rises over time you know if apple increases their you know their next iphone by ten bucks or verizon increases your bill by three dollars a month you're probably not going to discontinue the service right so we think stocks in the u.s provide some measure of protection against rising inflation then there's international stocks well one of the things i mean the definition of inflation is that money is becoming less valuable well if the dollar is becoming less valuable that means that foreign currencies are becoming more valuable okay when the dollar declines against foreign currencies it is a positive for u.s citizens u.s investors that own international stocks so if inflation increases slightly all else being equal it would be good for international stocks we think there's some protection there natural resources tend to go up when inflation rises real estate good real estate can raise rent some so there's at least a little bit of protection there you can renegotiate the lease and whatnot so then that leaves bonds right so most of the portfolio has some protection against potentially higher inflation bonds are a little bit different right bonds if you lend somebody money for 10 years assuming it doesn't default the big risk is that the dollars you get back aren't as valuable right however you can mitigate that somewhat by owning relatively short term bonds and that's something that we do we're not lending money for the most part for 30 years we're lending it for three years two years five years so that by the time inflation and the purchasing power decreases the dollars have already come back to you right or those dollars can be reinvested at potentially higher interest rates so we think that by focusing on what kind of bonds we own that gives some protection against rising inflation there right the other thing is that inflation could go up but inflation could also fall right and so if these parts of the portfolio are for rising inflation the bonds give you protection against falling inflation and getting back to the diversification the goal of building a portfolio isn't to pick the single best investment it's to pick a variety of investments some of which do good in different environments so that no matter what happens tomorrow next week next year you're going to be okay one of the things that sometimes accompanies higher inflation is higher interest rates and so when we look at the interest rates here um you'll see the gray area is interest rates going back to 2011.
That's the range um starting in the left-hand corner is short-term rates and then moving out to longer-term rates and what you see is three different lines 2013 is gray uh 2020 last summer is purple and then the blue is as of a few days ago right and what you see is that in all three of those environments short-term interest rates were close to zero but there was a great differences among the longer-term interest rates and what i would highlight is that if you look in the last you know i don't know what is that six months or so uh nine months the 10-year treasury here has gone from a half a percent to about one and three quarters so that's a pretty big increase in the ten-year treasury again that's one of the reasons that we focus on shorter term bonds the bonds haven't done as well lately simply because of that rising interest rates generally lead to declining bond prices in the short term in the long term the best thing that can happen is rising interest rates as a bond investor one of the things you want is income right income goes up when interest rates go up so when interest rates go up you get a raise it may take a little bit to realize that raise but it's like somebody's promised you a raise down the road so we view of rising interest rates is a positive for investors one of the other reasons that you buy bonds is because they provide diversification but it depends on what kind of bond you own and the environment right but oftentimes if you look here there are different kinds of bonds and then the correlation to the s p 500 so that means if the s p goes up if stocks go up does the bond go up does it go down or does it just not matter right and what you see is that in the bottom left-hand corner there are u.s treasuries and then some of the foreign bonds and some of the high quality bonds basically have very little correlation with stocks or sometimes even negative what that means is that if stocks fall maybe the bonds go up maybe they go sideways maybe they go down there's no relationship that's what you want when you build a diversified portfolio as you move towards the top right hand corner you're getting more correlation so what you see as you move into high yield bonds and emerging market bonds and stuff like that is that they tend to move more similar to stocks so if stocks go up maybe they go up but if stocks fall they fall the reason we bring that up is for some of you we own some of those higher yielding bonds they can be an important component of a portfolio we call it a plus sleeve right that's a slice of the bond portfolio that gets you higher return but with it comes a decrease in diversification and a little bit more volatility right so it's like everything else in life there's pros and cons and it's about implementing it if it's appropriate correctly but important to remember that the more investment grades shorter term bonds tend to give you better diversification than more higher yielding bonds vis-a-vis your stocks markets have done pretty darn good here in the last 12 months before that some of you may remember last march last february into march was not a very good time for the markets some of you maybe you've wiped that from your memory i you know it was not fun uh this was the sharpest decline probably in history and the swiftest markets fell 30 40 percent in the course of a month when the economy shut down right um that was exceptional that was one of the biggest declines in history but sharp market declines are not unusual right in fact if you look at this chart this is the last what is it going back to 1980 and gray bar is the year ending performance and you can see that in 75 percent of the years stocks finished up on the year the red dot represents the lowest point of the year so the decline from peak to trough and what you see is there's these gray bars and then below it are all these red dots because during almost every year markets suffer a relatively sharp decline so not at all unusual to have a good year but that during that year you suffer a sharp decline the reason i'm pointing this out is a couple fold one is stocks have had a good run so at some point they'll correct and then they'll go back up again right that's perfectly normal the second is because the difference between where those gray bars are and the red dots represents profits that investors that panic and sell are not getting people that move to cash or dive out of the market at those red dots and then don't get back in are experiencing performance that correlates with those negative red returns as opposed to the great positive returns and that frankly is the difference between a successful retirement or meeting your financial goals and not meeting your financial goals so this looks at the last 20 years and the title says it all investors are their own worst enemy this is different investment asset classes in the last 20 years real estate high yield bonds small companies s p so on and what you can see is all the way there doing better only then commodities and cash is the average investor right so people spend a lot of time talking about should they be in stocks and bonds in real estate should they be in big companies or small how much international should they have the reality is almost any portfolio somebody had bought and stuck with would have done better than the average investor that performance gap is again behavioral where people are their own worst enemy they pick one approach and then when it doesn't work right away they switch to a new approach they panic at the wrong moment and get out or they get overly aggressive a little bit greedy maybe and get in at the right take on more risk at the wrong moment and so really you know the way that we think about it is that pure financial and your financial advisor their job is to take you from what the average investor gets to what a diversified portfolio gets right with the idea being that that diversified portfolio is what you need to get through retirement and the goal there then is to help you along to help you avoid making those mistakes that cause the average individual to get significantly less than almost any portfolio mix would get a lot of emotion around the presidential election and elections in general just here to point out that going back to 1929 nearly every presidential term has seen positive market returns there's a lot of red on there a lot of blue on there it hasn't really seemed to matter as far as which color which party is going to be better for the financial markets that's not terribly surprising right i mean a markets tend to go up over time so you would expect most presidents to see the market increase and b while the president does have control there's a lot of other things going on right the last president i mean everybody whatever the response to something is but you can't control there being a virus and an economic shutdown and stuff like that um hurricane katrina in 2005 obviously set markets off stuff like that um there's the federal reserve that has a huge impact on the economy there's congress um there's the decision making of businesses there's the global economy so the president the administration in power is obviously important but they're not omnipotent they don't necessarily single-handedly control the direction of the economy or the direction of the stock market i will end with this slide and this is my uh this is always to end on a little bit of a depressing note um over here in the left this is the u.s national debt um as of about a month ago right 27 trillion 960 uh so when you calculate your net worth statement we're not including it but debt per citizen each and every one of you on this webinar owes eighty four thousand dollars back on our debt and then when you look at the revenue per citizen it's more like ten thousand just picture a business right if the business owes eighty six thousand 000 and has 10 000 coming in that math doesn't work right and that's why we talk about higher taxes that's why we spend so much time doing tax planning that's why we run inflation at slightly higher levels that's why we encourage most or many clients to make sure that they get at least some sort of meaningful return from their portfolio over time is because at some point it seems like taxes have to go higher maybe inflation has to creep a little bit higher because it's the only way to satisfy the debt that we've accumulated as a society and that's continuing to increase um with that let me pause again andy and see what questions there are and so uh don had another question he said if biden gets his infrastructure bill passed is there a way for us to take advantage of that in some way for example buying construction stocks or materials yeah um that's a tough one right so the idea is that they they want to spend a lot of money on infrastructure you know i yes and no i mean so those those are already held right i mean so we already hold in the natural resources section um a bunch of uh construction oriented stocks and materials type stocks so those are already in the portfolio it's not clear yet who the winners and losers are going to be because just because you're going to spend money it's going to happen over the course of years and decades a lot of it is going to be driven not by the federal government but by state governments a lot of it may be with new technologies so it's not as simple i don't think is identifying one or two companies that will be winners but we do have exposure to that in the natural resources slice of our portfolios as well as frankly in the u.s stock slice has plenty of materials and construction companies in there i personally want to say hey let's go out and find like three big construction stocks and buy them because i don't think it's going to be that immediate of an impact as far as from the bill passing to when their revenues start to increase and the other thing is keep in mind it's not like we're the only ones talking about this right markets are forward-looking so it's not like all of a sudden a bill is going to be announcing people are going to be like oh wow there's going to be infrastructure right people know that it's priced in so what will matter is how that evolves over time for each individual company how many projects they actually win right do they win the bid and then if they win the bid how profitable is it do they come in under cost and stuff so it's not as simple as just running out and buying the stocks just because the announcement came out all right and that's all the questions we have hopefully you got some good information out of this about kind of how we think about the portfolio construction process how we incorporate academic research into our process then just a few thoughts on what's going on in the world if you ask me what the market's going to do tomorrow or next month i'm going to say it's gonna go up and it's gonna go down right that's what markets do that's why we have the diversified portfolio designed to meet your required rate of return not every day every week every year but across time and uh thank you all and everybody stay healthy and safe out there take care great thank you brian have a great day