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The Smart Take:
2022 has been a bad year for most investors. Both stocks and most bonds are down sharply. You may be wondering why?
Hear Kevin explain what has been happening in markets with key points related to understanding diversification, risk, and four key economic regimes for investors to balance against. Learn why even a “balanced investor” has 90% of risk coming from one asset class, and why bad behavior is causing severe pain for many return-chasing investors as they go down with the ARKK.
The egghead alert may sound on this episode, but Kevin will keep things at a high, understandable level at this crucial time.
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The Host:
Kevin Kroskey – About – Contact
Intro:
Well, hey there, and welcome to another edition of Retire Smarter. Walter Storholt here alongside Kevin Kroskey of True Wealth Design. He’s the President and Wealth Advisor there serving you throughout the greater Pittsburgh area, Southwest Florida, and of course the home base, Northeast Ohio. You can also find us online from anywhere at truewealthdesign.com. Folks, get ready for it. Unfortunately, he does not have the golden pipes today. The show must go on, Kevin. You’re embodying that showbiz spirit. I’m proud of you.
Kevin Kroskey:
There you go. I don’t know if I’ve ever had the golden pipes. What’s the old saying? The old self-deprecating humor, maybe I have the face for radio or face for podcasting, but certainly not the golden pipes.
Walter Storholt:
There you go. There you go.
Kevin Kroskey:
In fact, my kids are still at the age where they don’t know that they inherited daddy’s voice, so they sing and it’s the cutest, but most awful-sounding thing in the world. And it’s all my fault.
Walter Storholt:
They’ll be able to get away with it for a few more years, and then they’ll start realizing, “Uh-oh, I don’t have the gift, maybe.”
Kevin Kroskey:
Yeah, maybe. It’ll be a sad day for sure in the Kroskey household.
Walter Storholt:
I used to be part of what we called the Frog Choir, Kevin. It didn’t matter what your voice sounded like. It was the passion behind the music that was important. It was a choir made up of all guys who are terrible at singing. All we were really going for was heart, passion, and volume. Those were our strengths.
Kevin Kroskey:
The Frog Choir?
Walter Storholt:
The Frog Choir is what it was called. Yeah.
Kevin Kroskey:
I might have to tuck that in the back pocket and bring it out from time to time, Walter.
Walter Storholt:
Yeah. I have a good radio voice, but it did not translate to music, unfortunately.
Kevin Kroskey:
Very good. Well, I’m not sure how to make the nice segue here, but work in a frog somehow. Maybe this, maybe the markets have been having a frog in the throat over the last several months.
Walter Storholt:
There it is.
Kevin Kroskey:
There we go. I pulled that out in some way, shape, or form. Today, I don’t really have much prepared, but I know a lot of people are probably looking at their portfolios and wondering, what the heck is going on? Stocks are down, bonds are down. They’re really not understanding, and they’re concerned. So I thought it would probably be worthwhile for everybody just to go ahead and talk through what’s been going on, as well as having some reasonable expectations and what certain purposes of investments are in your portfolio, and really touch on diversification as well.
Kevin Kroskey:
And Dr. Finka, who we had on recently, touched on this. But one of the things that he said in closing, on a bit of a pessimistic but probably a realistic tone was just a lot of bad news for retirees in terms of low expected returns, some inflation that we’ve been having. And that’s really come to manifest just over the last several weeks, and we’ve seen that in investment markets. So I thought that’s what we’d just riff on that today and tackle it. If I get too far down the rabbit hole or start using too many numbers or acronyms, you can go ahead and hit the nerd alert.
Walter Storholt:
The good old egg head alert? I’ll get it queued up.
Kevin Kroskey:
Get it queued up. Yeah.
Walter Storholt:
I’ll get it ready to go. Yeah.
Kevin Kroskey:
But more importantly, bring me back and don’t let me go down there too far, okay?
Walter Storholt:
Fantastic. Well, I am definitely, I’m sitting here with my hand raised, Kevin, as someone who’s just in all honesty, somebody who’s looking at the market and feeling a little… despite all the calmness that you present on the show and the education you provide, that emotional bone is taking over a little bit. Yeah, I feel nervous. I feel the effects of the roller coaster up and down. So looking forward to your calming guidance on the show today.
Kevin Kroskey:
Well, that means you’re a human, Walter.
Walter Storholt:
That’s a good thing, right?
Kevin Kroskey:
Yes. I mean, I don’t want to say varying degrees. We’re all are unique snowflakes. You used to say that all the time, but now snowflake has some other connotation.
Walter Storholt:
You said it before. It got all twisted into something else.
Kevin Kroskey:
Darn it. They stole my word. But candidly, one of the things that makes a really good investor probably also makes a good psychopath is a lack of empathy. When you can really just be very rational and think through things. There’s been a lot of different neuroscience brain studies that have shown this to be the case. In fact, probably my favorite, and this isn’t necessarily tied to empathy, but the amygdala, the real part of your brain that is the lesser developed, if you will, it was the fight or flight mechanism. It can’t distinguish between a bear market or a bear in the woods. The latter of the two is probably more risky to your existence. But there was a study, I think it was like 2005. I’m going from memory here, but it was out of the University of California, Davis. And they studied people with damage to their amygdala and put them through a series of stimulus response-type questions around investing. And the conclusion was that the people with brain damage were actually better investors than healthy brain people. Because they weren’t as emotional, because they weren’t as-
Walter Storholt:
Fascinating. Absolutely fascinating.
Kevin Kroskey:
Yeah. And then I’ll set this up too. The next episode we’re going to do, I’m going to have my partner Tyler Emerick on, and we’re going to talk about some of these, I don’t want to say tricks that our brain plays on us. I mean, they tend to work really well in many areas of our lives, but when it comes to investing, they can actually tend to cause harm. So it doesn’t mean that our brains aren’t working properly or what have you, but there are some tricks or shortcuts that the brain uses. It’s very, very useful in other areas of our life that don’t work so well when it comes to investing. So that’s where we’re going to go to in the next episode, but it will have some play into today too.
Kevin Kroskey:
We have this and even before we get into, I guess, the returns and diversification and all that jazz, let’s not lose sight of the purpose of all this. Obviously, nobody likes to see their accounts go down, but as we’ve talked about and practically preached on the podcast over the years, really you what’s the purpose of the money. The purpose of the money is not just to see how many dollars you can accumulate it’s to make sure that your lifestyle is being able to be maintained and preserved over time when you do go ahead and turn off your paycheck and what you’ve accumulated has to last the rest of your lifetime. And we don’t know how long that is, and we don’t know what inflation is going to be, and yes, the future is uncertain, but, step number one is to have your money last at least a bit, a little bit longer than you do.
Kevin Kroskey:
We have our Retire Smarter solution that we go through, six step process that really compartmentalizes these. And I think helps people understand really what’s required to have a good plan in place to make sure that their goals are met, that their lifestyle is preserved and we’re making smart decisions. I think it’s episode 45, if you want to go back and take a listen to it. But the investments, the point being is, they’re not looked at in isolation, they’re looked at in relative to your lifestyle relative to your financial life plan. Your investments need to be stress-tested against that life plan. You need to measure your required return. How much do you really need to produce to go ahead and make sure that you have a high probability of meeting your goals and maintaining your lifestyle and what have you. That you need to measure your capacity for risk.
Kevin Kroskey:
How much risk can you legitimately afford to take? A lot of clients can take quite a bit, but then the third variable there is, they may not feel comfortable with it and we call that risk tolerance. So that’s more the emotional side of risk-taking. All of those are very, very important. So, even though we’re going to talk about investments today, I don’t want to lose sight. That first step that I just highlighted is really where you need to start and is really, really important. And as I mentioned, when we had Dr. Finka on the podcast, and thanks again to Dr. Finka, I’m sure is not going to listen to this, but I had a lot of people reach out to me. We seem to have a lot of advisors that actually listen to the podcast and have positively shared that they’ve actually picked up a lot of things that they’ve used to help clients.
Kevin Kroskey:
That’s been a pretty cool thing. And a lot of them hadn’t heard of Dr. Finka and actually got a lot of good takeaways from that. Had several clients actually told me it was one of their favorite episodes, favorite series. So that was really, really great feedback to hear. But as I mentioned, he talked about the low return expectations, really the way he phrased it was the bad news for retirees today. People, not that they’ve been retired for maybe 10 years, people that have been retired for 10 years have had really, really good returns over the last 10 years. They’ve had low inflation. They’ve made it through sort of a retirement red zone where those first few years leading up to and into retirement tend to be the most risky and largely determine the success or failure of a retirement plan.
Kevin Kroskey:
So what he’s talking about is really the people that are in that retirement red zone today, the people that are nearly approaching or just getting into retirement. And he’s saying for those people that… Really the news is pretty bad. And for those reasons, I said the markets are generally expensive, whether it’s the bond markets, the stock markets or the real estate markets. All markets are pretty well expensive. Sure, we’ve enjoyed quite high returns, but a lot of those positive returns have arguably been pushed forward over the preceding years and really are going to take away from what we can expect going forward. We talked about inflation and it’s not just inflation there, but it’s really, and this is something we’re going to get into today. It’s really changing expectations. It’s not that “Hey, inflation is two or three or 7%.” But it’s really when those expectations of like, “Hey, we’re expecting maybe 3%, but now we’re getting something much higher than that.”
Kevin Kroskey:
Or, hey, we think, inflation is transitory due to COVID, but we have ongoing supply chain issues. We have truly some persistent inflation. We have worker shortages. We don’t have immigration. China is locked down impacting the supply chain. We have Russia invading Ukraine, roiling energy markets, you name it. There’s a lot of things that have happened that we had expectations, but they’ve changed quite a bit. And we’ve seen that royally impact stock and bond markets over the last several months. So those are setting the stage for what we’ve seen here so far this year, but I just pulled up a quick list of some broad index returns. So these aren’t actual investment returns, indexes don’t have fees, all the common disclosures there. But if we just look at year to date and here we record this on May 11th.
Kevin Kroskey:
So these are returns through May 10th. So year to date, 2022, the Russell 3000 growth. So these are more growthy assets. We’ve done a lot of episodes over the last couple years about how these growth assets are destined to underperform. They had really strong returns, but they were candidly trading at nose bleed valuation levels that just couldn’t really be justified, somewhat similar to what we experienced in the 1990s with technology stocks. And nobody can predict the timing when these things are going to happen, but it often tends to be pretty swift. And that’s what we’ve seen. So the Russell 3000 growth is down, let’s see, 24%, the NASDAQ’s down actually a little bit more than that. If you just look at the S&P 500, so now the S&P 500 is still fairly growthy. I won’t get into the reasons why, but it’s changed composition due to what’s transpired over the last decade or so, but that’s down nearly 16% Russell 3000 value.
Kevin Kroskey:
So now here we go to the other side of growth. So these tend to be cheaper stocks tend to be slower growth. They may have a little bit more debt on their balance sheet, things along those lines. It’s only down 9%. So quite a big disparity there between growth and the value, about 15% difference between the two. And then here’s the one that also is getting people, “Hey, what about my bonds? What about the thing that’s supposed to be the safe part of my portfolio.” Well, if you look at just the US aggregate bond index, so the Bloomberg Barclays US Ag Bond, it’s down just about 10% year to date. So, Walter, I’m looking at this here, and granted I’m a little under the weather, but I didn’t see any positive numbers there. Did I miss something?
Walter Storholt:
I heard a lot of negatives in there.
Kevin Kroskey:
A lot of negative.
Walter Storholt:
I’m picturing lots of minus signs.
Kevin Kroskey:
Yeah. So this comes back to the idea of diversification and most people, particularly when they start working with us, they generally will have a majority in US stocks, people, not just in the US but around the world have something that’s called a “home country bias”, we tend to prefer the things that we’re more familiar with. We tend to prefer those things that were around, whether we drive, buy Walmart or McDonald’s, or Amazon, or whatever the case may be. We tend to own more of those things that we’re familiar with. It just comes back down to that behavioral aspect of our brains.
Walter Storholt:
Is that necessarily a bad thing, because I mean, I’m just going to take an everyday example, like Shark Tank, they say all the time like, “Hey, this looks like it might be a great investment, but I just don’t know this space. So it’s not right for me, I’m out.” Now that’s a little bit more complex as they’re actually talking about helping to run the business in that space. So I realize there’s more context there, but it seems like that’s championed is a good decision to invest in what know.
Kevin Kroskey:
Yeah. There’s a really big difference here. I mean, it’s a good point that you’re making and there’s a really big difference here. And here’s how to take a quick tangent and this is something really important to keep in mind. And I think a lot of business owners suffer from this too because if you look at the people that have created the most wealth in our country and around the world, it tends to be business owners, somebody that had a lot of concentration that maybe had some luck, I’m sure they worked really hard and they created a successful business and probably a significant amount of wealth for them. And that’s how they created it.
Kevin Kroskey:
But how they created it and how they preserve it are generally two different things. What you’re talking about and what the Shark Tank people are talking about is buying an individual business, is operating an individual business. What we’re talking about is really diversifying and not taking any specific business risk, but taking market risk. And those are two different types of risks. You can own a whole group of stocks, whether it’s the S&P 500 or many others, and you can diversify any specific and here’s, I’ll give you the egghead alert here, Dr. Finka would call this idiosyncratic risk. But basically, that is…
Walter Storholt:
Yeah. That triggered it. That did it.
Kevin Kroskey:
It’s been a while since I heard it.
Walter Storholt:
Idiosyncratic.
Kevin Kroskey:
Yes. Did you just actually start slipping and call it idiot syncrantic risk.
Walter Storholt:
I might now.
Kevin Kroskey:
That actually-
Walter Storholt:
That’s the alternate spelling.
Kevin Kroskey:
That might work pretty well, but you don’t get compensated from taking risk in an individual company. There may be a luck factor, you may create significant wealth, but the reverse may be also true. And many people have seen that over time, but it’s just very different. I mean, we’re talking about apples and oranges, truly, particularly for people that are in retirement or close to it. And we’re talking about making sure that their money’s going to last their lifetime. Probably one of the worst things you can do is really take a lot of concentrated bets. Certainly, it could work out, but the probabilities are not in your favor. And you could really end up losing the war on the last battle, which makes zero sense.
Kevin Kroskey:
So, yeah, it’s a great question, but it’s a diversifiable and non-diversifiable risk. If you’re going to take market risk, broadly speaking, that’s nondiversifiable and generally speaking risk and return are related. So if we’re taking market risk, we expect to be compensated for that, otherwise, why would we take the risk. We would just own bonds or cash or whatever the case may be.
Walter Storholt:
I know you’d set me straight. Yeah, I appreciate that. Thank you for the tangent.
Kevin Kroskey:
Yeah. It’s a great question. I went through quickly through the different returns, we’ve been in this, and this will get into the next big transition anyway, but we’ve been in this period of low inflation, low inflation expectations, and high growth over the last several years I mentioned many, many times about how these high growth assets. Yes, they’ve done well, but candidly, it’s not. And some companies certainly have grown and grown their earnings and grown their earnings for share. And that’s been a net contributor, but if you look at it in general, it’s really been a behavioral thing where people just have bid up the price. So rather than paying $20 for every dollar of earnings for the company, we said, “no, no, thank you. We think it’s worth 30 or 35 or 40”.
Kevin Kroskey:
And they just really bid up the prices of these stocks. And it happens time and again, and it’s just how people are unfortunately, it’s the sort of a euphoria that they have. There’s a crowding behavior, they have this FOMO of missing out and then they just start of chasing on and driving up the price further until the music runs out. And the music certainly has run out over the last several months. And we’ll see what the future holds beyond this. But if you look at some of the real high flying names over the last several years, over the last decade, but particularly over the last several years too, all the famous stocks we’ve talked about, you down much, much more than the broad growth index that I talked about.
Kevin Kroskey:
There’s one that I particularly like to pick on. It’s the poster child or this whole era, it’s an exchange trade of fund. It’s the Ark, ARK, Innovation ETF. And it’s mostly Tesla coin base, a few other high-flying companies that have very low earnings and very high multiples that people are paying, and the ticker symbol, if anybody wants to take a look at it is ARKK. And unfortunately, it’s been so commonplace that we’ve seen this in portfolios, for people that we’re starting to work with, and they’ve just completely chased these returns on the way up, and the returns really the most flows into the fund. And this happens time and again, this isn’t just ARK, but this any sort of exuberant prior like this, you see this happen, people don’t… They use that hindsight to go ahead and pick this fund.
Kevin Kroskey:
They say, “Wow, this fund has had like really, really high returns over the last three years. I should go ahead and invest now”. And then they pile on as the price is already high. So the price is already run up on these things. Most of the flows for ARK came in, starting in December 20, January ’21. It reached its peak in February, 2021. It’s down more than 70%, from that high in February ’21 to where we are today. And it’s down more than 50% in 2021. So all those people, if you look at the five-year returns for ARK, it doesn’t look all that bad. It’s certainly relative to risk. It’s not all that favorable in my view, but the thing is, those are what’s called the time-weighted returns, whether you go on Morningstar and you see that reported or Yahoo Finance or wherever the case may be that you’re getting information.
Kevin Kroskey:
But the actual money-weighted or dollar-weighted returns that people are getting are way, way less than that because they bought in at the high and now they bought in probably somewhere around the high water mark, when all and say, “Hey, look at this fund, we’re a five-star fund. This time is different. Don’t invest that old way, invest this way.” And then they bought in, they crowded in, and now they’re down probably 50, 60, 70%. And unfortunately, I mean, I think of a new client that we have, and literally, all of their money is in this large growth bucket, ARK is in there. And we’re working with them candidly, we didn’t explicitly say this, but we look at this like, wow, this is crazy. It was my initial reaction. This is not rational. I know is maybe a more fairway or the way that we would speak to somebody about this. But they’re down like 30% year to date and they’re freaking out and say, I mean, this is why this is exactly why you chased it on the way up.
Kevin Kroskey:
You bought it when it was already high. Now the music ran out. Now the market is down and now you’re scrambling saying, oh crap, what do I do now? And it’s unfortunate, certainly, we wish we would’ve been able to meet this person before they made these decisions, but, there’s no time like the present to be prudent. So it is what it is, unfortunately, or the old adage of Wall Street charges, high tuition, unfortunately, comes to ringing in my mind as well. That’s been the environment that we’ve been in. We’ve been in this high growth low expected inflation. You had things like growth stocks doing really well, corporate bonds doing really well. And just US stocks in general and developed stocks, in general, have done really well. That’s been this predominant regime that we’ve had over the last decade or so. And that’s where most people’s assets are. While you’ve heard of the traditional 60, 40, I bet.
Walter Storholt:
Yeah. The 60/40 portfolio.
Kevin Kroskey:
So what’s the 60/40, as you understand?
Walter Storholt:
60 stocks and 40 bonds percentage-wise.
Kevin Kroskey:
You got it. And if you look over, and that’s pretty common and literally it’s not just people, but literally institutions, endowments, pension funds historically had risks similar to that. It’s evolved from that over the last decade or two. But it’s a good starting point, if you will, it’s fairly common. Most people know just as you do. And it had its best, best risk-adjusted returns, really over the prior 10-year period ending last year. So we’ve been in this regime where interest rates were declining, growth was going well. All these stocks were just people were bidding up the multiples, bonds did well and now it just changed and it changed quickly. And there’s two key variables that I would think about when you’re thinking through this. And it’s really unexpected inflation changes.
Kevin Kroskey:
And again, here’s that unexpected word. It’s not just if we have inflation, it’s really the change in expectations. It gets a little wonky to think about. And then the other one changes to growth, whether we have higher than expected growth or lower than expected growth. And if you plot those out, on think of like a little map, you come up with like four quadrants where you can have high unexpected inflation and low unexpected growth, so on and so forth. So what I mention is like really that prior 10-year period or so really since the financial crisis we’ve had that low expected inflation, high growth and growth stocks, corporate bonds, all really developed market equities have done really, really well.
Kevin Kroskey:
And this is where most people have most of their assets. And that traditional 60/40 stock-bond, even though you have 40% in bonds here, I’ll ask you a question, Walt, and I don’t expect you to know this, but I think you might be able to make a good educated guess.
Walter Storholt:
Okay.
Kevin Kroskey:
How much of the risk in the portfolio, traditional 60% stock, 40% bond, comes from stocks?
Walter Storholt:
60% of it?
Kevin Kroskey:
And here’s the thing. And that’s a good guess. Okay. I mean, because it seems like what you would think. That seems logical. Well, I mean, I got 60% in stocks and 40% in bonds, but, but here’s the thing, one, stocks, in general, have leverage, companies borrow. So on average, if you look at the S&P 500, there’s a two to one leverage ratio that they have there. So there’s automatically, anytime you have leverage, you’re going to have more volatility there, and stocks are inherently more volatile than bonds to begin with. So, because they’re more volatile than bonds, when you actually decompose the risk factors, literally about 90% of the risk in that traditional 60/40 stock-bond comes from stocks 90%. It’s just because of that volatility difference that I just described.
Walter Storholt:
So the 60/40 mentality of being the split of risk is really a misnomer or a really quite a piece of misinformation, I guess.
Kevin Kroskey:
Yeah. Completely is. The 60/40 on a risk level is really 90/10, stock and bond. So in terms of risk in terms of defining it by volatility. So if stocks are down a lot and bonds are holding their value, that may be fine, but, because 90% is coming from stocks, it’s still going to dominate the portfolio. And then obviously we have times like we’re in right now and we’ll see if it continues, but we’ve seemed to gone on through a few of these different quadrants quite quickly. We went from the period that we’ve been in. Actually, it seems like we’ve gone through all four, really in the last couple years, which is a little bit unique, but low expected inflation, low growth. So whenever COVID happened and the whole world shut down, we had inflation expectations dropped through the floor, growth expectations dropped through the floor.
Kevin Kroskey:
It was a shock. These are also things, not just like COVID, the great depression, financial crisis, the tech wreck, when things just go really, really bad, really the only thing that does well in those environments are government bonds. So while we’ve had this period that we’re coming out of and growth stocks did well, corporate bonds did well, real estate did pretty well. Even value stocks did fairly well. All developed market equities did good. When COVID happened or those other big severe events that I just mentioned, it’s really only government bonds that shoulder the weight there. Everything else, you may have heard the phrase, all the risks go to one and everything else just drops together. Government bonds are really been the only historical solace in that environment.
Kevin Kroskey:
We had that in March of 2020. Then we got through that. The Fed came in and just went with their bazookas and started to quote-unquote “printing money.” And we had also fiscal stimulus with checks being sent out to people both here, domestically, and global central banks around the world who got back into this high growth. We had low inflation expectations. And then really, we’re just more recently got into this high unexpected inflation. And we still had fairly high growth. So I would say that’s been more typical that we’ve seen over some months where real estate was still doing fairly well, commodities, have done pretty well. Even some emerging market bonds and stocks do fairly well in that environment.
Kevin Kroskey:
But, that was probably a period. If you think more so like the 2000s, you post the tech wreck and before the financial crisis, I would say that would be more emblematic of that period than any. And now more recently too, we were still growing well, but the markets seem to be more concerned about inflation, but now at least over the last couple of weeks as stocks have sold off quite a bit and bonds have actually started doing well again, we’ve had more concerns about growth. So the markets have become more volatile in general in regard to these expectations. And I think that’s probably something that is likely to continue for a while, but in those periods, we’ve had more recently commodities have done well, gold’s done fairly well.
Kevin Kroskey:
This is more the 1970s, that stagflation period, at least in some ways to what we were experiencing more recently, but those are some of the assets that do well in those different environments. And I think that’s important enough to know, again, most people, when you look at their risk, say if they do have a traditional 60, 40, 90% of the risk is coming from stocks, if you actually look into what they actually own, it’s really going to be assets that typically only do well in that one regime, generally speaking of, the period that we just came out of. The high growth and low inflation. Let me pause for a moment. I know it’s been rambling on here, but while bring me back down, buddy, making sense. Any questions you got?
Walter Storholt:
No, you’re making sense. I’m along for the ride today. I’m enjoying the perspective. It does feel good to take a breath though. So this will be good. Gather those thoughts. You were steamrolling for a while in a good way, which I liked. So no, keep it going because I think this perspective is fantastic.
Kevin Kroskey:
All right. So just a couple of other things. And I think-
Walter Storholt:
As long as we don’t have idiotic, measures or what was the…
Kevin Kroskey:
That’s Great.
Walter Storholt:
Idiosyncratic.
Kevin Kroskey:
It’s idiosyncratic, which is diversifiable risk, but candidly, a much better name for it is idiotic risk. Because if you can diversify it and you don’t get compensated for it, why or on an expected basis, you may have a luck factor, but why would you want to take it? So that’s the best slippage that I can think of in a long time, buddy. So great to have.
Walter Storholt:
I was able to contribute to today’s episode in a positive way. Fantastic.
Kevin Kroskey:
Yeah, I’m going to share with Michael Finka that, I think he’ll probably use it as well.
Walter Storholt:
Oh, excellent. Excellent.
Kevin Kroskey:
So if I go back to what’s been working year to date, so couple of things. So the only thing, I don’t want to say, the only thing, but a few things that are… again, commodities are positive, commodities are up quite a bit. So anybody that’s building a home knows this. Anybody that’s shopping at a grocery store, anybody that’s filling up their tank, they can see this happen. Commodities are very difficult to own. They’re very volatile. Candidly, they lost money for probably about 15 years. To actually own them in your investment portfolio, candidly is very difficult for a lot of people. Even if you have a good understanding of the role that they play, they’re very difficult to own.
Kevin Kroskey:
So I’ll mention that. Leveraged loans or bank loans, so these tend to be very short duration, higher yield, a little bit riskier loans in certain environments, but those are actually positive on a year to date basis. And I think that’s a good point, too. Anything that has higher cash flows, could be value stocks. Could be emerging market bonds, high yield bonds, leverage loans, real estate. Anything with more of near data, cash flows higher-yielding, tend to do fairly well, or at least have held up better in the more recent period that we had than stuff like the growth stocks, like things that have much future data cash flows. So that’s, that’s a general principle to keep in mind here. And then I’ve talked about asset classes, but now I’m going to mention a different strategy.
Kevin Kroskey:
So it’s using a lot of the same asset classes, but the way that it’s using it is different than what most people traditionally would do with these assets. And we just call this a trend following strategy. So yeah, it uses things like stocks, bonds, currencies, and commodities, but it uses that crowding effect that I mentioned where, as things are going up and you’re, it’s exhibiting positive momentum, a really strong trend. It will buy those things. And it’s truly just a price following strategy. But also on the other side, if things are going down, bonds were going down, interest rates were going up, but bonds are going down. It’s an inverse relationship. So a lot of these trend following strategies really because the positive commodity trend and the increasing interest rate trend said another way, the negative bond price trend have actually delivered quite positive returns so far.
Kevin Kroskey:
So I’m just looking at, it’s just for Morningstar, just a combination of all the US funds in the systematic trend category. And it’s actually up 16.7% year to date. All those negative numbers that we mentioned, leveraged loans are up slightly positive, but that systematic trend is up quite a bit. Because it can go both ways, it can own something long and follow the positive trend up or can own something short and follow a positive trend or the negative trend down. It tends to be, non-correlated both the stocks and bonds overall. That’s a really good portfolio diversifier. It’s also difficult to own and probably a little bit beyond the conversation for today, but there are different ways where you can incorporate it and probably make it easier to own.
Kevin Kroskey:
There’s been different investments developed over the last several years that combine it with some other strategies that candidly make it easier to own. And if you are a true wealth client, this is something that we’re going to be touching on in our client letter that we’re posting here to your client vault. I would say probably the one thing I want you to take away from today’s conversation in addition to not losing sight of, why we’re talking about this again, it’s all tied back to your financial life plan and what have you, but it’s really about preparing and not predicting. Sure, we may certainly favor certain assets that are more reasonably priced. We may choose not to follow the high growth stocks up into nosebleed territory, where there just doesn’t seem to be any legitimate fundamental reason to do so.
Kevin Kroskey:
But these changes in the market dynamic, particularly that we’ve seen over the last several months, they happen quickly literally in just a matter of several days to maybe a week, it seems like we’ve gone from one regime to the other and the markets are moving so quickly. So if think you’re smarter than the average bear and say, “Well, okay, hey, I really like my high growth stock returns, but I’ll just change whenever the regime changes or something like that.” Candidly, that’s probably something I always said in my early twenties before I had more humility and didn’t know what I didn’t know as much as I do today, but it’s really about preparing and not predicting. It’s really about focusing on, where the risk is coming from your portfolio and trying to build more that all-weather portfolio, regardless of the regime, just thinking beyond the traditional 60/40, trying to have some other things that are going to be in there that are particularly going to go ahead and be the balance to your portfolio.
Kevin Kroskey:
When we have the sort of inflation and growth shocks that we’ve been having, you need good ingredients, but you really need a good recipe. I like to call it portfolio craftsmanship. If you’re building a house, you need to have good lumber, you need to have good tools. You need to have good concrete, but you better have good people that are using those tools and those materials properly to go ahead and have a quality craftsman home, same thing when it comes to the investments, even though all of this and I can bore you and anybody else to death with all the empirical evidence or the science-based evidence, applying all this Walt, it’s like, even though it could make sense, if you can’t stick with it, it just doesn’t make sense to do it.
Kevin Kroskey:
And it makes this sense to have something that’s optimized for you, that you can stick with, that you can own. One way that we think of this, it’s really called tracking error and it’s so difficult, but when the S&P 500 and gross stocks are soaring, nobody wants diversification. They just, “Hey, give me that. That thing in my portfolio’s doing really well, give me more of that. That other thing, man, it’s got like low returns or maybe negative returns. Why do I want to own that?” And then ultimately, the music runs out and here we are. And maybe you’re down, 20, 30%, hopefully not more than that, when that happens. So it’s Retire Smarter, it’s Invest Smarter. It’s trying to do all these things smarter. It’s trying to be purposeful, trying to use science, really trying to prepare, not predict, not trying to have luck, but trying to be broadly accurate in what we’re doing.
Kevin Kroskey:
It’s all those things. But I think the time in the market that we’re in right now and probably going to continue to be in. All these things are going to become much, much more important in that whole portfolio craftsmanship, and just understanding and really that diligence of tying things back your financial planner become much, much more important. The Federal Reserve probably has really impacted investment returns and asset prices over the last, 15 or so years. And they just don’t seem to be able to do that, given the inflation that we’ve been having. So it seems like a lot of the things, a lot of the prudent planning, a lot of the prudent diversification that we need to have is likely to become much, much more important and a stable part of what we’re going to need to be doing over the coming years, because a lot of the probably Fed-induced, lack of volatility and asset price increases, is no longer going to be the case
Walter Storholt:
When we didn’t have to worry about inflation or when it wasn’t currently happening, people tried to ignore it. And when we didn’t need to worry about diversification, people were ignoring that just like you pointed out. And it’s a good reminder that a well-balanced plan isn’t just well balanced when it’s convenient for us, but needs to be that way all the time. And I feel like resonates from what you’re talking about today on the show, Kevin, and a good marker to take from here. So our plan needs to be properly structured all the time. Not just when all of a sudden we’re in crisis mode, then we got to proper it structurally do it right from the beginning and you’re in good shape.
Kevin Kroskey:
You got it. Sorry. Well, my three-year-old is getting ready to go to school, and our morning routine is that she comes down and to my office, I’m working out of the house right now while we’re in Florida. And she likes to show me her pretty dress. She didn’t know, and probably doesn’t get it, that we are recording a podcast and daddy’s talking.
Walter Storholt:
She doesn’t care. Why would she care about this?
Kevin Kroskey:
Pretty dress.
Walter Storholt:
That’s not important. Picking out the pretty dress is way more important than recording the podcast episode. So I’m glad we were able to take a quick break for that, make that happen there. Kevin, if anybody has questions about something you’ve heard on the show today, it might have brought up some concerns about your plan, your portfolio. Well, here’s the good news. There is help available. Kevin Kroskey and the fantastic team at True Wealth Design can certainly help you out. Whether you’re in the Northeast Ohio area, Southwest Florida, the Greater Pittsburgh area, where all the local locations are, or really anywhere they can help you remotely of course, with today’s technology and digital world, all those options are available to you to meet remotely as well. Here’s the easiest way to get in touch and find out if the True Wealth Design team is a good fit for you.
Walter Storholt:
That’d be to go to truewealthdesign.com, click on the, Are we right for you? button and that’ll allow you to schedule a 15-minute call with an experienced financial advisor on the team and begin that conversation. So it’s easy to schedule, easy to have that initial conversation and find out what the next steps might look like, and address some of those concerns that are on your mind. You can also call 855 TWD Plan that’s 855 TWD Plan. Or again, the website is truewealthdesign.com and look for the, Are we right for you? button. And we’ll put that contact info in the description of today’s show. So it’s easy for you to find.
Walter Storholt:
Kevin, appreciate the help and all the guidance on the show today. Glad we triggered an Egghead alert as well. And we’ll have another new episode coming out in a couple of weeks with Tyler joining us, which looking forward to Tyler Emrick joining the program to sub-in for you, Kevin, so you can rest that voice a little bit, feel better, my friend. All right. Appreciate it. Well, thank you.
Kevin Kroskey:
All right. You bet. That’s Kevin Kroskey and Walter Storholt. We’ll see you next time right back here on Retire Smarter.
Disclaimer:
Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance references, historical, and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
