April 2024
Here are some key takeaways from their conversation:
• The global environment has become increasingly complex with the geopolitical unrest between Israel and Iran, alongside rising inflation and higher interest rates.
• Meghan advises against making impulsive investment decisions based solely on headlines. Data suggests that by the time news impact markets, it’s generally too late for investors to react beneficially.
• The market dropped initially in response to Israel’s retaliation, which quickly rebounded, illustrating the market’s short-term volatility.
• Chris outlines a three-bucket approach for financial resilience: an emergency fund, income generation, and growth through calculated risks, designed to safeguard against sudden economic downturns.
• Chris and Meghan emphasize gold as a long-term hedge against market volatility and inflation.
Watch previous episodes here:
Ep. 81 Pitfalls of Selling a Business Without a Plan
Ep. 80 Gold Hitting All Time Highs: Should You Invest?
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Chief Investment Officer Meghan Pinchuk. Meghan, thank you for joining us.
Glad to be back.
Few headlines last week. We've got more geopolitical unrest over in the Middle East with Israel and Iran. We had higher inflation and then higher interest rates, or the cost of purchasing a home became even more expensive because not only were rates high, but prices are high as well. Typically with headlines like this, with especially the geopolitical unrest and inflation, it's easy to react. And if you look over a long history of time, selling out or getting rid of your investments because of a headline hasn't worked out that well.
It's really too late once you see that headline. So if the market was going to react dramatically to something that happens in the headlines, by the time the individual investor reads that, essentially the market is already down or had that correction. So that is usually not the time to sell or to let emotions sort of sway what should be hopefully long-term.
It's just the fear-mongering. I mean, because there's just a lot of emotions that kind of go into all of the tensions that are happening over there and look, we don't have a crystal ball. We don't know how this is going to play out. But I guess where I struggle with it is the fear-mongering of the headlines that causes emotions and people wanting to react.
But from an investment standpoint, you know, tell us a little bit about how you're looking at things that go on in the world and making decisions.
Look at a lot of this stuff is scary stuff or could be. And I think a lot of what makes it scary is the unknown of it. So how bad could conflict be, right?
Or how high could interest rates go? Or will inflation spike back up? And that uncertainty feeds into that fear a lot. And so when you are crafting a portfolio, ideally you are planning in advance for this uncertainty. There are different times in history where uncertainty is higher, and when uncertainty is lower. So right now we feel that there's heightened uncertainty sort of out there, the system related to not just geopolitical risk but all kinds of monetary investment, investment risks.
And so because of that, we are more conservatively positioned, say, let's move away from certain risk assets where those unknowns will have a bigger impact, and let's move more toward or tilt more toward things where they're more resilient.
It's interesting, I mean, when the headlines first came out, when Israel went back and retaliated against Iran, I saw the futures market go down a lot. Then you wake up the next morning and the market pretty much brushed it off. We don't know why. If we had that crystal ball, we would have, you know, probably be managing all the money in the world.
But it's sort of interesting how when you read the headlines, you can make some assumptions on how you think things would react. But this market seems to be more driven because of inflation and what the Fed may do. And it's sort of interesting if this conflict in the Middle East gets escalated even more. I mean, it can cause a situation where, you know, oil prices could go up and then inflation is higher.
And then the Fed, you know, even though there's unrest going on in the Middle East, they could be in a situation where they're not all of a sudden lowering rates or even keeping them higher or raising them like, who knows what could potentially happen.
There are a lot of factors that go into it. So it's very challenging to read the headline and assume that, you know how markets will react. That's a mistake I think a lot of investors make where they read the headlines that sound scary. So the assumption is, oh, the market will go down in recent years, there's been an interesting phenomenon where if there's bad news in markets, markets actually go up because the assumption is, oh, good news, it's bad news.
But in a way that's good news, because that means the Fed is going to come in and either keep rates lower, lower rates more quickly, whatever, whatever the rationale is that there will be more easy money. And so that actually is a good thing, that there's bad news out there but it's something that again, you can't assume.
And so it's a really good practice to not assume, see that headline and assume you know how markets are going to react and how it will even affect your portfolio.
Yeah, it has been an interesting time the last 15 or so years where bad news has become good news because we are addicted to easy money policies, and we're in a situation where the fed, like we've talked about before, raises rates very fast, hasn't really broken anything. We're not in a recession, even though there was, you know, months of headlines around that.
I mean, I guess if I'm making decisions for myself and I'm in a situation where, like a lot of our clients are saying, listen, I've worked really hard, I've saved this money for me from a financial planning standpoint, the way that I'm going to protect myself is a couple of ways. I'm going to go with the bucket approach.
I'm going to make sure that there's enough money in a bucket. Let's call an emergency fund to last a year or two. So like, what is my life cost? I'm going to make sure that I have access to those dollars and have that invested safely, because if something were to happen, it's going to buy me time. The middle bucket is going to be the bucket that's going to generate enough income for me to live my life.
And then that third bucket, I'm going to take calculated risks to try to grow the money. And so to me, not that you're, you know, building something that can withstand just about any, environment because we don't have a crystal ball. I would sleep at night knowing that I've got plenty of money in emergency fund, plenty of income coming in, and the money set aside for growth.
That's how I would handle it. From a financial planning standpoint, how do you sort of look for diversified assets but also create opportunity within the portfolio management or portfolio design.
And even we just described diversification. It wasn't by investment type, but it was by purpose of money. And you can find investments that fit you to those type. So while to your point that whole portfolio, the market tanks, it's not that it won't lose, but there are pieces of it that won't move. So it'll be stable.
So that's that approach. I think we can give a lot of comfort to the fact that you can have a piece of stocks in your portfolio that can have big swings, but still live off the portfolio. So have enough money in earnings there. Look, there's pieces of things that you can mix in that will make a difference in more challenging environments.
We have a pretty healthy allocation to gold. And so gold is an asset that we've talked about a lot before I think in a recent podcast on it too. Lots of pros, cons, challenges. We have it more as a true long-term hedge against all the money printing that's happened almost like an alternative currency. Gold tends to do very well in turbulent geopolitical environments, so it can be almost a hedge against that kind of uncertainty.
It's not perfect, but it tends to be a good hedge. So that's something that everybody can mix in. Otherwise today it's a lot about instead of sort of betting on future growth, which is really what stocks are saying, hey, we think there's going to be great growth and we're going to participate in that.
There's a lot you can do today, short-term contracts where you're lending against assets and you're getting paid really nicely just because of where interest rates are to do that and a lot of control about protections that can be built in place. Having that be a piece of one of those buckets, right. The income piece, you know, as well as gold that's theoretically more of a growth asset but should be less tied to what happens with stocks or other growth assets.
That kind of a mix is sort of the bucket approach that you describe. That's the bucket approach on the investment side.
I do like that a lot. I mean, when we look at our peers and the tools that they have to sort of make investment decisions for our clients, they're more limited than what we are because we've stepped outside of the box and made a conscious choice to look outside of traditional stocks and bonds and mutual funds. But we have significantly less stock exposure than, you know, for our clients than some of our other peers or competitors.
And to me, that's a starting place to that. Clients should recognize when they see these headlines and they feel the emotions and they want to react, they should understand first and foremost. They probably have less stock exposure than their friends.
And so that preparation in advance is something we really believe in strongly. Because again, once that headline comes out, if the market does react very negatively at that point, it's really too late to pivot or it's much more challenging to pivot, right? It's much more challenging to make that call in.
That's that's actually how investors lose a lot of money at selling at the wrong times. But I guess for all times. But the part of this is that we are positioning to more conservatively now. We believe because of the uncertainty. We're also, I think, making nice, or very good target returns on some of those lending opportunities.
I described. But because this portfolio should be more resilient and fluctuate less, hopefully that does allow us to be more opportunistic. If things did get really bad with the stock market or other more volatile asset classes, that I think it's a lot tougher to make those calls even, let's say, buy more stocks or rebalance into it. If your portfolio is down huge with the market versus if you already had a piece that took a hit, okay, now maybe we have enough courage to go in and basically buy when everyone is running in the opposite direction.
That is historically, I think how a lot of money can be made.
And look, I think that sometimes clients just ask us, hey, what does the investment team talk about when the headlines and stuff like this come about and without a doubt, we're monitoring those headlines and these new reports and they they get baked into some of our longer-term decision making. But right now is not the time to put your foot on the gas.
Whether it is the headline risks or the challenges that the economy faces. So, you know, we're positioned in a way where we're getting really attractive returns on some safer or, more, you know, a loan type of investments. but you also mentioned that we have opportunity if something were to arise to where we could take advantage of it.
Yeah. And look, I think that way clients are reading some of these headlines because again, there's a lot of scary, uncertain stuff out there. If the gut reaction is, oh no, I can't handle this, I have to sell. So first obviously go back and reeducate on where they are in their portfolio.
But if that continues to happen and there's that strong emotional response, it's important that their positions... that they can handle potential large moves. Right. As you know, going back and revisiting the bucket approach, revisiting how much risk is in that portfolio and can they handle it if there truly is a bad situation, is very important for keeping people from making bad decisions at the wrong time.
Yeah, I think that's a great point, Megan. I mean, obviously be aware of what you're feeling and let's have a conversation about it. But, you know, even just rewinding back about four years ago, Covid was another really good example where the market reacted very quickly to a global shutdown and then started to make its way back up.
And we were somewhat in denial. Nobody really knew how it was going to pan out, but if you sold because you were nervous and you left yourself on the sideline, you probably never got back in and you're probably regretting it.
That's one of the challenges to market timing, is it? It's not one good timing decision. It's actually a few different timings in particular. When we get out. And then getting back in, I think is really tough because it's always lower. Or even if it pulls up it's going to come back down and I don't think there's anyone out there who can consistently make timely decisions.
No, I don't think so either. Meghan, thank you so much for your time today.
Disclosures: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances
