EWA Stock Market and Portfolio Review Q3 2023

Welcome everybody. I’m Matt Blocki here with EWA. Excited to be joined by Jordan Fediazcko. We are going to address some common questions we’re getting around the direct indexing. So direct indexing is an amazing strategy that we’ve rolled out for our clients over a year now and things have been going really, really well.

But some, it’s a very tech -heavy play with obviously with the manpower and I like using the analogy of a surgeon with robotic arms. This is not a robot that’s replacing us. This is a robotic arm that’s making the surgeon more efficient, able to get to different angles, but it’s still the human mind that is processing the trades and then also making the decision -making because we’re going to talk about some of the decision -making that we have to make behind the scenes of the tracking error.

So Jordan, tell us about tracking error. What is it and how does this play out on a day -to -day basis when you go in and trade these accounts? Yeah, so the tracking error is a figure we like to keep it around two and it’s just making sure that our stocks are aligning with the indexes.

So instead of holding the mutual funds and ETFs that mirror like the S &P 500 for example, we’re holding those stocks, but we want to make sure that we’re holding the right amount of them so that we’re keeping like our large cap, mid cap, small cap, etc.

all in line with the portfolio. So for large cap, the amount of companies that we’re able to purchase to get within that goal of the 2%, I know we use the S &P 500 for large cap category, how many companies do we need to purchase out of the 500 S &P 500 company?

How many of those would need to purchase to achieve that 2% tracking error? So we want to be in about 100. companies. So that will make sure that we’re diversified enough and then anything we can be in more than that but it doesn’t really reduce our diversification risk further so that’s just a good number to be around.

Okay and obviously that if a the whole purpose of direct indexing obviously removing another middleman so there’s no cost for direct stock ownership but also if one stock let’s say Apple drops and we sell it and we don’t repurchase it for 30 days now we don’t want to time the market this is not about stock picking and this is not about timing the market we would immediately get back in to another holding having a hundred the 500 obviously that leaves us with a lot of options to replace and hopefully stay within that tracking error so tell us if if that example happens if Apple was a holding in that direct index for the large cap category it dropped and the trade that the software recommends has a replacement.

What are you looking at before you officially press go on that trade? So if Apple is at a loss and we want to harvest the losses on it, and we’re gonna take a look at what the software wants to buy, how it’s gonna affect the tracking error.

So if it wants to buy a replacement that won’t affect the tracking error, make it worse, then we’ll get into it and we’ll get out of Apple. But if it increases the tracking error, making it worse, then we’re just gonna leave it alone.

We’re not gonna harvest the losses for that stock because we wanna keep our tracking error as close as possible to that 2%. Okay, so priority number one is all of the principles that we’ve discussed, asset allocation, diversification, long -term investing, those don’t get sacrificed.

But with direct indexing, obviously we’re adding a layer of extreme tax efficiency to what otherwise would not be tax efficient, which is non -qualified investing. So if someone has their 401k maxed out, their IRAs, back to our Roth IRAs maxed out, et cetera, and let’s just use an example.

So if someone has a million bucks that grows over years and years and years, and now we have $2 million, and that person’s retiring, the million they put in will come back out tax -free in a non -qualified account, but the million of growth, if it was just an index fund, would get taxed at capital gain rate, either 15, 18 .8, or maybe 23 .8%.

So that would be 238 grand of taxes in that example. But for someone that’s direct indexed. Yeah, so it’s nice, because they’ll have those losses built up to be able to offset those gains for the future when they’re ready to start taking money out of the account.

Because we’re gonna be harvesting losses every opportunity we can. We’re monitoring the accounts. On a week by week basis, but we’re making sure we’re not going against the rules. against the wash sale rolls.

So we’re holding the funds for at least a month before we’re getting back into the original holdings. So hypothetically, if I was a index investor, million grew to two million, I’d go retire $238 ,000 of taxes if I’m in the highest capital gain rate.

If you were direct indexed, million dollars grew to two million and you had diligently tax lost harvest every single year and carried that forward on your tax return, hypothetically, you could offset and save that $238 ,000 of taxes while achieving the same returns that I did while operating with the same amount of risk that I did as an index investor.

OK, awesome. So Jordan, talk to us about the wash sale rules. What are the wash sale rules? So say that we wanted to sell out of Coke. It was at a loss. And we were going to buy into Pepsi, something similar.

We have to hold Pepsi for at least 30 days so that we can officially. collect those losses. If we were to sell out of Pepsi 25 days later, then we wouldn’t get those losses. So it’s a 30 -day, if once you sell something you can’t repurchase it for 30 days, if you do, that’s fine for the portfolio, but you just eliminated the tax loss harvesting move, which is the whole purpose of direct indexing.

Correct. So that’s something obviously that we are looking at and the technology helps us track as well. Which is amazing. Okay. Well, thanks for sharing that. So one of the question we recently got was from a client, it was basically they asked us how many clients had adopted this and our answer was, you know, over 90% of our clients that have non -qualified accounts have adopted this.

And so then he asked, you know, is this like a giant hedge fund? Which was an interesting question. So what would your answer be to that? So it’s not like a hedge fund at all. We both can have direct indexing portfolios, but they’re going to be different, whether it’s the holdings the amount that we have in each holding, it’s all going to be different.

So it’s not the same portfolio. Every client is different. So if you put in 100 ,000 on April 1st, I put in 100 ,000 on June 1st based upon where the markets are, where the market caps of companies, yeah, it’s going to buy different holdings, but we’re all going to, we’re both going to be mirroring.

Yeah, same strategies, like all mirroring the indexes, but yeah, it depends on when you get in, when what the holdings are looking like, what the system wants you to purchase, sell every portfolio is going to be different.

Okay, great. Well, do you have any, so Jordan, you’re obviously are working hard behind the scenes. Do you have any questions for me that you think would be beneficial for listeners? Yeah, so we’ve had a client ask what the downsides to direct indexing would be?

Um, that first of all, that’s a great question. It’s a question we often get when someone one new and some of our existing clients have come back and asked that after being in this for over a year. So really the downside is one thing in my opinion and that is, is the tax benefits going to be greater than the potential difference in returns of the index that we’re trying to mirror?

For example, if we have a 2% tracking error and looking at our portfolio, the direct indexing portfolio has actually been a little bit above the indexes so far in what we have. A hypothetical is below, studies have shown from a Great Depression till now that a direct indexing strategy, if someone’s doing the due diligence every single month, let’s say doing that tax loss harvesting, it’s a 1 .08% actual tax savings.

If someone has a million dollars, it’s $10 ,800 a year in tax savings, 1% per year. And over 20 years, a million dollars is getting an extra 1%. That’ll be over $600 ,000 more of the money you keep. So then the question becomes, well, are we going to get returns less than those tax benefits?

And so that’s really the artwork of keeping that tracking error super low. And really the artwork between let’s get as many tax benefits as possible, but let’s return relationship that we manage very closely.

So if someone’s in the highest tax bracket, the tax alpha historically has been able to offset those difference in returns. But that would be the only downside. The other question that we’ve had with downsides, what’s the cost of this?

Well, at EWA specifically, we offer a RAP program. So we sponsor RAP programs. Every client with us pays us a flat fee. Any commissions, trading fees, et cetera, go to us, not our clients. So when a client goes into direct indexing, for example, a fidelity for large cap stocks has commission free if your paperless or a million dollars.

So usually there’s a $5 commission every time you buy yourself. That’s waived. But for international, that’s not waived. So a lot of the ADRs that we do, if you were trying to do this yourself, this would be very costly because every time you buy yourself, that’s $5.

It’s $5. It’s $5. Well, we have the leverage with fidelity. We obviously pay those as we’re doing our trades. Those get paid by us, but we’re able to include that in the fee that we charge, which just directly offsets our profit margins, our clients are going to save money because they’ve eliminated the middleman of the mutual fund and ETF managers, and now they’re just paying us a flat fee to incorporate that, which is a lower fee than they were paying the mutual fund or ETF managers from the ago.

Yeah, because our regular portfolio is around the internal fees. 0 .3% whereas other portfolios are a lot higher because the active holdings are more expensive and we tend to lean more towards passive holdings.

But with the direct indexing, those stocks, they don’t have any internal fees. So then we just tack on a little extra fee just to be able to provide the software in the hands -on aspect. And cover all those trading fees, which don’t go to our clients.

So that’s a great point. So, well, thank you so much for joining anything else. Any closing thoughts on direct indexing? Has this been something that you’ve even joined implementing behind the scenes?

I know it’s been a lot of hard work. Yeah, I think it’s good. It’s very beneficial for clients. And being able to be hands -on with it and see the benefits has definitely been eye -opening. Next up, Nick Stone -Cipher, portfolio manager at EWA.

And I are going to talk about… the portfolio construction at EWA, and then also the current environment and why we’re making a couple moves, not just rebalancing that we do on a quarterly basis, but also some strategic asset allocation shifts.

So the two that have been identified with some of our partners at Fidelity Institutional are in the emerging market space and the international space. So Nick, let’s first start with international space.

What moves are we making and what’s the rationale logic behind that? Yeah, absolutely. Happy to be here. I’m happy to bring some of the quarter three outlook, at least in terms of what we’re doing with the portfolio construction at EWA.

So to take one real quick step back, just to take a look at what we did at the end of quarter one, and now what we’re recommending at the end of quarter two, because it does kind of link together. At the end of quarter one, we made one small shift in our portfolio for our clients.

We looked to add additional quality exposure in domestic equities. So this primarily was affecting large cap and mid cap. It was just a small shift, a few percentage points. We shifted out of a momentum factor into a quality factor.

And to explain what quality factor is, is it’s companies with strong financials relative to similarly priced peer groups. So we’re looking for strong financial backing companies. So we shifted some in domestic equities at the end of Q one.

And the first move we’re looking to make at the end of quarter two is kind of mirroring that, but now we’re looking to do it in the international space. So we’ll be shifting a few percent in our clients qualified allocations into an international ETF that focuses on additional quality investments.

Okay, well, Nick, thanks for sharing that. So I think to a lot of listeners, so with the quality space in the US, these companies are really looking for strong balance sheets. So there’s been talks of, you know, are we going to go back in a bull market?

Are we in a real? recession, but regardless, these companies typically participate well in bull markets, but also have balance sheets and cash reserves and the business strategy that are able to whether a recession or a downturn much greater, much more efficiently than, for example, a tech company.

Absolutely. So international, same logic behind that? Absolutely, same logic. It’s definitely mirroring what we did at the end of quarter one just in the developed market space. So increasing some geographical exposure to Japan, to Canada, a little bit additional into Europe and the European nations, but same type of strategy for sure, looking for those quality companies.

Awesome. And that looking backwards obviously turned out very well. It ended up being a very good move and something. The US were keeping it rolling with the quality exposure and now with international.

Adding that exposure in how long do you anticipate that we’re gonna stay in these quality? investments truthfully It looks like it’s not just a short -term play We’ll obviously continue to monitor on a quarter by quarter annual basis, but right off the top I think this is a this is something that we’re looking to keep in our portfolio for the for the near future for sure This won’t be a quarterly semi -annual shift in and out.

So awesome. Okay, so emerging markets. So emerging markets First of all some clients have asked You know over the last couple years emerging markets, you know Sometimes going to Peter and sometimes when the market’s dropping emerging markets get hit the highest because It obviously has one of the highest standard deviations of an investment when you asset allocate as part of a portfolio It actually lowers risk overall But some clients have asked, you know, why do we have emerging markets at all and one statistic?

I want to share, you know with the population the US I Want to say it’s like three hundred and forty million There will be more people that come out of poverty into the middle class in Emerging markets over the next few decades than the population the US itself.

So as these people Go from poverty to middle class and develop lifestyles that will obviously have very positive effects on the economy As the US figures out how to import export that’ll be good for US markets as well.

So just to address overall Emerging markets we do believe is a small but very important fit into the overall portfolio But tell us what moves are we now? Specifically making in our emerging market sector.

So I mean as you said emerging markets will always be a part of our dynamic asset allocation Regardless of what’s happening in the in the overall markets. It will remain in our portfolio So we are going to make one small shift in the emerging market space like developed markets though we In the international side of our portfolio construction, we do have some active plays.

So we’re primarily passive, a lot of ETF exposure, but we do have some mutual fund active exposure in the international sleeves of our portfolio. We don’t want to fully scrap that at this point. For the past 18 months in both developed markets and emerging markets, we did ride with some of our active money managers as it started to decrease over the past year, year and a half.

So far this year, year to date, those active plays have seen some significant increases. It’s returned nicely. So significantly above the indexes. So we don’t want to fully sell it at that now because we do think there’s still some room to run and some recovery coming in those active plays.

But what we are looking to do is just make a small shift a little bit out of the active and a little bit out of our minimum volatility holding inside of emerging markets. And we’re looking to move into an ETF that is emerging markets ex -China.

So by its nature, it’s looking to invest in additional geographical sectors outside of Chinese emerging markets exposure. So this will be an emerging market fund that is more concentrated on other areas because China obviously one of the biggest powerhouses with population wise, we’re not investing in that.

And we’re investing in every other emerging market sector, not including China, which means pretty dramatic extra exposure to every other emerging market. Correct. So why are we excluding China? We do have Chinese exposure.

So it’s not that we have zero Chinese exposure. So this is a little less about China, a little more about the other opportunities out there. So let’s take a look at Taiwan. Let’s take a look at India.

Let’s take a look at Brazil. Let’s take a look at some additional emerging nations that have some potential good growth there. And a lot of times you’ll run into emerging market holdings that are heavily related to China, heavily inclusive with China.

So this is, I guess a little less about we’re doing this because of China. We’re doing this because of the other opportunities are out there. So we’re really looking to increase additional exposures across our portfolio.

Awesome. I know some of the analysts we’ve been talking to say India is set up to be one of the greatest powerhouses in the 21st century moving forward. So that’s cool to see and excited to see what comes out of that.

Absolutely. So again, not huge shifts. We’re talking a couple of percentage points across the portfolio, shifting a little out of these active plays into these ETFs. It won’t be a massive reduction in fees, but it actually does effectively lower the overall expense ratio of our portfolio.

So less internal costs to the portfolio and making some of the moves as we just outlined. Well, Nick, thanks for watching. Thanks for joining me. I look forward to getting these moves completed. Then, all of the updated quarter reports will show up in your e -money logins within a matter of a couple of days.

Next up, we are talking about some of our firm initiatives. I’m joined by Stephanie and Piper, Piper who will introduce in our second. I’m very excited to have her on the team. One of the main folks we’ve had really in the past 12 months is financial literacy and educating our clients just to empower them on big decisions and take the stress out of financial planning.

We’ve recently launched a podcast. I think we’re like 15 episodes in. Let’s definitely give us the high level recap and why we’re going to continue to do this and some of the asks we have of our clients and audience.

Yeah, absolutely. As most of you know, we did launch our Finlet by EWA podcast actually debuted in early April of this year. So we’ve been running up here for over three months. It’s just fantastic. We’ve covered everything from estate planning to annuities.

And actually one of the most exciting things we’ve had is we’ve had a few of our clients come on to the podcast and candidly talk about their life story, how they got to the place they are in their career, and really the work that we’ve done at EWA and the advice that we’ve given them, how we’ve helped them to achieve their goals and get them on the path to financial independence.

So for me, that was the coolest thing that we did. So now we’re able to have this visibility into how we’re affecting clients’ lives and also share that with other clients and the public out there. So I feel like this is a really big initiative for us to just continue to always educate our clients because there’s so much out there to know.

And at times you don’t even know what you don’t know. So deep diving into these topics for 30 minutes to an hour each week, we’ve had great feedback and I think it allows our clients to get in there when they have some time and really learn about all these topics.

And so when you’re meeting with clients, Matt, in your client appointments, I have a feeling less questions are coming up on these topics. Maybe you can give us a little insight into that, but I think that’s been a trend.

Yeah, no, for sure. So I think a couple things, a couple asks we have of our audience and our client base is one, if you’re wanting to share your story, we’d love to have you on the podcast and interview.

I think people relate to people and learn from other people and real life examples. So the ones that we’ve done so far have been a big success. We will be emailing slowly our client base, but if this is something that would excite you, as a client would love to have you on, please email us.

And then secondly, if you don’t mind, you know, share this and rate the podcast and make sure you hit follow. The way the Piper will describe this in a second as we introduce her, but the way the algorithms work and the way it reach grows and the way we can pass this financial literacy on to really the masses, which is our mission here, is to grow this thing.

So encourage you to follow and rate. And then also if there are any top, that are of interest, that you’re really wondering, what are some topics that would love to go on a deep dive? Please email us as well.

We have many, many ideas, but I think the best ideas will come from you or clients on what information you want to be educated on further. So with that being said, Stephanie talked to us about, so you obviously were slowly in charge of recruiting and convincing Piper to come take a job here at EWA.

So before we officially introduce her, give us the process of why we decided on how to make the decision. Absolutely, so everything we just talked about with the podcast and the outreach of education for our clients and their next generations also.

So I think this is how younger people are digesting their information now. It’s more online than in book form. So this is really an outreach to every generation that we want to serve for EWA. So I’m sure our audience can also appreciate, that’s a pretty big endeavor.

And I have been in this field for quite some time, but maybe we’re not experts around social media and production and so forth. So what we want to do is always bring in the best talent that we can to help us really push these initiatives forward.

So I was lucky enough to meet Piper. She is from my alma mater, University of Pittsburgh, comes to us with a degree in business administration, concentrating in marketing and supply chain management, and really impressive.

Had some internships overseas and some opportunities to work here in the Pittsburgh area with social media, graphic design, work, and marketing. So just really a talented, wonderful person that I came across and I really feel is a really great, strong addition to our team at EWA.

Fit right in and has already just given me just so much insight and value. So I’ll let her talk for a moment about her goals and what we want to accomplish here at EWA. Big things coming. Yes. Well, thank you, Stephanie.

Of course. So my name is Piper Martin. I started here at EWA in July. So just a few weeks ago, so far it’s been absolutely wonderful. And my role here is the social media and executive assistant. So essentially managing all of our social media accounts, working on the website, doing some SEO management, really just trying to gain some reach for the company here and really boost those podcasts because it’s it’s a great one.

So I’m very excited to see where things will lead and how I can help build the EWA brand. Like Stephanie said, I graduated from the University of Pittsburgh with majors in marketing and supply chain management.

Had about four internships coming in to EWA. So yeah, I’ve had a lot of experience, a lot of great experience in marketing and working a lot with LinkedIn. That’s been my like primary expertise, which has been awesome.

And I just have such a passion for marketing and I’m super excited to share that with the team here at EWA and build the brand. We’re super excited that you’re here. This has been, like I said, very helpful to me in the last month.

I’ve learned so much from you already. So thank you so much for sharing that with our audience. And we look forward to everything that we’re going to build moving forward. Super excited. Thanks for joining us and being here and thanks for joining us.

Well, Stephanie, next up, we’ll have the quarter to look back and I’ll be joined by Jameson and Chris. Next up, we are reviewing a look back of quarter two of two thousand twenty three joined here by Chris Pavzik and Jameson Smith, lead advisors with EWA.

So just to start out, Jameson, give us a high level recap. What are some headlines that occurred over the last three months? Yeah, so we saw continued global economic expansion. Inflation started to come down a bit in the US and both globally and a lot of the riskier, more risky asset classes.

perform the best. A lot of the major central banks still continue to raise or keep interest rates the same to try to tame inflation. We saw US growth stocks soar, which Chris is going to talk about in a second.

A lot of that was due to artificial intelligence, new technology being injected into the economy and the workplace, and a lot of investors are betting on mega cap stocks, so your Amazons, your Googles, your Apples that are adopting these new technologies.

Chris, how did the asset classes perform? Yeah, so in quarter two, you just kind of mentioned that US growth was the top performer, 12 .5% for the quarter and year to date 28 .1%. The majority of US growth stocks are primarily tech oriented.

These companies aren’t focused on paying dividends, so all the profits are being reinvested to go towards the growth of these companies. US large cap as a whole is also performed well for the quarter.

US large cap to date 0 .7% and year to date 16 .9%. Excellent. So Chris, what are some of the worst performing asset classes for quarter two? Yeah, in quarter two, commodities really suffered. So as a whole, the commodities was down 2 .6% for 4Q2 and then year to date down 7 .8%.

Second to last was gold at negative 2 .5% for the quarter. Excellent. All right. Well, Jameson, so you started to hit on this artificial intelligence. So talk about just how impactful that’s been not only for companies adapting this, but also for individual investors.

Yeah. So this is a study that was done that looked at 21 ,000 portfolios and just a moderate equity portfolio. And it showed that I think a lot of just because of how companies are adopting this now that 16% of the portfolio is exposed and something that had to do with robotics and AI.

And all that 16%, 90% of that made up of these mega cap companies. We’re not advocating to shift into AI robotics, but I think that just shows a lot of how these companies are adopting it. We’ve adopted some new technologies just to improve efficiency and productivity.

A lot of that, if you look at the S &P 500 index that’s ballooned this year, large portion of those companies are these mega cap tech companies that has basically contributed to a lot of this growth.

A normal portfolio, basically, whether you like it or not, if you’re just investing in mutual funds or ETFs, you have average person in a modern equity portfolio. You said it’s 16% exposure. I think that’s important to realize.

Also, a lot of people don’t realize if they have a US -based stock portfolio, there’s a lot of exposure internationally already because US companies do business with a lot of international companies and international markets, exports, imports, et cetera.

Now, the same principle applies from the tech space is that these companies with big pockets that have the ability to invest and develop this technology, you’re going to have exposure whether you know it or not or whether you like it or not across the board.

So thank you for that explanation. Chris, talk to us about other factors that came into play in quarter two of 2023. Yeah. So one big thing is Jameson mentioned earlier rates are still climbing a little bit, which is making it a little bit harder for companies to get money.

So as a result, the manufacturing sector specifically has seen a bit of a slowdown, but as a whole, unemployment has continued to drop as well as inflation. Awesome. Well, Jameson, talk to us about corporations.

How are corporations cash flow? How are their profits? Because that’s one of the biggest signs of a recession that we’ve seen in headlines and might take them. A lot of these headlines, as a reality, is a lot of them are clickbait and a lot of news channels trying to gain viewership.

So talk to us about profits. Yeah. So we’ve been tracking this probably for the last year and basically this chart shows if during a recessionary period, corporate earnings drop on average roughly about 20%.

And they’ve been positive up until like right now actually. So we have seen equity prices in the hit the low at about a 25% drop and right now corporations on average are down, corporate earnings are down by about 3%.

So we’re still not in the range of a recessionary period, but they have significantly come down since last year when we talked about this last six months. Typically a recession is a 20% or more drop in stock market prices and then a 20% or more drop in earnings.

And we saw the one in 2022 as far as the prices go, but the earnings, the reality is corporations are still profitable. And then like we’ve talked about before, this type of economy favors companies with strong, robust, bad, and low.

balance sheets, probably why we saw large cap stocks perform so well. If you have a lot of cash on the balance sheet, your balance sheet’s really strong, you don’t have to rely on lending, get borrowing money from the bank, whereas if you’re a small startup and you’re relying on getting money from the bank and interest rates really high and it’s harder to get money, you may struggle to perform.

So yeah, brilliant economy, favorite strong balance sheets which we’ll talk about in portfolio moves and in the outlook. Well, how was this year to date in 2023? How’s this compared to the history of the stock market?

Because obviously we have a good start to the year. Yeah, it’s, I believe it’s the 14th best equity performance start to the first six months. So it’s done really well. And then this, actually this chart here shows the volatility.

And so this just tracks, if there’s been more than a 2% movement up or down in the S &P 500, last year we saw 46 days. where there was a 2% movement one way or the other, which is a very volatile year.

2023, we’ve only seen two days up until the end of June. So a lot less volatile, but we’ll talk about and look forward what we expect. Will that continue or will that volatility come back? Okay, and then I see to the right of that graph, there’s 10 or less days, we’re halfway through the year with two days.

If that’s 10 or less, then the returns of average 17% since 2001. So statistically, obviously, history never guarantees future results, but historically, we have a lot of good analysis showing that the markets can continue its current run, which is great.

Well, Jameson, Chris, thank you for joining for the look back of quarter two. Next up, Ben, James and I are going to look ahead towards quarter three. And now we are looking forward into quarter three of 2023.

Then what are some headlines that are gonna be important looking ahead the next three months? Yeah, a couple of things that we’re monitoring is number one, the global business cycle. So it’s becoming less in sync, facing some crosswinds.

United States specifically is in a late cycle expansion phase. And we’re looking at particularly the global inflation rate. We’re projecting to see a drop from where it stood in 2022 to where it’s going by the end of 2023, which leads us to believe that there will be some market volatility projected towards the second half of 2023, particularly in the third quarter.

So what we’re doing, what that means for EWA from an portfolio standpoint and for our clients is we wanna make sure that we’re focusing on companies that have strong balance sheets with heavy cash positions to withstand that market volatility, as well as shifting to some defensive holdings, taking a look at why that’s so important, particularly for clients in the distribution phase.

This chart right here references the returns required to break even given a certain level of loss. So if your portfolio drops 10%, it would take an 11% recovery to get back to where you started to recover that loss completely.

Where this can be challenging for clients that are in the distribution phase is, let’s say you’d have that same 10% loss, but then you’re also distributing 4% annually from the account, you’re essentially locking in that loss and you’re not allowing the 10% to recover.

So what would originally take 11% to recover from that 10% loss now would take 40% because not only did the market go down, but then you distributed it when it was down. So- I see the examples over five years.

I’ve met so important to illustrate. If you’re in the growing or the climbing stage, so you’re accumulating assets, this is really relevant. Down 10, get 11, you’re back up. with the strong diversification of your distributing down 10, five years of withdrawals, you take 40% to get back up.

So speak to what planning technique for our distribution clients do we have in place to make sure that this is really irrelevant because of the guardrails and safety nets we have in place. Yeah, generally speaking, we like to have seven years of safe money for each client.

And this is specific to each client’s spending patterns, what they’re getting from Social Security, what their guaranteed income sources look like. But generally speaking, seven years of safe money so that if the market is down, it’s never been down more than seven years in the history of the United States market.

So we wanna make sure that we could withstand seven years straight of market downturns without having to turn to any equities. And we can do that by making sure that there are cash positions, making sure that there are bonds one required in the portfolio or taking money out of a life insurance contract, for example.

Those are avenues where you can access safe money to allow equities to recover during those down years to prevent taking distributions when your accounts are down. Awesome, all right, well, speaking of safe assets, Jameson talked to us about cash and what are some considerations looking forward on cash?

Yeah, this is an interesting discussion. We’ve gotten this question a lot from clients and I think just the industry as a whole right now with a high interest rate environment, like two years ago, no investment, no cash investment, cash alternative was paying really anything.

So this was kind of irrelevant. But now with these high interest rates, what we’re seeing is basically we have an inverted yield curve. So short -term interest rates are higher than long -term interest rates.

So short -term treasuries, money market accounts are paying four to 5%. And so we are still in favor of long -term equity investment for long -term goals. anything in the short term, there are, I guess, alternatives to just holding money in a checking account.

One of the fidelity government money market accounts is paying between like 4 to 5%, which seems pretty standard with some of these cash alternatives. 4 .87 as of yesterday. That’s high compared to the last decade.

Yeah, absolutely. So talk to us about the… So you mentioned that’s such an important consideration because typically you, if you’re willing to give your money to a corporation for 10 years, and I’m willing to give my money to a corporation for one year, they think they reward you with a higher rate because you’re lending your money for a 10 -year period versus I’m just lending my money for a one -year period.

However, that’s inverse right now where I lend my money, for example, to the US government in a one -year treasury, I’m getting 5 .3%. You lend your money for 10 years, you’re getting about 3%. What that tells us is that the government does not think that rates are gonna stay this that high for so long and That this is potentially they could still go up in the short term But in the long term they don’t expect rates to continue at this level.

I think it’s really important to do not It clients should not flee out of equities and go to something that’s paying 5% If you’re invested in equities long term stay invested for the long -term goals This is again talking about things that you need money for in the next, you know A couple of years that’s already in cash and we can just put it somewhere that’s more efficient.

No question All right, we’ll talk to us about other you know the S &P 500 seen it has seen a big rally So what other data are we looking at moving forward in quarter three? Yeah, a lot of Chris mentioned on this a little bit the there’s a PMI index for us manufacturing and that’s trending downward a lot of it is because Credit conditions it’s harder to lend money Basically, there’s still a lot of good things going on in the economy with low unemployment rate, but a lot some of these leading indicators are Trending downward which could point us to believe there could be some volatility Down towards the latter half of this year and so as we’ve already talked about we’re continuing to primarily focus on minimum volatility holdings quality companies both the US and internationally that have strong cash heavy balance sheets To whether some of this volatility and then once we see a An upward trend from this this bear market.

We would you know make some changes All right, so just a recap so you know we moved to some quality holdings About six months ago. So those we’re gonna continue to hold based upon the points that Ben brought up and then also the you know minimum volatility holdings we’re gonna continue to hold as well as We’ve seen a good rally so far in 2023 but those kind of defensive holdings with strong balance sheets both in the quality and the minimum volatility sector will We’ll continue to go with the upside of the market, but have a strong protection on the downside as well.

What we’re looking at the screen now is really an encouraging data based on history that those that stay in the market, even during a drawdown we saw in 2022, will be rewarded significantly versus those that moved to cash and tried to play the timing game.

This data shows all the way back from the Great Depression until now. This shows every drawdown that’s 25% or greater. For example, in the Great Depression, we’ll circle right here, it was a 25 month duration where we saw a drawdown of 83%.

Then I’m going to fast forward to the dot -com bubble, 2000, really the middle of 1999 to quarter four of 2022, there’s a 39 month period that led to a dry down of 49%. Then fast forward to 2008, there’s the global financial crisis which took 17 months and a 57% dry down the most recently, the COVID -19 pandemic, which was a little bit over a month and where we saw a 34% dry down.

After all these dry downs, the next one, five, and 10 -year returns were not only positive, but were very significant. Those that are patient and only know whether the storm that stay in, it’s impossible to time right twice, time out before the market drops, put it back in before the market recovers.

For those that are patient and stay in the market, stay diversified, will be significantly rewarded in the long run. What we can see here is the longest point that we’ve seen for a dry down to occurs that 39 months in 2000, 1999, 2002.

So we don’t know where we are in 2022. If it’s going to, we’re going to see another drop before it comes up, but we just know in the next, based on history, in the next two or three years, there’s a significant chance we’re going to see double digit returns and moving forward in equity market.

So a bit of good news regardless of what happens in the short term, the stock market always transfers well from inpatient investors to patient investors, and those that stay in will be significantly rewarded.

So I’m here with Chris Pavsik, and we are going to dive into a common question that we’re getting asked from clients right now. It has to do with interest rates, like Chris mentioned earlier in the video.

Interest rates are as high as they’ve been since 2007. And so question we get is, how does this impact my financial plan? Are there decisions I should be making differently now? Should I buy a house?

Should I not buy a house? So Chris, what are some things along those lines that you’re talking to clients about? Yeah, this is a question probably comes up at least once or twice a week, I’d say. people are still looking to move, houses are still moving quick, but with rates going up, the biggest impact that has is on your monthly budget.

I think you crunch the numbers that we’ll go through here in a minute about how does that payment change with a three and a half rate, four percent, seven percent, and so on. So with that in mind, we still want to fall back.

We have two rules of thumb on how much house I can afford. So the first rule is looking at your gross income. It’s the total amount that you’re taking a loan out for stays under two times your gross income.

So if you’re making 500 ,000, we’d want to keep that loan under a million dollars. And then the second rule is kind of factors in the interest rates and the payments a little bit more because this is looking at your net take home pay.

So from a payment standpoint, the second rule is we want to keep that payment under 30 percent of your net take home. So that’s going to be the test that is most affected by these rates. From your planning standpoint, we still recommend housing should be primarily lifestyle first.

Make sure that that decision fits for your family and where you’re at in life. And most importantly, make sure that you’re going to stay in the house long enough to where if you’re selling, you’re not underwater with the mortgage.

Yeah, totally agree. It’s a lifestyle decision. Most cases, real estate, you’re not doing it from an investment standpoint. If you’re getting into investment property, use different conversation. But primary residence, mostly a lifestyle decision.

And totally agree with what you said. So just to give you an example, if your take -home pay is about $25 ,000 per month after taxes, we want that your total housing cost under 30%, which should be about 8 ,000 per month.

And so that’s so important, the two times gross income rule and the 30% net take -home pay, why we want both those. And this interest rates make a huge difference. So this is just the math, a million dollar mortgage at a 7% interest rate is about $6 ,653 per month, almost $80 ,000 a year total, $1 million in a mortgage at half of that interest rate, 3 .5% comes out to $4 ,490 per month.

So it’s about a $26 ,000 a year difference. So interest rates do have a huge impact on being able to buy a house or not buy a house. And our advice would be, don’t make the decision just because the interest rates are high, it’s a lifestyle choice.

And if you can fit that into those two tests, then you can go ahead and purchase the house, if that’s the house you wanna be into.