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Since the October twenty twenty two lows markets have had a great run, recovering all of their losses and then some. But valuations are higher and the market seems to be narrowing. How should long term investors respond to these conditions? I'm Barry Riddelts and on today's edition of At the Money, we're going to discuss what you should be doing with your portfolio to help us unpack all of this and what it means for your money. Let's bring in Liz
An Saunders. She is chief investment strategist and sits on the Investment Policy Committee at Schwab, the investment giant that has over eight point five trillion dollars on its platform. So Liz, let's start with the basics. How should long term investors be thinking about their equities here?
Well, you know, Barry Shaman, anybody that answers that question with any kind of precision around percent exposure, and that's not just on the equity side of things, but broader acid allocation. I could have I could have a little birdie from the future land on my shoulder and tell me with ninety nine percent precision, what equities are going to do? Over the next whatever period of time, what bonds are going to do, even what maybe real estate
is going to do. But if I were sitting across from two investors, one was a twenty five year old investor that inherited ten million dollars from their grandparents. They don't need the money, they don't need to live on the income. They go skydiving on the weekend. They're big risk takers. They're not going to freak out at the first ten or fifteen percent drop in their portfolio. And the other investor is seventy five years old, has an st egg that they built over an extended period of time.
They need to live on the income generated from that stag and they can't afford to lose any of the principle, So one essentially perfect the high conviction view of what the markets are going to do. What I would tell those two investors is entirely different. So it depends on the individual investors.
So that raises an obvious question. You work with not only a lot of individual investors, but a lot of rias and advisors. How important is it having a personal financial plan to your long term financial.
Well, absolutely essential. You can't start this process of investing by winging it. It's got to be based on a long term plan, and it's driven by the obvious things like time horizon. But too often people automatically connect time horizon to risk tolerance. I've got a long time horizon, therefore I can take more risk of my portfolio vice versa.
But we often learn the hard way. Investors learn the hard way that there can sometimes be a very wide chasm between your financial risk tolerance, what you might put on paper, sit down with an advisor, establish that plan, time horizon coming into play, and your emotional risk tolerance.
And I've known investors that should, essentially on paper have a long term time horizon, but if the sort of panic button gets hit because of a short term period of volatility or dropping the portfolio, then that's an example of learning the hard way that your emotional risk tolerance may not be as high as your financial rest.
So let's talk about that a bit. Everybody seems to focus on let's pick this stock or this sector or this asset class, but really, is there anything more important to long term outcomes than investor behavior?
Investor? Absolutely, it's not. Too many investors think it's what we know or somebody else knows or you know that matters, meaning about the future. What is the market going to do? That doesn't matter because that's impossible to know. What matters is what we do along the way. And I enjoy these conversations because we get to talk about what actually matters, the disciplines that arguably are maybe a little bit more boring to talk about when you're doing, you know, financial
media interview. The bomb bast is what sells more, but it's asset allocation, strategic and at times tactical. It is diversification across them within acid classes. And then the most beautiful discipline of all is periodical rebalancing, and it forces investors to do what we know we're supposed to do, which is a version of BI low sell high, which is add low trim high and one left to our own.
Devices low trim high ad low trim high.
So I almost the reason why I have that sort of nuance change to that is by low sell high.
Almost infers market time.
Get in, get out, And I always say that neither get in or get out is an investing strategy. All that is is gambling on two moments in time.
And you have to get them both to get them both dead right.
And I don't know any investor that has become a successful investor that's done it with all or nothing, Get in, get out investing. It is always a discipline process over time. It should never be about any moment in time.
So we've been in the cycle where the FED started raising rates and markets became much more volatile. Now everybody's expecting rates to go down. What do you say to clients who are hanging on every utterance of Jerome pal and trying to adapt their portfolio in anticipation.
What the FED does.
Well to use the word adapt expectations have adapted to the reality of the data that has come in. Not to mention the pushback that Powell and others have shared, and even before the hotter than expected CPI report and hotter than expected jobs report, that the combination of those brought the FED to the point of Powell at the press conference at the January FMC meeting saying, it's not
going to be March. But even in advance of that, we felt the market had gotten over At SKIS with not only a March start, but as many as six rate cuts this year. The data just did not support you know that old adage. Berry, I'm sure you know what of the FED typically takes the escalator up and the elevator down. They clearly took the elevator up this time. I think their inclination is to take the escalator down.
Huh.
Very interesting. So you deal with a lot of different types of clients. When people approach you and say, I'm concerned about this newsflow about Ukraine, about Gaza, about the presidential election, about the FED. Do any of those things matter to a portfolio over the long term or is this just short term noise? How do you advise those folks.
Well, things like geopolitics tend to have a short term impact. They can be a volatility driver, but unless they turn into something truly protracted that works, it's way through. You know, commodity price channels like oil or food on a consistent basis, they tend to be short lived impacts. The same thing
with elections and outcomes of elections. You tend to get some volatility things that can happen within the market at the sector level, but for the most part, you've got to be really disciplined around that strategic acid allocation and try to kind of keep the noise out of the picture.
The market is almost always extremely sentiment driven. I think probably the best descriptor of a full market cycle came from the late great Sir John Templeton around bull markets are born, and its despair and the grown skepticism mature and optimism die in euphoria. I think that's such a perfect descriptor of a full market cycle. And what's maybe perfect about it is there's not a single word in that that has anything to do with the stuff we focus on at a day to day basis, earnings and
valuation and economic data reports. It's all about psychology.
So in order to stay on the right side of psychology. Given how relentless the newsflow is, we're constantly getting economic reports that are constantly fed people out speaking earnings, you know, we're just wrapping up earning season. How should investors contextualize that fire hose of information and what should it mean to their buy or sell decisions?
Well, to the extent, some of this stuff does drive volatility. Use that volatility to your advantage. A lot of rebalancing strategies are calendar based, and it's forced to be calendar based in a situation like mutual funds that do their rebalancing at the last week of every quarter, but for
many individual investors, they're not constrained by those rules. And one of the shifts in a more volatile environment where you've got such a fire hose of news and data coming out you and that can cost short term volatility is to consider portfolio based rebalancing as opposed to race rebalancing. Let your portfolio tell you when it's time to, you know, add low and trim high.
So in other words, it's not like every September first, it's hey, if the markets are down twenty twenty five percent, good time to rebalance. You're adding low and your trimmings.
And that's within asset classes too, whether it's something that happens at the sector level or you know, magnificent seven type action. And that's just a better way to stay in gear as opposed to trying to absorb all this information and trying to trade around it to the benefit of your performance.
That's that's a fool's Errand.
What do we do in a year like twenty twenty two, which admittedly was a forty year run since the last time both stocks and bonds were down double digits how do you rebalance or is that just one of those years where hey, it's literally a forty year flood and you just got to ride it out.
Yeah. I mean, it's obviously been a tough couple of years in terms of the relationship between stocks and bonds, and we do think that we are in the midst of a secular shift. For much of the Great Moderation Era, which essentially represents the period from the mid to late nineties up until the early years of the pandemic, you had a positive correlation between bond yields and stock prices because that was a disinflationary era for the most part.
So as an example, when yields were going up in that era, it was usually not because inflation was picking up. It was because growth was improving. Stronger growth without commensurer at higher inflation, that's nirvana for equities.
But if you go back to the thirty years prior.
To the Great Moderation I've been calling it the Temperamental Era, from the mid sixties to the mid nineties, that relationship was almost the entire period. The complete opposite of that, you had that inverse relationship because bond yields, as an example, when they were moving up in that era, it was often because inflation was sort of rearing its ugly head again. Now that's a very different backdrop, but it's not without opportunity.
In some cases, it may be you benefit by taking more of an active approach, both on the equity side of things and on the fixed income side of things. The other thing to remember is that there's the price component on the bond side of things, but there's also the fact that you are going to get your yield
and your principle if you hold to maturity. So for many individual investors, much like we say, be really careful about trying to trade short term on the equity side of things, the same thing camply on the fixed income side of things, but it's a different backdrop than what a lot of people are used to.
So to sum up, there's a lot of noise. There's news, there's fed pronouncements, there's earnings, there's economic data, all of which creates volatility, and that volatility creates an opportunity to rebalance advantageously when markets are down and you're off of your original allocation. If you're seventy thirty has become a six because stocks have sold out off. That's the opportunity to trim a little bit on the bond side, a little bit on the equity side, and now you're back
to your original allocation. Same thing when markets run up a lot and your seventy thirty becomes an eighty twenty. It doesn't just have to be a calendar based allocation. You could be opportunistic based on what markets provide. I'm Barry Ridults, you're listening to Bloomberg's At the Money