2022 Year-in-Perspective - Part Two

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Welcome back

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 listeners. This is your host Tom romano, and thank you

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 for joining us for part two of our 2022 year

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 in perspective. Once again, we're joined by Casey Dillon

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 to give us some insights on the markets and

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 how they affected investors throughout the course

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 of the previous year. Thanks for joining us again. Casey talked us

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 a little bit. How did the markets react right? I mean we saw both

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 equities and fixed income have negative

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 performance for the year. And what

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 are we seeing from rates of

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 return from the US as well as abroad?

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Yeah, well the the sharp increase

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 in rates reverberated across

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 markets everything from stocks to

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 bonds to real estate to commodities.

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And in what we observed was

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 sort of some interesting things

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 again threads that

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We'd seen coming into 2022 for instance. The

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 the growth of tech stocks

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 becoming a huge portion of

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 the sort of the the US market,

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 right? So if you you think about the Fang stocks Facebook

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 Apple Amazon Netflix, Google

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They accounted for almost 25% of

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 the market cap of the US.

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Coming into 2022 and they were

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 the sort of those growth oriented tech stocks were the drivers

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 of the tremendous returns

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 that the market had given kind of the past five years.

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Or even ten and and to the

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 point that there were a lot of folks who looked at that and said,

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 hey, look are we out over our skis here this feels

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 very much. Like we're entering into kind

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 of frothy Tech bubble territory

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 and there were sort of the Hallmark things

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 trappings of

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 that that were that felt very familiar to

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 those of us who lived through the first tech bubble. So you saw things

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 like the mean stocks right with games stop

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 and Best Buy and sort of, you know day trading.

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To to the overuse of Leverage on these

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 and a lot of that was kind of being driven by

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 this idea that you know coming out of the pandemic these

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 growth stocks. This was the story. These were the story

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 stocks that people were gravitating to so so what happens people

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 buy them up they to the point where the valuation

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 no longer makes sense. If you

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 take a step back and say well what am I buying right at

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 the end of the day?

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Investing is about purchasing future cash flows. And

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 so you arrive at a price today based on

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 some assessment of what you think those future cash flows

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 are and what you're willing to pay for those.

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If you get to a point where you're paying so much today for

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 you know, this idea of

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 heightened future cash flows at some

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 point you enter into a world where?

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To to even substantiate the price you're willing

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 to pay today. You have to have Perfection on those future casuals

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 going forward and the world doesn't work that way right? You

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 have a situation where Russia invades Ukraine, you have

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 a situation where you have, you know pandemics and Avian flues

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 and things like that. So the world is just in that

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 need a place where you can predict Perfection

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 for cash flows for things like yeah, Facebook

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 Apple Amazon, and in fact what we see

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The the case for Perfection fell off the cliff in 2022

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 because the the earnings for

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 those companies started to turn around and go the other way and that

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 caused Market participants to rethink the

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 valuations that they were giving them and what

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 we observed was the Fang stocks lost

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 collectively over three trillion dollars in market

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 cap over the course of the year. So that that

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 was a homos 25% of the total market cap lost in

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 the US was attributable to those handful of stocks

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 right those those Fang stocks that you allude to. I mean

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 at some point they were you know, collectively very

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 large percentage of common us benchmarks

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 like like the S&P 500, right they've been

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 inflated and so when there is that correction, you're gonna

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 feel it across the the industry across the all

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 the markets rather. So I think that makes a lot of

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 sense a lot of our investors are evidence-based investors,

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 you know, Casey you and I share the same investment philosophy

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 of buying hold.

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Long-term taking a factor approach to investment management.

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What how did factor-based investors or

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 evidence-based investors fair in 2022?

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 Yeah, so if you think about what what

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 are you doing? If you're a factor investor? Well yours, you're

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 lazing in on specific characteristics of

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 risk to invest in and those

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 character those risk factors those characteristics of

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 risk that that you have

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 been identified by way of academic research to have a

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 premium or return

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 associated with that that characteristics of risk.

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 So you're trying to figure it

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 out and say okay, you know, the the tech stocks

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 is great example, the thing stocks if things become exceedingly

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 expensive. Well, what does that

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 do? Then to the cheaper stocks the stocks that aren't the

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 thing stocks, right? How are they priced relative

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 to these these growthier stocks?

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What historically we've observed is that

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 there is a premium associated with valuation. Meaning

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 the cheaper stocks tend to outperform the

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 more expensive stocks over time.

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And so you enter into a world where the Fang stocks are

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 ripping the cover off the ball and they're kind of the expensive growth stocks and

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 by comparison, the the cheaper value

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 stocks just aren't keeping up with that on the upswing and

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 you got to a point where the

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 market was collectively the one of

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 the most expensive markets in history. Meaning that

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 the

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thighs and weight of those Bank stocks across

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 the market

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and how expensive they become

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lifted the whole market up

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But the spread between the growth stocks and

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 the value stocks became as wide as we've

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 seen really since the tech bubble right going back to

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 that that the the value stocks were

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 just so unloved and so beaten down my price relative to

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 the tech stocks. So if you're

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 a value investor rolling into a year like

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 2022 when the the Fang

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 stock bubble sort of starts to become deflated and

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 those prices start to to come

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 back to the mean if

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 you will.

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One consequent of that is is that on a relative

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 basis those cheaper value stocks start to perform better. Even

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 if the market is going down as a whole the value

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 stocks tend to hold up better because it's the

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 top end of the market the expensive end. That's moving more.

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And so we we saw that and in 2022 value

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 stocks actually did quite well, they did exceedingly well

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 relative to grow stocks large

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 cap value outperform large cap growth handily

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 for 2022. And

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 so if you're a value a factor investor with

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 a tilt towards value that was really helping your portfolio in

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 2022. We also saw factors like

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 low volatility or

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 associated with lower volatility stocks

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 doing well across the

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 board minimum volatility globally and

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 also here in the United States. So those stocks that tend

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 to be less volatile than the market in general.

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There's a return premium associated with that and of course

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 in a year that highly volatile like 2022 those less

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 volatile stocks had a premium associated with

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 them relative to everything else. And if you're a factor investor who

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 has a tilt towards minimum volatility you you reap the

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 reward on that but it is as we sort of

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 break out of kind of globally or looking at the US things like

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 small cap stocks and Emerging Markets continue to do quite well.

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 So if you had a tilt towards size in your

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 Factor tilt that that paid off

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 for you on a more broadly Diversified basis.

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And so you you started to see that these these

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 Factor tilts in at

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 a time when normally you would think a look

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 if it's a risk off environment. Well Factor, it is

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 a risk anyway, right? So you might

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 expect for the factor exposures to

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 be down it and to a degree you're

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 right, but they're also relative to the other things that

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 they're trading against and in that case they held up

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 much better than the market in general.

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And so a broadly based a broad

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 Diversified broadly Diversified Factor portfolio

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 tended to do better on both a relative

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 and absolute basis than the market in general

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 did and certainly more so than the Contra points

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 of that things like growth or more volatile stocks or you

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 know, large cabs. So so being a factor investor

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 really was beneficial in

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 many regards in 2022.

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Yeah, we've seen that in the performance of a number of

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 portfolios that that you and I have talked about over the

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 years that you know, a diversified portfolio factors in

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 2022 albeit was

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 still in the red at the end of the year, but not nearly as as bad

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 as some of those market like portfolios

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 or benchmarks that we've seen. I do

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 want to hang on the value conversation a little bit. Right?

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 We you know value as a factor you and

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 I share the the belief that investors should have exposure

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 to value in their portfolios. And I know

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 over the years Casey you and I have had shared a cocktail

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 discussing. What was the underperformance of

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 value for a number of years. We saw the rise

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 of the things which we discussed earlier and for

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 Value investors. I think that they were

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 someone Vindicated in 2020 to but for

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 those are out there listening, you know with this outperformance

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 of value. Is there still room for Value to

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 continue to outperform in 2023?

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You know, I love the quote history rare

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 rarely repeats itself, but it often Rhymes because

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 I think that that's incredibly true

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 across markets in particular and I

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 heard an a quote that I think shed some light on that and it's

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 not that history repeats itself. It's that people

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 repeat themself, right? And so if you think about markets are

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 made up of people making purchasing and

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 selling decisions across the board it it's it

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 should be no surprise that in a similar

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 type of dynamic or environment.

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People might Chase things like large cab growth

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 tech stocks, right? And so if you look back to

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 a time that was very similar to that during the tech bubble where

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 you saw again Tech socks become very expensive and

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 value stocks kind of be left to languish

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 on the sidelines for

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 some time when the tech Bubble Burst, right all of

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 those growthy tech stocks valuation plummeted

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 and value stocks had a tremendous run for several

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 years.

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Well, where are we now?

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The we see these these Fang stocks the the air going

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 out of them value having a nice run.

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So you might think is the run over. Well, if you

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 look at the sort of globally the value spreads.

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So again cheap versus expensive we are still in

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 the 90 plus percentile

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 meaning it still one of the most expensive markets,

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 right? So if we look at the, you

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 know, nine out of 10 markets have been cheaper than

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 the market that we're in currently even after 2022's price

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 decline. So that tells you that value

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 stocks, even though they had a tremendous year

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 in 2022. The potential is there

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 for them to continue to experience this

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 reversion to the mean of these expensive stocks

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 coming back down and value could have

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 a run akin to what we observed post

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 the tech bubble in the early 2000 when value

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 was really dominant for a

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 good three years in the marketplace. Now,

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 I'm not suggesting that that it will exactly repeat itself.

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 But you see the dynamic there in the case

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 to be made for hey, it looks like there's still some fuel for

249
00:12:29.400 --> 00:12:29.900
 this fire.

250
00:12:31.300 --> 00:12:34.200
And it would not be surprising to continue to

251
00:12:34.200 --> 00:12:38.100
 see value run relative to the the

252
00:12:37.100 --> 00:12:39.100
 more expensive stocks.

253
00:12:39.800 --> 00:12:42.300
Certainly, and you know, I think it's

254
00:12:42.300 --> 00:12:45.300
 important for our listeners to know we're by no means suggesting people

255
00:12:45.300 --> 00:12:48.600
 should speculate between growth and value. We think that you

256
00:12:48.600 --> 00:12:52.100
 know factors specifically value are our

257
00:12:51.100 --> 00:12:55.700
 long-term Endeavors and investors who maintain that

258
00:12:55.700 --> 00:12:58.500
 exposure tend to do better over time

259
00:12:58.500 --> 00:13:02.000
 is what I'm hearing you say and I

260
00:13:01.300 --> 00:13:04.200
 and I lived through the tech bubble as you did

261
00:13:04.200 --> 00:13:08.200
 and you know, those those years after where value did outperform

262
00:13:07.200 --> 00:13:11.400
 they were still poor years, right 2000

263
00:13:10.400 --> 00:13:13.300
 2001 weren't positive years in

264
00:13:13.300 --> 00:13:16.500
 the market. And do you have any comments on you

265
00:13:16.500 --> 00:13:19.200
 know value kind of shining during those downturns when

266
00:13:19.200 --> 00:13:22.500
 we say values out performing. It doesn't necessarily I mean values positive, right?

267
00:13:22.500 --> 00:13:25.700
 I think this is this the the Crux

268
00:13:25.700 --> 00:13:29.100
 of why it's difficult to be a value investor because

269
00:13:28.100 --> 00:13:32.300
 I mean sexually value investing

270
00:13:31.300 --> 00:13:34.400
 is not hard to get your head around by cheap stuff

271
00:13:34.400 --> 00:13:39.100
 and hold it right like that's not hard from sort

272
00:13:37.100 --> 00:13:39.500
 of a conceptual.

273
00:13:39.800 --> 00:13:42.500
Went to get the hard part is actually doing it

274
00:13:42.500 --> 00:13:45.600
 and being able to be patient through those

275
00:13:45.600 --> 00:13:48.100
 periods when it doesn't look like

276
00:13:48.100 --> 00:13:51.300
 it's working because those are those come right you

277
00:13:51.300 --> 00:13:54.300
 you have those periods where the the tech bubble

278
00:13:54.300 --> 00:13:57.100
 occurs where the Fang stocks are ripping the cover off the

279
00:13:57.100 --> 00:14:00.300
 ball for five years in a row and your value stocks are languishing.

280
00:14:01.400 --> 00:14:04.700
Most investors the vast majority of investors cannot

281
00:14:04.700 --> 00:14:05.600
 sit still through that.

282
00:14:06.300 --> 00:14:10.600
that's why value investing well easy to to

283
00:14:09.600 --> 00:14:12.400
 sort of implement is hard

284
00:14:12.400 --> 00:14:15.700
 to maintain and yet right what

285
00:14:15.700 --> 00:14:18.600
 why do why do folks like you and I gravitate to

286
00:14:18.600 --> 00:14:21.500
 Value as an important element of

287
00:14:21.500 --> 00:14:24.800
 kind of a broad-based factor portfolio because

288
00:14:24.800 --> 00:14:27.600
 the data going back over time

289
00:14:27.600 --> 00:14:30.300
 suggests that if you can be patient

290
00:14:30.300 --> 00:14:33.500
 through those periods when values not working the

291
00:14:33.500 --> 00:14:36.400
 payoff for you when it comes in times

292
00:14:36.400 --> 00:14:39.200
 like after the tech bubble when it comes when it

293
00:14:39.200 --> 00:14:42.300
 comes in times like 2022 the payoff for

294
00:14:42.300 --> 00:14:44.500
 you for being patient through that period

295
00:14:45.400 --> 00:14:49.300
And maintaining that that value exposure is

296
00:14:48.300 --> 00:14:51.600
 significant enough such that

297
00:14:51.600 --> 00:14:54.700
 over the total holding period you you

298
00:14:54.700 --> 00:14:57.100
 end up ahead of where you might otherwise have been

299
00:14:57.100 --> 00:15:00.800
 had you just had kind of Market level performance right?

300
00:15:00.800 --> 00:15:02.100
 Just just broad beta.

301
00:15:02.900 --> 00:15:05.400
And so at the end of the day, you know, the question is, how

302
00:15:05.400 --> 00:15:08.200
 do I out? How do I outperform the market? Well, one way to

303
00:15:08.200 --> 00:15:11.300
 help perform. The market over time is to tilt towards

304
00:15:11.300 --> 00:15:15.000
 these characteristics of risk, which have shown over

305
00:15:14.300 --> 00:15:18.000
 time to outperform the market and values

306
00:15:17.100 --> 00:15:20.000
 one of those now what I

307
00:15:20.200 --> 00:15:23.600
 would say Tom is that it's incredibly difficult to just

308
00:15:23.600 --> 00:15:25.500
 be a value investor and that's all you do.

309
00:15:26.100 --> 00:15:29.300
Which is why it's so beneficial to have a

310
00:15:29.300 --> 00:15:33.100
 blend of factor exposures to have other things

311
00:15:32.100 --> 00:15:35.400
 working when things like value for instance

312
00:15:35.400 --> 00:15:38.900
 aren't so a good example of that is momentum, right? So

313
00:15:38.900 --> 00:15:41.300
 it momentum and value are really nice

314
00:15:41.300 --> 00:15:44.600
 pairing to put together in a portfolio because they're

315
00:15:44.600 --> 00:15:48.200
 negatively correlated meaning when when values down

316
00:15:47.200 --> 00:15:50.400
 momentum tends to be up and vice versa.

317
00:15:50.400 --> 00:15:53.400
 So if the value investor if it's incredibly difficult

318
00:15:53.400 --> 00:15:57.300
 to sit through those periods when value is not doing well with momentum

319
00:15:56.300 --> 00:15:59.200
 exposures you end up

320
00:15:59.200 --> 00:16:01.100
 having things in your portfolio.

321
00:16:02.200 --> 00:16:05.400
Which are picking up what's working and so in the case of the past five

322
00:16:05.400 --> 00:16:07.700
 years a broad-based?

323
00:16:08.400 --> 00:16:12.100
Factor multi-factor portfolio would have value stocks

324
00:16:11.100 --> 00:16:15.100
 in it, but it would also have some exposure

325
00:16:14.100 --> 00:16:17.200
 to the fangs because those are

326
00:16:17.200 --> 00:16:20.400
 representing kind of the momentum in the market until you have exposure to

327
00:16:20.400 --> 00:16:23.700
 that and and that becomes an easier portfolio for

328
00:16:23.700 --> 00:16:27.300
 most people to consume and sit through and the

329
00:16:27.300 --> 00:16:30.100
 real magic here is the longer you

330
00:16:30.100 --> 00:16:33.900
 can hold on to any of these Factor exposures. The more

331
00:16:33.900 --> 00:16:36.700
 you have an expectation that you're going to have performance that's

332
00:16:36.700 --> 00:16:37.200
 above Market.

333
00:16:37.900 --> 00:16:40.300
And and the real challenge for everybody is

334
00:16:40.300 --> 00:16:43.500
 to sit still long enough to reap

335
00:16:43.500 --> 00:16:46.200
 the reward of putting that Capital to risk. So you just trying to

336
00:16:46.200 --> 00:16:49.700
 build a portfolio that people can actually stay in

337
00:16:49.700 --> 00:16:53.000
 through these Market turmoil these ups

338
00:16:52.300 --> 00:16:56.000
 and downs because if they can sit still there, you

339
00:16:55.400 --> 00:16:58.700
 know it a bears make

340
00:16:58.700 --> 00:17:01.100
 money Bulls make money pigs get slaughtered. Right? What does that mean?

341
00:17:01.100 --> 00:17:04.400
 Look regardless of what your philosophy is, if you

342
00:17:04.400 --> 00:17:07.200
 maintain that philosophy eventually the market

343
00:17:07.200 --> 00:17:10.400
 will come around and rotate to you and pay you off for it. If you

344
00:17:10.400 --> 00:17:13.000
 keep jumping from philosophy to philosophy trying to

345
00:17:13.400 --> 00:17:16.200
 chase whatever is in front of you and get those returns. That's when

346
00:17:16.200 --> 00:17:19.000
 you get slaughtered. That's when the cost of

347
00:17:20.300 --> 00:17:23.700
Trading in and out eats up your returns that

348
00:17:23.700 --> 00:17:26.200
 that's when you're catching a falling knife. That's when

349
00:17:26.200 --> 00:17:29.200
 all of these things that you hear why you might want to

350
00:17:29.200 --> 00:17:32.300
 not want to be a growth investor or a value investor or

351
00:17:32.300 --> 00:17:35.100
 right? All of those things can be true. If you're

352
00:17:35.100 --> 00:17:38.800
 trying to find those things because the timing is is has

353
00:17:38.800 --> 00:17:41.900
 been proven to be elusive if not impossible. So

354
00:17:41.900 --> 00:17:44.000
 picking a philosophy and sticking with

355
00:17:44.200 --> 00:17:48.100
 it as shown consistently over time to to be the way to go and we

356
00:17:47.100 --> 00:17:51.700
 happen to believe in the philosophy of what's been

357
00:17:51.700 --> 00:17:54.100
 shown from the academic research to be these

358
00:17:54.100 --> 00:17:57.200
 characteristics of risk that pay off over time certainly and so

359
00:17:57.200 --> 00:18:01.300
 in a nutshell, it's time in the market versus

360
00:18:00.300 --> 00:18:03.600
 timing. The market is the best course of

361
00:18:03.600 --> 00:18:06.600
 action. I want to hit upon something

362
00:18:06.600 --> 00:18:09.900
 that you're alluding to and that platitude or

363
00:18:09.900 --> 00:18:12.700
 it sounds like a platitude to most investors, especially

364
00:18:12.700 --> 00:18:15.400
 when the markets down right telling them. I'm

365
00:18:15.400 --> 00:18:18.300
 in the market not timing the market that doesn't mean much to somebody

366
00:18:18.300 --> 00:18:19.700
 who's like am I gonna be able to retire?

367
00:18:20.200 --> 00:18:23.500
Right, but you have to understand where that platitude

368
00:18:23.500 --> 00:18:26.200
 comes from right where where that rule of thumb comes

369
00:18:26.200 --> 00:18:30.600
 from any and it is informed by

370
00:18:30.600 --> 00:18:34.400
 decades upon Decades of observations

371
00:18:33.400 --> 00:18:36.400
 of how markets behave

372
00:18:36.400 --> 00:18:39.600
 and where returns to markets come from. Yeah. That's an excellent

373
00:18:39.600 --> 00:18:42.100
 point. You were alluding to

374
00:18:42.100 --> 00:18:45.000
 diversification Factor diversification but diversification as a whole

375
00:18:45.300 --> 00:18:48.300
 and there's one thing I'd like you to comment on, you

376
00:18:48.300 --> 00:18:51.300
 know, I've been hearing in Reading in popular press and

377
00:18:51.300 --> 00:18:54.100
 in the various industry trade Rags that you know

378
00:18:54.100 --> 00:18:57.700
 diversification didn't work in in 2022. My

379
00:18:57.700 --> 00:19:00.200
 thought on that is that I think it's a misunderstanding of

380
00:19:00.200 --> 00:19:03.100
 how diversification actually works and I'd love to hear your

381
00:19:03.100 --> 00:19:06.100
 thoughts on that. Yeah. So you sort of

382
00:19:06.100 --> 00:19:09.400
 come back to well. What are your expectations? I went

383
00:19:09.400 --> 00:19:12.600
 when when you hear someone like you or

384
00:19:12.600 --> 00:19:16.400
 I say, hey a broadly Diversified portfolio is

385
00:19:15.400 --> 00:19:18.900
 is the starting point for most

386
00:19:18.900 --> 00:19:19.800
 investors like

387
00:19:20.200 --> 00:19:23.500
Everybody should have if you're going to invest you should do it in a

388
00:19:23.500 --> 00:19:26.400
 fashion that allows you to take advantage of broad-based diversification.

389
00:19:27.300 --> 00:19:30.800
If your expectation when you hear that is, oh, okay. I'll

390
00:19:30.800 --> 00:19:33.200
 never lose money. Well, no that that's not what we're saying,

391
00:19:33.200 --> 00:19:36.500
 right? The the point of broad-based diversification

392
00:19:36.500 --> 00:19:39.800
 is you're taking off some of the idiosyncratic risk

393
00:19:39.800 --> 00:19:42.200
 of any one kind of investment meaning.

394
00:19:43.400 --> 00:19:47.000
All I want to invest the only thing I know about is expensive wine

395
00:19:46.600 --> 00:19:49.200
 French wine, right? That's the only thing I know about that.

396
00:19:49.200 --> 00:19:50.200
 The only thing I want to invest in

397
00:19:50.900 --> 00:19:53.400
So if that's my investment philosophy the risk

398
00:19:53.400 --> 00:19:57.500
 that I have is that the the wine

399
00:19:56.500 --> 00:19:59.800
 market goes away people, you know,

400
00:19:59.800 --> 00:20:02.100
 they're tasting preferences. They no longer want

401
00:20:02.100 --> 00:20:05.200
 to drink expensive wines. We see

402
00:20:05.200 --> 00:20:08.600
 a shift in the in the wine market where French wines are are no

403
00:20:08.600 --> 00:20:11.700
 longer as highly valued as California wines, for

404
00:20:11.700 --> 00:20:14.100
 instance. And if I've invested in

405
00:20:14.100 --> 00:20:17.400
 a bunch of French wines, just the shift in the market now, I have

406
00:20:17.400 --> 00:20:20.700
 a dramatic impact in my portfolio and or

407
00:20:20.700 --> 00:20:23.400
 you know fires in

408
00:20:23.400 --> 00:20:26.700
 California and drought in France and

409
00:20:26.700 --> 00:20:29.400
 suddenly the wine market has absolutely no

410
00:20:29.400 --> 00:20:32.600
 Supply. And so the

411
00:20:32.600 --> 00:20:35.300
 price of what you're holding goes up dramatically, but then

412
00:20:35.300 --> 00:20:38.500
 when it's gone, it's gone, right and then what do you invest in? So

413
00:20:38.500 --> 00:20:41.300
 so the the risk of investing in any one

414
00:20:41.300 --> 00:20:45.600
 thing you may know that thing inside and out but it's idiosyncratic

415
00:20:44.600 --> 00:20:47.200
 to that thing. You're

416
00:20:47.200 --> 00:20:47.900
 investing in like wine.

417
00:20:48.900 --> 00:20:51.700
So, you know the idea is with

418
00:20:51.700 --> 00:20:54.400
 diversification. Yeah, okay invest in wine, but while

419
00:20:54.400 --> 00:20:57.900
 you're doing that can we find some other things to invest in that are

420
00:20:57.900 --> 00:21:00.600
 going to behave differently than Wine does

421
00:21:00.600 --> 00:21:01.100
 because

422
00:21:02.200 --> 00:21:05.400
If the risks come to bear for wine, you don't get wiped out.

423
00:21:06.100 --> 00:21:09.400
Right. So we want to invest you know in a fashion

424
00:21:09.400 --> 00:21:12.300
 that allows us to sort of achieve these long-term goals without getting

425
00:21:12.300 --> 00:21:15.300
 wiped out along the way. So instead of investing in

426
00:21:15.300 --> 00:21:18.100
 wine. Maybe we invest in, you know,

427
00:21:18.100 --> 00:21:21.100
 small cap stocks in the United States and those are

428
00:21:21.100 --> 00:21:23.200
 gonna look and behave very differently than the wine market.

429
00:21:23.600 --> 00:21:27.100
And maybe we invest in Emerging Market

430
00:21:26.100 --> 00:21:29.200
 debt because we know that that's gonna

431
00:21:29.200 --> 00:21:32.700
 behave differently than Securities and wine

432
00:21:32.700 --> 00:21:35.200
 and maybe we invest in treasuries and

433
00:21:35.200 --> 00:21:38.200
 maybe right. So as you start to go down that path you look at

434
00:21:38.200 --> 00:21:42.100
 all of the different things you can lay around that are going to behave differently

435
00:21:41.100 --> 00:21:44.500
 from the other things that you're holding. That's not

436
00:21:44.500 --> 00:21:48.700
 to say that when a systematic level

437
00:21:48.700 --> 00:21:51.600
 risk comes along like a pandemic or

438
00:21:51.600 --> 00:21:54.500
 Rising interest rates that all of those things aren't

439
00:21:54.500 --> 00:21:58.100
 going to be impacted by them. They will be right your your

440
00:21:57.100 --> 00:22:00.800
 wine your small counts dogs. You're you're

441
00:22:00.800 --> 00:22:03.200
 treasuries, right? You're you're emerging market

442
00:22:03.200 --> 00:22:06.400
 that all of those things are gonna be impacted if there are

443
00:22:06.400 --> 00:22:09.300
 issues that are roiling markets across the

444
00:22:09.300 --> 00:22:12.600
 board. And and so if you're expectation going

445
00:22:12.600 --> 00:22:15.300
 into a broadly based Diversified portfolio as I'll

446
00:22:15.300 --> 00:22:16.700
 never lose money, or it'll never go down.

447
00:22:17.100 --> 00:22:20.200
That's the wrong. I would like to disabuse you of that notion.

448
00:22:21.200 --> 00:22:24.400
What you should expect is if any one or two of these things

449
00:22:24.400 --> 00:22:27.200
 are impacted by a risk specific to it.

450
00:22:27.200 --> 00:22:30.500
 I'm not going to be wiped out and that's why I would have a

451
00:22:30.500 --> 00:22:33.500
 broadly based portfolio Diversified portfolio. Now,

452
00:22:33.500 --> 00:22:36.000
 I will say that if a part of your

453
00:22:36.800 --> 00:22:39.800
 diversification are things like Factor exposures. Well, you

454
00:22:39.800 --> 00:22:42.400
 you end up often doing

455
00:22:42.400 --> 00:22:45.200
 better than the market even if the markets down

456
00:22:45.200 --> 00:22:48.200
 and your portfolio is down you end up doing a

457
00:22:48.200 --> 00:22:50.100
 bit better than the market did in general.

458
00:22:51.100 --> 00:22:54.500
And if you look at like a sick just a generic 60 40 portfolio.

459
00:22:55.400 --> 00:22:57.700
It was one of the worst years on record for.

460
00:22:59.100 --> 00:23:00.600
1640 board folios

461
00:23:01.400 --> 00:23:04.200
because stocks and bonds both went down

462
00:23:04.200 --> 00:23:08.600
 dramatically in fact bonds had a historically bad year led

463
00:23:07.600 --> 00:23:10.300
 by treasuries which had the

464
00:23:10.300 --> 00:23:13.300
 worst year since the you know in 200 and

465
00:23:13.300 --> 00:23:16.300
 something years, right? So a 60 40

466
00:23:16.300 --> 00:23:20.500
 a broad base 640 portfolio being down is unusual.

467
00:23:19.500 --> 00:23:22.300
 It's Unique to have

468
00:23:22.300 --> 00:23:25.300
 that experience, but it's also

469
00:23:25.300 --> 00:23:29.100
 not unexpected given the the

470
00:23:28.100 --> 00:23:31.100
 Catalyst for why all of those

471
00:23:31.100 --> 00:23:31.900
 things were down.

472
00:23:32.900 --> 00:23:35.800
That doesn't mean you abandon that that

473
00:23:35.800 --> 00:23:38.300
 investing discipline. It just means that

474
00:23:38.300 --> 00:23:43.000
 you should expect there are going to be times when broad-based

475
00:23:41.400 --> 00:23:44.100
 diversification isn't going to

476
00:23:44.100 --> 00:23:48.800
 be the thing that saves you from experiencing a

477
00:23:48.800 --> 00:23:49.500
 downmark.

478
00:23:50.300 --> 00:23:53.300
So it sounds like there's like two two things that you're bringing

479
00:23:53.300 --> 00:23:56.800
 up here, right diversification certainly provides you with some

480
00:23:56.800 --> 00:23:59.700
 protection from concentrated stock concentrated

481
00:23:59.700 --> 00:24:02.300
 industry or even sector right? Like you bring

482
00:24:02.300 --> 00:24:06.000
 up wine a great way to sort of

483
00:24:06.400 --> 00:24:10.300
 balance that out by maintaining diversification. But however diversification is

484
00:24:10.300 --> 00:24:13.600
 not going to necessarily protect you from the natural ebb and

485
00:24:13.600 --> 00:24:16.400
 flows of the market, right? Those are gonna continue to happen

486
00:24:16.400 --> 00:24:19.400
 but the market risk and I

487
00:24:19.400 --> 00:24:23.000
 think you would agree is that that's what rewards investors for deploying

488
00:24:22.100 --> 00:24:25.200
 their Capital into the market. Why would I invest

489
00:24:25.200 --> 00:24:28.500
 broadly in you know, the S&P 500 well because

490
00:24:28.500 --> 00:24:31.300
 there's risk associated broadly with the SD, but and

491
00:24:31.300 --> 00:24:34.700
 I should be paid for doing so you're absolutely spot on right? Yeah. Why

492
00:24:34.700 --> 00:24:37.200
 are we investing in anything because there's risk associated with

493
00:24:37.200 --> 00:24:40.200
 it and that risk generates return, right? Yeah risk and return our

494
00:24:40.200 --> 00:24:43.600
 absolutely Inseparable and I think it's it behooves investor

495
00:24:43.600 --> 00:24:46.200
 to keep that investors to keep that sort of Mantra in

496
00:24:46.200 --> 00:24:49.200
 mind so Casey, thank you so much for

497
00:24:49.200 --> 00:24:50.100
 your comments. I do have

498
00:24:50.400 --> 00:24:53.500
Last question for you, you know, we covered the current events

499
00:24:53.500 --> 00:24:57.100
 how that affected the markets, you know investors are

500
00:24:56.100 --> 00:24:59.400
 listeners are looking at the retirement

501
00:24:59.400 --> 00:25:02.500
 accounts. They're seeing a lot of red. What advice

502
00:25:02.500 --> 00:25:05.300
 would you give investors? What should

503
00:25:05.300 --> 00:25:08.100
 they do going into 2023? What are some of the things investors could be

504
00:25:08.100 --> 00:25:11.800
 doing now? Well, you know, my my knee jerk

505
00:25:11.800 --> 00:25:14.200
 response to that is nothing right. So if you're

506
00:25:14.200 --> 00:25:18.000
 if you're a discipline investor maintain that discipline, right?

507
00:25:17.300 --> 00:25:20.600
 There's no question 2022 was challenging year

508
00:25:20.600 --> 00:25:23.300
 for investors. And there is likely,

509
00:25:23.300 --> 00:25:26.500
 you know, these issues that we've been talking about they're not resolved.

510
00:25:26.900 --> 00:25:29.800
Right and in and in fact, there will be other things

511
00:25:29.800 --> 00:25:32.300
 that will Royal the markets layered on

512
00:25:32.300 --> 00:25:35.400
 top of these like for instance a fight over

513
00:25:35.400 --> 00:25:36.300
 the debt ceiling, right?

514
00:25:37.300 --> 00:25:40.700
So there's likely more turbulence ahead. However, right the

515
00:25:40.700 --> 00:25:44.200
 the best option for the long-term investor is

516
00:25:43.200 --> 00:25:46.300
 to find a philosophy that

517
00:25:46.300 --> 00:25:49.500
 makes sense for them build a portfolio around that and

518
00:25:49.500 --> 00:25:53.100
 then maintain the course maintain

519
00:25:52.100 --> 00:25:54.200
 the discipline.

520
00:25:55.800 --> 00:25:58.300
Through up markets down markets, you know turbulence in

521
00:25:58.300 --> 00:26:02.000
 the headlines the it's the discipline of maintaining

522
00:26:01.200 --> 00:26:04.800
 that philosophy over time that is provides the

523
00:26:04.800 --> 00:26:07.600
 reward for long-term investors and their steadfast

524
00:26:07.600 --> 00:26:08.000
 patients.

525
00:26:08.800 --> 00:26:12.700
Through these short-term Market movements or macroeconomic

526
00:26:11.700 --> 00:26:14.300
 events are the things

527
00:26:14.300 --> 00:26:18.000
 that are going to generate returns for them over the next Century, right? That's

528
00:26:17.500 --> 00:26:20.900
 it just is what it is. It's what it has been for

529
00:26:20.900 --> 00:26:23.600
 those investors who are looking at 2023 here are

530
00:26:23.600 --> 00:26:26.400
 some statistics. Hopefully that will Empower you to maintain

531
00:26:26.400 --> 00:26:30.800
 the course over the sort of the past Century

532
00:26:29.800 --> 00:26:32.600
 the US has endured 15

533
00:26:32.600 --> 00:26:33.600
 recessions.

534
00:26:34.500 --> 00:26:37.700
In 11 of the 15 or 73% in

535
00:26:37.700 --> 00:26:37.800
 time.

536
00:26:38.400 --> 00:26:41.500
Returns on stocks were positive two years after the

537
00:26:41.500 --> 00:26:42.300
 recession began.

538
00:26:43.200 --> 00:26:46.900
With an annualized average Market return 7.8% So

539
00:26:46.900 --> 00:26:49.800
 if you're concern going into 2023 is always

540
00:26:49.800 --> 00:26:52.100
 it gonna tip into recession. Should we be concerned with

541
00:26:52.100 --> 00:26:55.700
 what the FED is doing? Are they gonna go too far? My answer to you

542
00:26:55.700 --> 00:26:59.100
 would be look recessions are not new with the

543
00:26:58.100 --> 00:27:00.300
 we've experienced them.

544
00:27:01.500 --> 00:27:04.300
Over time in fact more frequently than

545
00:27:04.300 --> 00:27:07.200
 you would think and yet in a vast majority of those

546
00:27:07.200 --> 00:27:10.100
 recessions. If you just have the patience to ride through

547
00:27:10.100 --> 00:27:13.400
 it you're rewarded on the back end of that to to

548
00:27:13.400 --> 00:27:16.300
 the tune of sort of a healthy average annual Market return of

549
00:27:16.300 --> 00:27:16.800
 almost 8%

550
00:27:17.200 --> 00:27:20.500
So going into 2023 expect volatility

551
00:27:20.500 --> 00:27:23.300
 expect there to be things playing out in the headlines. Do not

552
00:27:23.300 --> 00:27:27.000
 let that pull you away from the long-term

553
00:27:26.600 --> 00:27:29.800
 discipline and know that the the

554
00:27:29.800 --> 00:27:33.200
 rationale for why you're investing over

555
00:27:32.200 --> 00:27:36.400
 the long term is sound and

556
00:27:35.400 --> 00:27:38.400
 you have expectation that this too

557
00:27:38.400 --> 00:27:40.500
 shall pass and I'll be rewarded for that patients.

558
00:27:41.300 --> 00:27:44.500
Yeah, absolutely discipline and patience tends to be the biggest Catalyst

559
00:27:44.500 --> 00:27:47.600
 for rewards for investors over the long term and going

560
00:27:47.600 --> 00:27:51.000
 into 2023, you know investors who might be uneasy

561
00:27:50.500 --> 00:27:54.000
 unable to sleep at night concerned about their portfolios.

562
00:27:53.300 --> 00:27:56.500
 They should go meet with their financial advisor.

563
00:27:56.500 --> 00:27:59.500
 Make sure that their current asset allocation is aligned with

564
00:27:59.500 --> 00:28:02.200
 their financial plan and their long-term goals

565
00:28:02.200 --> 00:28:06.100
 and objectives and you know, I think staying

566
00:28:05.100 --> 00:28:09.300
 the course and remaining disciplined makes the

567
00:28:08.300 --> 00:28:11.700
 most sense but making

568
00:28:11.700 --> 00:28:14.500
 sure that your portfolio is aligned with what you want to achieve with.

569
00:28:14.500 --> 00:28:17.500
 Your hard-earned capital is something investors could

570
00:28:17.500 --> 00:28:20.600
 be doing into 2023 and then expect your

571
00:28:20.600 --> 00:28:23.300
 advisor say everything's gonna be fine unless there's

572
00:28:23.300 --> 00:28:27.200
 some sort of life-changing event that happens with the

573
00:28:26.200 --> 00:28:29.700
 investor not necessarily the markets

574
00:28:29.700 --> 00:28:32.100
 Casey. Thank you so much for your insights today.

575
00:28:32.100 --> 00:28:35.100
 It's always a pleasure. We love talking to you and

576
00:28:35.100 --> 00:28:38.000
 we look to have you back over the next

577
00:28:38.200 --> 00:28:40.700
 couple of podcasts and I want to thank all of our listeners out there.

578
00:28:41.100 --> 00:28:45.500
Joining us today. Please feel free to access other

579
00:28:45.500 --> 00:28:49.500
 podcasts that we have done and they

580
00:28:48.500 --> 00:28:51.300
 can be accessed anywhere you get your

581
00:28:51.300 --> 00:28:54.500
 podcast. So thanks everyone and we will see you

582
00:28:54.500 --> 00:28:57.900
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583
00:28:57.900 --> 00:29:00.500
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584
00:29:00.500 --> 00:29:03.500
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585
00:29:03.500 --> 00:29:06.400
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588
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592
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594
00:29:30.600 --> 00:29:32.700
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595
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596
00:29:36.200 --> 00:29:39.800
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597
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598
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605
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