On this episode, Karl Eggerss explains one of the many reasons individuals hire financial advisors.
Welcome to the podcast, everybody. Thank you for joining me. Appreciate it. My name is Karl Eggerss and this is Creating Richer Lives. Just a reminder, you can go to creatingricherlives.com. That is our website. You can also give us a call at 210-526-0057. Hope you are doing well.
Well, we certainly got a little more action this week, didn’t we? In the stock market. The markets have been really unusually calm and flat this year. They had a nice start to the year and then the last two or three months we’ve really seen really, I guess, technicians would call it a digestion of the gains.
And so instead of going back down, the market’s just simply have gone up and then they’ve just moved sideways the last few months. Well, things changed this week, of course. So let’s get right into that.
So we heard a lot the last few weeks, and if you follow the news, especially financial news, you heard about Evergrande and this is the second largest property developer in China. And they’ve taken on way too much debt and they can’t pay it back essentially. And real estate in China is so expensive that you have a lot of families living together and so there’s a theory out there that they need prices to come down in real estate.
And so this is perhaps whether it’s intentional or not, we don’t know, but there is a thought that the leaders of China want prices to come down to encourage people to go and buy some of this real estate. And so how much will they help Evergrande? So that was really, that started weeks ago because we started to hear about that weeks ago and it really came to a head the last couple of weeks, when there was news they were possibly going to go bankrupt. They were missing some of their interest payments.
And you have to remember, I mean, China is really new to a lot of the things that we’ve been doing in the Western world for a very long time. And so they have built, you’ve heard about it on this podcast and all over the place, these ghost cities where they build things, and then they wait for this towns to populate. So they essentially build cities, build all the infrastructure, but nobody’s there.
And that may be catching up to them. It’s kind of unusual but that is how it’s been over the last several years. And so they’ve borrowed a lot of money to do this and it’s now coming to bite them. And so you’re seeing Evergrande saying, “Hey, we may miss some interest payments.”
And the first thought, and you may be thinking, “Why on earth did that affect our stock market on Monday?” Which it did. I mean, at one point the Dow Jones was down about 900 points. And the reason is, is because people were questioning, will this be like Lehman Brothers?
So you remember back in the financial crisis? We started to see little issues pop up and I have issues in air quotes, in the financial world. And it started to spread and most of wall street was ignoring thinking it was contained and it was not contained in and it in fact spread all around, not only the United States, but around the world and Lehman through that bankruptcy, it started to spread and a lot of people felt like, okay, if there’s one Evergrande, and this is the second largest property developer in China, if there’s one of those, are there more?
Now, there probably are more of those out there, but is it Lehman Brothers? And the answer is no, it’s a local issue and a lot of this debt, you have to see where’s the debt coming from? Where are the investors coming from? That’s what causes contagion. With Lehman Brothers, they had a lot of international investors, a lot of people that owed money to internationally. So that’s what you have to look for to see how far will this spread.
And it seems like a China issue, but again, I don’t think it’s the last one we’re going to hear about. So in the United States, we certainly have an economy that’s starting to slow a little bit. The recovery is still intact but it is slowing. And at the same time, again, there was fear that maybe the federal reserve was going to start taking their foot off the accelerator and you got the sell-off and the sell-off started. Now, again, we have not had a 5% sell-off in some time and we still haven’t. We still have not had that officially on a closing basis.
So it’s been very calm. And so this time of year, if you’re into the seasonality, is the time that stocks tend to struggle. And so a lot of people believe that, hey, this is just part of the deal. We’re going to have some sort of sell-off here. But as has been the case with this market the last several months, every little bit of dip has been bought, and it was no different Tuesday. We had a little bit of a reprieve from selling, but Wednesday was up and Thursday had a very strong rebound, pretty much eliminating all of the losses from the Monday sell-off.
And so are we going to continue to see this? Some people believe we’re in what’s called a blow off top, meaning at the end of bull market, you tend to get the strongest gains. But let’s remember, I’ve been saying this for several weeks now, you have a lot of negative things competing with liquidity and low interest rates and a recovery in good demand and not enough supply. So when you put all that together, the market still is continuing to move up.
Now we do have to watch underneath the surface because this is what happened in 2007 and ’08 where underneath the surface, there’s a lot of sectors, a lot of stocks, a lot of industries already going down. And the stock market on the surface looked okay because we were looking at the Dow Jones, which is 30 industrial stocks. We were looking at the Standard and Poor’s 500.
Eventually everything went down. And so we always watched the health and breadth of the market and right now, it is still pretty good although we’ve certainly seen a little bit of deterioration in the markets underneath the surface, but it has to last for a while.
So no need to panic just yet. But it’s interesting, somebody asked me or told me this week, “Hey Karl, if it wasn’t for you, if you were not advising me and watching over our money, we would be sitting on the sidelines because of the negative news flow, all the negative things that we perceive going on in the world, how on earth can the stock market keep going up?”
And I’ve told you, I’ve had that question numerous times lately. Why hasn’t the market crashed? And again, the short answer is the federal reserve is very powerful and they have been signaling, “We are going to keep interest rates low.” They’ve signaled that and that’s very important.
Now, even this past week, Jerome Powell did a pretty good job of walking that tight rope of saying, “Look, let me explain to you what quantitative easing is and quantitative tightening. We are going to continue to provide support for the markets, financial markets, credit markets, but we’re going to start doing it at a slower pace, probably in November, which is a couple of months from now, but we’re still going to be there. And so we’re just barely, barely letting our foot off the accelerator. That is very different than tightening and that is also very different than raising interest rates, which we’re not going to do right now.”
And the market took that as a big sigh of relief. We also heard at the same time, there was talk that Evergrande did make an interest payment and that if they went bankrupt, it was going to be a little bit of a disassembling of the company, maybe broken up into four parts. The Chinese government would come in and facilitate this and make this very smooth.
And the market for some reason took that as a positive, but it did, it took that as a positive. So here we are. We have really three months to go in the year and the year has really gone by fast. I think a lot of us are still living in 2020. We still remember 2020 and here we are in 2021 and it’s coming to a close and it’s been such a calm year. I mean, yes, it’s been a year of recovery. It’s been a year of supply chain disruptions, which again are not going away anytime soon. You try to order a stove or even order a new car, it just takes a long time and there’s no promises on when those things will come in.
And so we’re still working through the supply chain issues caused by the pandemic. People shutting down factories because of COVID or shutting down factories because they didn’t think there was going to be demand and there lo and behold was demand and here they are having to ramp back up production and you just can’t get this stuff fast enough, and that is going to continue for a while.
So again, the theme remains the same. Inflation, probably running hotter for longer. Number two, you have a recovery happening but the economy is starting to slow a little bit, not only here but around the world. But there also are some places doing very well economically as well, and their stock markets are reflecting it. So diversification has really worked well in the last year. When you think about the vaccines first being announced and coming out and we had some final dates in November of 2020, you started to see a real change in character of the markets. You started to see the reopening trade really kick in to full gear and you had commodities doing well. Real estate started to recover and technology took a back seat. It didn’t go down dramatically, but it took a back seat.
And so we’ve kind of had this rotation underneath the market for many months of certain things doing well for a while, and then pulling back. I mean, recently utilities have had a tough time. Energy’s been doing well. So you’re continuing to see that rotation. That’s how investing really should work, it’s diversification. And some things are going to work well at times and some things are not, and very difficult to know exactly when those things are going to start, when they’re going to end.
But you can certainly tilt your portfolio towards the things that you believe are going to outperform on a relative basis and underweight the things that are not. And again, really the key to me, and I said it last week in the podcast, is interest rates. Interest rates are really the key here. If interest rates are going up, it signals that perhaps the economy is starting to do much better. If interest rates stay low, people have some fears, but also there’s a whole set of trades that goes along with that. When interest rates are low, certain stocks do really well. When interest rates are going up, certain stocks do better and then other ones start to underperform.
And so we need to continue to watch interest rates. It had a little bit of a spike this week, but that’s the big picture right now is that there’s not a lot that has changed. And so again, don’t overdo it by thinking what this client said, which is, “If it wasn’t for you, I’d be all in cash the last several months missing out on these gains.” Don’t overdo it. I mean, again, there’s times where we probably all think, “I don’t know why this market’s going up either,” but there are also times where I can see exactly why it’s going up.
And so you need to focus on longer term and if you’re needing cash for short term, typically that money should not be in the stock market anyways. And so there’s not a huge set of themes coming out of this in terms of what types of stocks we think are going to do well the next six or nine months. But I haven’t been making a lot of changes lately, I think on days where the market’s has dipped, and you have two, three, four days where the markets are down, like Monday. Yes, if you have cash and it’s meant to go in the stock market, you can average in.
Now the real conundrum, and I continue to hear about it, it’s people that are saying, “I don’t want to take risk.” If you don’t take risk, you get paid virtually nothing. So you have to take some risks if you want to earn something. And that’s always been the case, but it’s pretty extreme right now and people are literally falling behind because of inflation.
And so you have to make a choice. Can I take a moderate risk with my portfolio, a portion of it to stay ahead of the inflation? And that’s a tough decision for some people who are used to being in CDs, money markets, treasury bonds, things of that nature that are going to have to step out. And I think that’s probably why, a big reason why the stock market does continue higher, is they have to go do something. The TINA acronym, which you’ve heard of, There Is No Alternative, meaning we have to buy stocks. There’s nothing else to invest in.
And I wouldn’t go that far, there’s plenty of things to invest in. We’ve talked about numerous things on this podcast, the last several years. Plenty of ways to earn income in this interest rate environment, but it doesn’t come for free. There is some risk, but can you earn some more income without taking all stock market risk? And the answer is generally yes, but you have to craft a portfolio and put it together in a methodical manner based on what’s going on in your life and based on what’s going on in the markets.
So what did you do these past couple of weeks? I mean, are you taking advantage of dips? Are you still buying the dip? Are you selling the rallies? Are you sitting with a larger portion of cash than you normally would because you’re just waiting for a pullback? That’s a challenging thing to do. And so to me, it’s easier to have a portfolio that reflects your financial picture and also what you think about the markets, but not just what you think over the next day or two, but what you think over the next several months. And you put that together and you come up with a portfolio that, yes, it’s going to have some elements of volatility in it. It’s going to have some elements of safety and income and conservative nature in it.
And you put those together and that’s your portfolio, that’s portfolio construction. Oftentimes I see people that really just have a bank account and then the rest of it’s like pedal to the metal. There’s no thought of portfolio construction, which is huge. I mean, yes, you own different things, but why do you own the percentage or the amount that you do have certain individual stocks, bonds, mutual funds, ETFs? Why do you own those things in that amount?
And that’s the part that most people can’t answer. “I don’t know why I own X dollars of that or X percentage of that. I just did, that’s the cash I had available.” There’s got to be a little more intentionality to that. It’s interesting, when you look at positions in your portfolio, you can look back over time and you can assess how much they move based on the market.
And so, because of that, how volatile they are, you can craft a portfolio that you kind of have an expected volatility. You kind of know what to expect in a normal environment, and that’s how you begin constructing it. So not only volatility, but what’s your expected return? What are you hoping to get out of this portfolio?
And so that’s the challenge that people really have to look at. And I don’t think most people know how to do that. And again, for most that just read the news and watch what’s going on, this comment I made earlier that the client told me, yes, that is a concern. That is partially why you hire an advisor is to keep you accountable, to keep you on budget, to also keep you in the markets when you normally would bail.
Getting rid of your emotions when it comes to your investing. Some people cannot separate the two when managing their own money, cannot do it. And you have to learn to do that, or you have to farm it out to a competent advisor. And so sometimes that’s what we’re here for. People hire us for different reasons, but some of the most value I bring to clients over my career has been keeping them in the game when they were wanting to sell out during those scary times.
When you think about debt ceiling talks and fiscal cliffs and oil drops and pandemics, and all of those things that we’ve been through on this podcast together, going back really during the financial crisis, late 2000, ’08/’09, I think I started the podcast sometime around there. I think it was in 2010.
So we’ve had a lot of what looked like the next big financial crisis and some were legitimate reasons to lighten up. Some were legitimate reasons to add to stocks. I don’t blame people for being nervous during the 2020 pandemic sell off. That was something that we hadn’t dealt with before. The economy literally was shutting down and we didn’t know when it was going to open back up. People were staying home and not doing anything, that was a major concern and the fact that we recovered so quickly was a surprise to a lot of people.
Don’t let people fool you and say, “Oh yeah, I was calm during that.” No, but what we did do is not change our long-term game plan because of that. And it paid off and there was things to do like tax loss harvesting. Were are you doing that during those times? Did you, for example, take advantage of Roth IRA conversions? Your IRA was smaller than normal. You convert money to a Roth IRA for a smaller value, and guess what? It goes back up but the gains now happen in the Roth IRA.
So there’s always things to do and those are the real needle movers. The fact that your stocks went down, then it came back up and ended up at the same place they were a few months before didn’t do anything in your life that caused you anxiety. But what did you do during that time? Did you take advantage of some of these techniques? That’s what an advisor will do. That’s what an advisor can do is sit down and say, “This is what you should be doing right now. I can see the laundry list of things you should be doing and also, let me show you some things of why you probably don’t want to sell everything right now in your portfolio.”
If you need help with your portfolio, going through some of those discussions, looking for some techniques, creatingricherlives.com is the website. Pretty simple, creatingricherlives.com. Or you can always call us at 210-526-0057.
But certainly an interesting week this week with a little more volatility than we’ve seen. The volatility index is elevated a bit and again, it feels crazy volatility, but it’s just because it’s relative to what we’ve seen for 2021, which is pretty much nothing in extreme low volatility. So use the volatility to your advantage at times.
I hope that’s helpful to you. Thank you for listening, appreciate it. We’ll see you back here on the next episode. Take care, everybody.
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