How Are You Preparing For 2020? (Audio Podcast)

November 30, 2019

On this episode, Karl discusses how to prepare for potential volatility in 2020.  There are investments beyond stocks, bonds, mutual funds, and exchange traded funds.

Hey, good morning everybody. Welcome to Creating Richer Lives. My name is Karl Eggerss. Thanks for joining me, I appreciate it. As always, hope you and your family had a great Thanksgiving. I know I did. It was very traditional in the sense of doing the same thing we’ve been doing for the last 20-some odd years it seems like. It’s nice, all the family comes over. We always host at our house, and it seems like everybody brings the same dish. People may even sit in the same place. But as I’ve learned over the years, as my kids get older, they really like tradition. And when you try to change something up, they don’t want to change it up. And so we just continue to do the same thing, and it was great. And I hope yours was too. Very grateful this year and thankful. My mother and my mother-in-law both had some health issues in 2019, and so it was great just to be with them and that they were healthy.

Let’s jump right in here. Don’t forget, our telephone number is 210-526-0057. Our website is And just a reminder, if you’re listening to the podcast, we not only update the podcast on Saturday mornings when it’s released and it goes out on our website, it goes out on iTunes and Spotify, and really a lot of the podcast services, and so if you use a podcasting service it just shows up when it’s released. What I found out though is that a lot of people still like to get notified via email when our podcast comes out. That comes out on Monday afternoons. We send it out in something called Covenant U, and Covenant U is really an educational piece with anything that we have put together on the site and uploaded onto the site each and every week.

So we take anything that’s been posted, whether it’s a blog article, whether it’s a TV interview, a radio interview, a piece that we find educational and think you will too, any of that is distributed out on Monday afternoons. And so that is how our new format has been for the last few months. So if you’re listening to this and you want more information, it’s Covenant U that you will get in your inbox each and every week on Monday afternoons. And just a reminder, Covenant is the sponsor of this show, lifestyle, legacy, philanthropy. And really the goal of Covenant is to unburden clients from the daily cares of financial management. And that can come in a lot of different forms and fashion.

Before we get into my topic this week, just a quick update on the markets. We’re sitting here right now pretty close to all-time highs, obviously Friday pulled back a little bit after the Thanksgiving holiday. But market’s been very resilient. We’ve had overbought conditions from a technical nature I’ve been talking about the last few weeks, and yet the market’s grinded higher and we’ve seen some really important things such as small caps break out. They had been lagging behind and they started to outperform. And so we’re really seeing kind of a broad-based rally. But again, we’re still overbought and I still think we’ll get a pause. Now when a market does not pull back when it’s “supposed to” because it’s overbought, that just means it’s a really, really strong market. And that’s what we’re in right now.

As we move into 2020 will we see more volatility? I personally think we will, and it brings me to my topic today. Because I met a gentleman early this week that said he had a portfolio, he’s retired, living pretty comfortably, and he said, “I’m just concerned that there’s going to be a big pullback next year, and I don’t really know how to prepare for it.” And so we had this discussion. I thought this is something that perhaps you would like to hear in terms of some of the highlights of what we talked about. And first of all, I do think we’ll see more volatility. Here we are, almost in December and with great gains in the stock market this year. In taxable accounts, very few people want to sell stocks and lock in gains and put them on the books for 2019. They would rather put them on the books for 2020, and I think people will do that. And so what they’re going to do is defer those gains. And so there’s a good chance we will see some selling in early 2020 simply for that fact that the folks that wanted to sell in 2019 thought, “I’ll hold off until the new year.”

In addition, we have something very big called the presidential election, and many people are concerned that volatility will pick up. And I think it will, again, depending on how the polls go. And again, regardless of your political stance, as we navigate through this there’s a lot of different opinions, as there usually are coming into an election for both parties, their beliefs and their policies are going to look very different. This year is up there as one of the most bifurcated ones. You have one side that’s looks very different than the other side in terms of the policies. So watch that, as we move along and the poll numbers change, the market is likely to get more volatile. So we talked about this, this gentleman and I, and said, “Look, what can we do?” And this was somebody that was not a client of ours. He was wanting us to look at the portfolio and see what options there were.

And so the first thing I told him is the best hedge is cash, right? I mean if you’re sitting there with cash, that is not going to go down. Cash, meaning money market, savings account, something outside of the stock market or the bond market. That is going to hold up versus the stock market fall. I mean that’s your best hedge. Now there’s problems with that. Doesn’t make a lot of money. You’ve got gains to lock in if it’s in a taxable account, as we just talked about. And the challenging part is you have to buy back in, so you have to get the timing right. So we explored other options, and these were just brainstorming ideas. As we move forward, I’m going to look in the portfolio and see where some holes are and some things that can be plugged, if you will, where there’s leaks in the pipe, and we’re going to try to plug those for him.

And so I wanted to share a couple of things you can do to protect your portfolio. So I would say number one is if you’re going to lighten up, and I wouldn’t suggest that you do that right away, but if you were going to, especially as we move into 2020, look at your IRAs, your Roths, your tax-deferred and tax-free accounts, your 401k’s. That’s the place that you can lighten up, get more conservative, if you will, without the tax consequences. So that’s number one, if you’re going to get more conservative. Now when it comes to getting more conservative, do you do it now? Do you wait until the election? That’s the challenging part. And so you need signals, you need a strategy, and that’s what most people don’t have. They’re either going to sell out now and sit there as the market continues higher or they’re going to wait, and then of course it’s going to be too late. And when they’re at their peak fear, that’s usually the bottom, right? The sell-off’s already happened. So if you’re thinking about getting more conservative, regardless of the timing, yes you can go to cash.

The second thing you can do is obviously, what most people do, is go to fixed income. They go to bonds. What if over time we get a environment where stocks are challenged and bonds are challenged because interest rates are rising? I know we haven’t had that for a long time. And when I mentioned that to this individual, he looked at me like an alien, as if I was an alien, like, “What? Bonds are always a great option for the non-stock portion.” That’s true because of the environment we’ve been in the last 15, 20 years at least where rates have been falling. If we get into a persistent rising-rate environment, which I’m not saying we’re going to get into a hyperinflation, but if we just have rates rising moderately, bonds won’t give you the safety that you have wanted. They could lose money. They may not lose as much money as stocks, but they could still lose money. But fixed income is an option. So he already had some of that.

So then we start looking at things that are nontraditional, right? So this gentleman already had bonds, he had stocks, he had mutual funds, he had ETFs, like most of you do. What else is there? Those are traditional investments. What else can you be doing and adding to the portfolio? And I’ll start with maybe the thing that probably most of you don’t have or don’t have access to or haven’t ever explored, but private equity, investing in a private business. So you’re taking your public money, your stock money, and maybe moving some of it to private equity, a private business, probably better valuations, and that’s something that in this world you may be able to get something at a third of the valuation of what the stock market is giving you. So you’re still in stocks, but you’re getting it at a cheaper valuation.

Now, what’s the negative of that? Liquidity. That’s why public stocks get a bigger premium is because you can sell them anytime you want. You can liquidate them. That’s a huge benefit. Private equity, you don’t get that. You’re in, it’s the roach motel, you check in, you can’t check out until there’s a liquidation event, generally speaking. But that is an option. That’s one way to diversify away from public markets and something away from the political volatility we might get or the volatility due to the politics because the business is still operating, right? The reason the market moves up and down is because it does move on news on a day-to-day basis. So private equity is one thing.

What about, and this is something we’ve talked about for years, but a lot of new listeners, what if you look at private lending or private real estate? Again, you know about public REITs and you know about public bonds. That’s public lending, right? And public real estate. But really public REITs are really just glorified stocks. They move just like the stock market. In fact, sometimes they move more than the stock market. So yes, you’re getting some real estate exposure. But in terms of what your portfolio, how it moves on a day-to-day or week-to-week basis, it really looks just like the stock market. But then when you go in the private real estate market, very different.

Now, what can that look like? That can be a private fund. That can be a private real estate investment trust. It can be your own warehouse. It could be your own rent house. It’s all of the above. Those are private real estate, and that can diversify you away from the market. Again, you’re getting income and you may be giving up some liquidity, but you’re gaining the non-correlation to the stock market. It’s not moving the same as the stock market on a day-to-day basis and the election’s probably not going to affect that. That would be affected by the economy. That’s another animal. We’re talking about reducing volatility because of the stock market.

What about private lending? There’s companies out there that need your capital. We’ve talked about this in the past, but there are a lot less banks nowadays than there were in the early ’90s. And because of that, there is a shortage of lending. So companies need capital, and oftentimes they will come to the private markets for that capital. And you can be that lender. And oftentimes you can get collateral. They will back the loan up with something tangible. So those are out there in individual loans. They are out there in the form of institutional type funds where it’s a basket of loans. There are diversified lending funds that will buy distressed debt. They can even short bonds. They can lend for commercial real estate, to build commercial real estate. All of that can be packaged in a lending fund. Now on the surface it may look like a bond fund, but much less affected by interest rates. So again, if we get in that environment where we’re talking about, they won’t be affected as much. They’re more affected by the credit or what’s going on with the economy. But private lending is another option.

Now private lending can also be non-commercial. It can go on the individual route. In other words, somebody needs a loan to buy a home, a family, and you’re going to provide that financing for them, the home’s the collateral, you’re getting paid interest. And again, unless that couple can’t pay their mortgage or loses their job, you’re going to get that income regardless of what happens with the presidential election. Again, a great diversifier and very, very different than the overall stock market. So you’ve got private lending, you’ve got private real estate, you have individual lending, commercial lending, you got real estate in the form of homes or apartments or buildings or warehouses that you can invest in, you can lend in.

I mean there’s just a huge other market out there in terms of investments. Now all of these things have their pros and cons as every investment does. Stocks and bonds are the most simple. They’re liquid, click a button, get in, click a button, get out. But with that, sometimes you pay premium and sometimes you put up with a lot of volatility that you may not want to put up with. And that’s why we’re talking about these other things. And then we just talked about private equity as well.

Another bucket, liquid alternatives. So alternative to me is really anything outside of the traditional stock and bond market. But in the last several years there are several funds, ETFs, private or institutional type funds. Some of them you may have access to, some you may not. But they’re designed to do something different than the traditional mutual funds. So instead of a large-cap value fund or a small-cap growth fund, these would be a fund that literally move more. They give you more gains when there’s more volatility. So you can see how when there’s more volatility, usually that means your stuff’s probably going down, your traditional mutual funds, ETFs. These would be something that actually may go up during that environment.

Now in a bull market like 2019, they’re going to lag behind. So they’re going to be the ankle weights around your ankles as you’re running a marathon and everybody else’s running past you. That is why there is no free lunch. You either own these things or you don’t. I use them to really outpace my bond portfolio. If I can do that, I’m happy with them. Now, if I need income, that’s a different story because a lot of these don’t pay income. Some feast on volatility. Some go long and short the market. In other words, they say, “We’re going to buy the best stocks and we’re going to short, in our opinion, the worst stocks.” And they put it together and you get a fairly low-volatile fund. So again, there’s all kinds, but if you start adding those in in various pieces, you get a real diversified portfolio.

And I think this gentleman I was talking to, I think he was onto something because if you go back to 2008, which is an extreme example, but if you go back to 2008 many people thought they were diversified because they owned eight mutual funds, 10 mutual funds, they owned bonds, they owned ETFs, they owned international. But everything went down. What didn’t? Cash, right? That didn’t go down. I think treasury bonds did okay. Other than that, a lot of people were in trouble. But if you start adding in things that can actually benefit from volatility and maybe short the market at various times, you can see how it acts as a shock absorber to your portfolio.

Now, how much you do depends on your situation. And as I’ve said, there’s no free lunch so you have to kind of live with it. In other words, if you have 20% of your net worth in non-traditional investments and let’s say some of them are meant to do well during times of volatility and we have no volatility for the next five years, you’re going to underperform. But that’s okay if that’s what your goal is, if that’s what your strategy is. So everybody’s different. So I haven’t proposed anything to this gentleman yet because I haven’t looked at his portfolio. I want to look at it, see how much international he has, how much value he has, how many bonds, how many individual bonds versus bond funds. Which stocks does he have? I’m going to analyze those. I’m going to go through his whole portfolio, tear it apart. It’s like rebuilding the engine.

And then I’m going to look at it and say, “You know what? You know what’d fit nicely in this portfolio as a nice puzzle piece would be this, this and this,” and we round out that portfolio. I’m not trying to duplicate what he’s doing. I’m trying to add value in his life to what he doesn’t know how to do or can’t do. And so part of this is education. And so as we move into 2020, this is a good time to review that. This is the time right now, it’s not November of 2020. Because once the volatility starts, that’s when you really don’t want to do anything unless you’re taking advantage of the volatility by buying low and selling high, which can be challenging. So this is the time to review your portfolio. This is the time to do some stress tests on it, et cetera.

If you need help doing that, Covenant does that each and every day for our clients. We can do it for you. So you just give us a call, 210-526-0057. And our website’s I hope that was helpful to let you know what else is out there, what’s out in the investment world that you may have access to that you didn’t know you did. And you never learned about it because Money magazine doesn’t talk about it. And bald people on TV throwing stuffed animals to the screen, they don’t talk about it. And people that tell you to throw your credit cards in the blender, they don’t talk about it. They just talk about traditional investments, which again should be the core for most people. It should be the core of what you’re doing. It’s the bell curve. Should be traditional investments. I’m all for that. But on the satellite piece, the fringe, the edges, there’s other things out there that you may need to learn about. Because, again, in the next bumpy road, which could be in 2020, it’s something to investigate now.

Well, I hope you guys had a great Thanksgiving, as I mentioned, and have a wonderful rest of your weekend. And we will see you back here next week on Creating Richer Lives, the podcast. Thanks everybody. Take care.

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