Episode 5 Why We Should be Talking About Preservation More


Welcome to investing evolution podcast with Vince Esposito, and rob is bits from sun garden investment research. We are in investment firm that takes an alternative approach to the most common investor objectives, preservation income and long term growth. We focus on bottom line outcomes. Not what everyone else is doing in this podcast. We clarify confusing investor issues bust investments and discuss how to invest in any investment climate. Our number one goal is to help you think about investing in different way, a more straightforward way without all the fluff and sales tactics of the Wall Street culture. Listen is we share stories and insights on how to offer a truly unique approach to investing now onto the show. Hello. And welcome to another investing evolution podcast with Vince. Esposito? An rob is bits today. We're going to talk about something that not enough financial services professionals talk about which is what is preservation, and why don't advisers talk about it more. So Vince right out of the gate. We need to start with a good operational definition of what preservation is what is it in? What does it mean? Good question. Matt. Thank you preservation to us means don't lose big. And it's really our mantra here it's on garden. So we focus on preservation in our models to us. It's really really important to make sure that we don't lose big first. And then from there we look for for two days. How do you do differently than I mean, how how do you make it? And how is that mantra put into effect in your your systems for investing in your philosophy? So the first thing we do that as we get to know our clients, right? So it so don't lose big, obviously means different things to different people. So the first thing we do with their clients as we we get to know what their goals and aspirations are. And then we get a really good feel for what their risk tolerances. And see if there's a match between that and what they're trying to do with their money, and if not than we than we need to tweak it to figure out how we get there. But then once we do, and we figure out what what a big loss means to someone in in what preservation isn't there world, we make sure it matches up with with our thinking. And then we go ahead and build four folios with things that specifically are in there that are designed to protect on the downside, which is quite different from your traditional asset allocation type model that a lot of advisors employees. How do you figure out the risk though, guys? That's something to me. I had an adviser who was a friend of mine who wanted me to beta test his risk allies. And then after I took the risk allies. He said Matt you are investing like a ninety year old man. And I was like well, heck, I just answered the questions talk to me about how you guys use a risk tolerance and in different systems to flesh that out. Yeah. So risk allies is a great system attack one one that we use. We we moved over to using risk allies. What rob a couple years ago? Yeah. Yup. And really we have I think each of us in our careers before we were together. And especially since we've been together we have stressed tested a lot of risk models modeling software things like that. The thing we like about this one is it it shortens. The timeframe enough is everybody says there are long term investor until something goes horribly wrong. And what we like about this one in particular, the risk allies system is it the it looks at it on a six month timeframe, and we actually have a our own phrase, we call AB L and bins mentioned before we're trying to avoid the big loss and AB L. I'll always keeps us centered in so by extension. We wanna get a tool that could help us with that. And a tool that wouldn't just help us, but it would help yet the client in the right mindset to talk about what risk really needs and over timeframe. We're talking. Yeah. I find it much much more useful than your traditional risk tolerance questionnaire. Which is rob you, and I growing up in this business. We had paper risk tolerance questionnaires at all these really esoteric questions to try to figure out what someone's risk tolerances fast forward to today using risk allies in that that and using that six month timeframe, it's like, look if you got a million bucks, and your million bucks turned into seven hundred thousand in six months is that good with you. It makes it really really simple. And in quantifies it in a way that I think most most other systems don't do. And we love it. It really helps. I think it's been our experience bells that. People think they know themselves in an investment context. But investing is so inherently of motions when you get when it's not something that you do every day. And I think what we've trained ourselves to do obviously with the hard way you make a lot of mistakes along the way. But Vince, and I in in the team that we lead we've all been through the enough of battles. Whether it's with markets were were you're trying to put the right plan together. And I think with with anything like this. Yes, there's an emotional component to it in that has to be sort of right size for each investor in each investor is different. You say what's big loss and to Matt impersonating ninety year old it's one answer and to a thirty five year old couple that just had the first child it could be something else into somebody. See that's fifty five years old and wants to retire in five to ten years and things they have about enough money to do. It doesn't wanna blow it at the back end of all their working years. It's completely different. And I think what's really so significant this is you want to focus on risk tolerance. Which is why we we use risk allies and some other methods, but you also don't want to over correct? And so we go beyond just the simple question of hypothetical dollar routes. Let's talk about that loss though. So the AB L phrase for the big losses SunGuard mantra by let's talk about loss. I mean, everybody's gonna lose money at some point in their portfolio. I'm sorry. That just and maybe I'm not allowed to talk about salutes like that. But it seems that you know, if you're going to try to get some upside, there's the potential for downside. So you need to be prepared for that. But what what does it mean? Let's say somebody. Does lose X amount. Let's say it's thirty percent in their portfolio. How does that actually play out over time with with how flexible you all need to be and how much do they need to get back in order to just break even? Yeah. That's a great question. Matt. So would a lot of people don't realize if you lose thirty percent you need to make more than thirty percent. Just to get back to even in fact, it's actually rounded up. It's forty three percent on the upside just to get back to even. And that's one of the big reason in the numbers get worse as it goes. You know, if you lose forty percent or fifty percent of unit just the numbers get even worse as to what you need to make just to get back to even. So like rob said, we'd both been in this business along time. We've we've learned from our mistakes along the way and one of the big ones is if you if you wanna. Reap the rewards of of compound interest in I won't get into the details of that on this podcast. But I'm sure a lot of folks who've been investing for a long time in visors know-how compound interest works in in. It's it's very magical with the first thing you need to do to take advantage of that. It's not lose a lot of money. And that's why we're so focused on preservation, and so focused on getting that right with the client from the get-go as to why how much are we going to focus on preservation? Well, it's it's different for every client rights, if you're if you're a nine year old guy Matt nets year. It's the way you feel about investing than we need to be cognizant of that we need to make sure managing your portfolio to that risk tolerance. Because in working with us. We wanna forge a long term relationship. We wanna make sure that you get the type of investor experience that you signed up for. The risk is the risk of going a little bit Quant on you guys here. We I think especially after the kind of markets we've had over the last nine years for stocks and thirty five years for bonds. There haven't been a lot of uncomfortable moments. There have been a lot of chew pain points. And sometimes either people forget or they weren't investors. The last time this happened is particularly true bonds. But the even people know the stock market is Volvo least, I think they remembered his, but I was pulling something up. Here's we were. We were talking. I just within the last decade you had a period in which the the broad stock market S and P five hundred fell by over forty percent in six months. I remember that pretty well. Because it was the first time I manage to mutual fund and right out of the gates. What people may be don't understand is that even investments that may be in recent history have not produced major drops in value of they can do so very quickly. It wasn't that long ago that even portfolio of longer term Bonn. Sounds can fall by Kane to twenty percent before you can blink it. I and so a lot of times it would it comes back to is yet. There's there is risk of principle fluctuation in everything at the end of the day. I think this is what I think Vince the advisory folks here do so well is they tie that attitude toward risk put that way the attitude toward risk in in fluctuation in short term volatility in the value of your count. They tied that to what you're all of Jackson's are. I don't wanna say it's as simple as no pain, no gain. But he does need to be fleshed out. And and sometimes you only learn more by yourself as a desperate when you had some actual experience with it. Which is why the idea that we do focus on what the big loss of you can get that accurate for the client of front than. The wrist. You much better chance of having pretty smooth sailing from there to the expectations are in check. And I think that's where it really goes wrong for advisors of front the expectations between the advisor and the client are not set because like been said they just sort of Russia over it with a compliance of departments required response questionnaire Enron. There's something in there a need a little bit more color on you said bonds can fall ten to twenty percent. I don't I don't get that will I do. But can you give me a little more color cause because what most folks will do to to try to mitigate risk in create a portfolio that's quote conservative as put a lot of money in bonds. They've done so well over the last thirty years, I'm they well, my physicians friend, let me answer it this way. So you know, I great for Forbes pretty often. There was an article of if you months back and the title was had a lose seventy percent, really ease and it Banzer mass. Okay. And so when interest rates are going to you you have you have the amount of interest on pays who pawn. There's quote zero coupon bond, but I won't make it any more complex than it needs to be. So you you haven't amount that you're going to get from the issue of the bond, and then you have the impact of interest rates during the time you own the bomb. So if you own the bond, fizz, fizz, a three month treasury Bill will there isn't going to be that much time for the interest rate to fluctuate and the end you're gonna get back pretty much the money. You know that you that you put up in interest. So that's not the problem. But what a lot of people don't. Realizes that. Once you start to get into the realm of seven ten twenty thirty year bonds, or even some Basel go out to a hundred years maturity that introduces think about anything in in life. Are you more certain of what's gonna happen in your life over the next week over the next twenty or thirty years, right? So when you when you and apply just some basic math of the Bonn world to it. It's very easy to have. Let's say a bomb you buy with for with a hundred dollars of your harder. Monte, okay. Take a very, simple example. And yes, you can expect the issue would doesn't default? That in was a twenty years, you're going to get that hundred dollars back, but if interest rates start to go up that bond that they were paying you maybe three dollars a year interest on your hundred dollars. All of a sudden people can get similar bonds for four percent. Five percent. Six percent will how valuable is your three percent or not. You're stuck with it for twenty years in this example, and you're gonna you're gonna end up with the with a pretty big loss because the market reflects that at that's how you can lose money on bonds and much of people's money. These days in realize it is not advantages by you, hold until maturity, it's in bond funds that by very long term bonds in so they're introducing this basic bond risk that I that I just explained, but they're doing it hundreds of times over in a portfolio, and that's what we kinda real against at at sun garden, at least. In an environment. Where interest rates are about as low as they've been for forty years. Yeah. And I think the takeaway for me, rob. Thank you for that explanation. Should you need to you need to be more flexible, you need to think outside the box of little bit when building portfolios for folks that wanna focus on preservation and look not not everybody does. And if they don't that's cool. I get it. And then maybe maybe it makes sense to to look to some of these other areas, but but for our clients, you know, the folks that we work with as a general rule have either worked their entire life to build up a business in and sell it in need to live off that money or worked hard saving money in their retirement accounts in need to live off that money as well. So preservation is paramount in in. I think where we do a really good job is being flexible being adaptive thinking of other. Ways to to protect into build portfolios that we feel are are built to last through any market environment. And I'm gonna add one thing to add in maybe more specifically she's gonna out in adult with a fuel to the fire because I believe in. I'm not sure degree with events. But I think that was happened over the last thirty years, particularly with bonds is that a lot of people were sort of classically trained in in what they think bonds are. And it's all the entire spurious has been in a falling rating barring in a rising rate environment. Even if it's. It it takes a long time to play out years, maybe a decade or so history tells us that the type times written now, you can't just sort of mail it in on the bond side of your portfolio yet. If you look at the typical sixty forty mix that people have while the sixty is in stocks, and we can talk another time about. All the inherent use of just sort of mailing it in your on. Your stock portfolio is kinda taking with the market gives you were not fans of that. But on the bond side, the other forty percent of it. There is understanding that either they're going to be good contributors to the portfolio or that they're at least going to be sort of a flat performer and let the equity side of it. Do the work will I think that there is a tremendous lack of understanding believe it or not not just the investor community, but in the advisory community about that we're talking about when it comes to fixing the bond market. We could probably do a whole Todd cast on it. So definitely don't lie beat the dead horse. Cer- certainly there. There's some issues in. I'd say one other thing to us. That's really really important, rob, especially given our backgrounds in seeing seeing some things in this businesses having that daily liquidity, and and feeling like you have the ability to buy or sell something on any given day. If you if it really hits the fan, and you really really need to. It's almost like a what hear you saying if you if you buy some of these bond funds or by it's like, yeah, they might be they might be liquid. But you might find yourself in a situation where you're kind of backed into a corner half the sell it at a loss. I can tell you as someone that descends from a fellow that grew up in the depression in New York City, which is my father Carl is bits. I always felt is an investor in. No you to that you I have to start with the parade deplorables. What's the worst thing that can happen? And they go forward from there. And if in a investment advisor financial advisor or do yourself investor does not start with what's the worst thing can happen move forward from there. Then I think they're doing themselves disservice, and they're probably only going to be a successful as able market in stocks bonds were as a rising tide lifts althought. But what happens from the goes out? Right. Lint will warm of zits. I goes out. You can see women naked. Show. Let's hope not. But. Getting no doubt, no doubt. So, but but I do want our listeners also understand that beyond preservation as important as it is for us. I mean after all we're looking to deliver solid returns over time. So we're we're not so focused on the preservation side of the equation that we're not out there looking for opportunities. But I think the point is if you focus on that I in make sure that you don't have any disastrous situations in your portfolio, then you're you're putting yourself in a position to be able to do that to be able to go out there and look for opportunities and take advantage of them. And I think one of the one of the interesting things about the way we manage money is on the income side and will save the, you know, the growth side for another podcast on the income side, we generate the majority of our income from dividends and. A lot of our clients have money in taxable accounts and in this day and age in until things change. It's a really favorable way to generate in create income from tax standpoint dividends are tax much lower rate than than other traditional ways of income like bonds, or even a new these I have to pause you here because I'm just sitting back in, you know, thinking like a ninety year old here because obviously that's what my risk. Tolerances are just on paper on paper. So I'm hearing you talk about preservation, how important it is to preserve their their capital right there nest egg in I understand at least. I'm hearing you when it comes to daily quitted he to take advantages or to run if need be, but guys I mean their products in place for this. Right. I mean there there are annuities products. That guarantee you a specific amount of income potentially for the rest of your. Life. Why in God's name 'em. I not using that. That's good question. And and you certainly can't if you're willing to deal with all the things that go along with doing that. Okay. You have to tell me what the things because because I'm hearing what you're saying in. Honestly, a lot of sense to me. But I I've also heard the pitch on the other end. So help me understand that a little bit more. Please. Now, it's my turn play facetious guy. Right. Vince, there is such a thing as a free lunch in investing isn't there? No. Tell me more. Look would I wanna say I before I get in to get on my soapbox about the products. Matt you're discussing mainly newest he's I can I can tell you that in the course of my twenty four twenty five year career. I have come across situations where I said that they're appropriate. I I don't, you know, occurrence don't don't use new these. Here's garden. It's not. It's not part of what we do. But there are situations where they make sense. But I think they're few and far between in. Controversial. I would venture to say that if a new itys didn't pay such a big commission to the folks that sold them there'd be a lot less of them. Decades-old? With that said that some of the things that we don't like about annuity so one big one is the liquidity, right? I mean, I I like to invest money in places that I know if if we're wrong, we can get the heck out anytime want any day, we want Sundar really based on that. Right. I mean that really is one of our our founding principles that we only want to invest, and we we get hitched sings from our industry constantly immediately. We dismiss so many of them because they don't offer the ability to change your mind soon. We want change our mind. Okay. I'm still going to play devil's advocate here because you guys are are doing such a good job of of kind of arguing back and forth. Well, you're the same. Okay. So commit commissions aside. Right. The liquidity aspect of it. How were you from a disciplinary standpoint in an investment discipline standpoint, not reacting emotionally, right? So having this daily acquitted seems to me to allow you to get caught up in the emotion of investing. Such a great question. And I say all the time it's nearly impossible to make smart investment decisions. Based on you feel. I mean, it's really really hard to do. Because when you feel like absolute garbage and the world's coming to an end in. Everybody hates the stock market in stock. You can't make any money buying stocks. Like people fell in two thousand eight two thousand nine was probably the buying opportunity of our lifetime. Those of us on this podcast. But you felt really really terrible in vice versa. I would say everybody right now feels awesome. Except with the exception of what's happened over the last month, some people haven't even noticed that. Like, man, stocks are gray people are talking about at go to the barbershop. Everybody's don't go the barber shop. I take back. You go out about town. People are talking about stocks in how much money friends are making. They're making stocks. Everybody feels really good about it. And I would argue it's probably not the best time to back up the truck on on these these Uber aggressive type of of equities. So what do you do to get around this this whole emotional rollercoaster? I think what you do in in what we do here. Son, Garner's, we have a process, and we stick to the process in we end, we believe in it. And and we we constantly valid in make it better. But it's something we can fall back on in in. Helen, it helps us get our emotions out of the way. Because if we Robin I've spent a lot of time, many, many, many, many hours owning this investment process in different things that we watch. And why we watched him while we follow them and for us the process. Works. It is podcast is about preservation primarily and preservation has a high component of risk management, and we've yourselves as risk managers before everything else. Because typically somebody's accumulated a lot of assets. The first thing I wanna make sure is with big losses. We said earlier and one of our clients had a great expression for this. I want to minimize maximum regret, which is financial emotional Saint time. Which is why love that that phrase? It's great and into Vince is right about the process. And, but it would everybody said they have a process, I think some processes are Bill to where the time is their friend. In other words, just be alone term investor in you'll be fine. And that opens you up to a wide range of possibilities in and a lot of people don't want to be open to. All those possibilities. So a along with the process within the process there must be discipline. And what is the discipline will well in layman's terms is having guardrails around what you willing to do. And now refer back again, the risk allies score in that part of the discovery process with with with any new or exist, implying we update those. Is to try to define the guardrails and then from actual experience. You also get a pretty good idea of what the guard rails are. And we're long short investors of at the core. And if you're investing in things that by their nature can tamp down volatility, then you have built in guard rails. And I'm sure we'll go into that in depth another podcast. But for sure. There have to be guard rails in I guess the other phrase, I would keep in in mind of home longtime this, you know, rob. What is great about e you folks, son garden is that you realize that even though I may quote, long term investor that the long-term is made up of many shorter term periods of time in you actually, take the care to proactively oversea end when necessary make decisions in those timeframes in you don't just lean back to to rooting for the portfolio to go up waving the flag. Four for Uber. Longterm investing because they're different timeframes support. If I could pull up. Cut ourselves on the back if the market's down thirty and we're down twenty seven. That doesn't work for us. Nobody pension world. They'll probably give you more money 'cause you'd beat the bench more. It's a different world. That is not us. So how do we wrap up? How do we wrap this up in a nice tight little bow for today? Good good question. I think it's done. So I think we've we've said pretty much all there is to say on the preservation front, but the I'm think we touched enough on the income. And why why dividends why do we focus on generating most of our income from dividends one tax advantages are very very important. But I think what's also really important when it comes to dividends as there's potential for your income stream to grow over time because companies that are doing well that have good profits. That are in good businesses that have great balance sheets, they tend to raise their dividend overtime and not a lot you know, it. But if you take a small, let's say two percent dividend raise every year over ten years. It moves the needle, and you just don't get that opportunity in a new ities. You don't get that opportunity in bonds. I think it's the only place that I know of that that there's potential for that to happen. And. Everything else goes up in price. Right. So it's important for for us to be kind of that over the long haul to. And win with so much a real price fluctuation in some of that you have to figure out that in the stock market. We get the dividends from I think one of the things that really is differentiate or our investment process, and in it's a good one of the guard rails that I've talked about again, I I'm sure we'll discuss this more deeply another podcast, but there's really a two tier approach to how we approach dividend invested. There are the core. Stocks company's growing dividends that Vince just talked about. And then there is also a tactical component to because one way to adapt to the way markets have changed over the last ten to fifteen years in particular. They've got more volatile. There's a lot of players that were involved before this win prices round. And so it encourages us to think in different timeframes. And so yes, there are plenty of stocks in the long side of the folio that we would like to own for a few years more. And then there also others where we're kind of keyed in on the dividend. We wanna try to the income without having too much capital arms way. And I think I'll leave it at that for for this broad brush on preservation in. Thanks. Thanks. Thanks, vince. I love the idea that you guys are are looking at something in a fundamentally unique and different way to provide your clients and investors an alternative something that is highly advertised that is highly commission structured and also is highly talked about to the point where people don't think there's another option having another option for you. And your portfolio can make a huge difference when it comes to your long term investing. So guys, thank you very much for your thought leadership today that and if you have not subscribe to the podcast yet. Make sure you click that's absorbed now button blow, and if you know if I national services professional that is consistently selling in these and is consistently talking about, you know, an old school way of bide Holden asset allocation without liquidity without flexibility. Please make sure that you share this podcast with them. And also do your best to find rob is bits column. In Forbes magazine, if you just Google, rob you will see very quickly that he has been writing great thought leadership for many many years. So for everybody at sun gardening and the investing of Lucien podcast. This is Matt Hallard, and we'll see on the other side of the Mike very soon. Thank you for listening to the investing Aleutian podcast. Subscribe button below to be notified when new episodes become available. Then Sasebo, rob is bits are investment adviser representatives with dynamic wealth advisors. DB SunGuard investment research, all investment advisory services are offered through dynamic wealth. Advisers, the material in this podcast has been distributed for informational purposes, only the material contained in this podcast is not a solicitation to purchase or sell any security or offer any investment advice. No part of this podcast me be reproduced in any form or referred to in any other publication without expressed written permission investing involves risk including possible loss of principle, Vince Esposito, and rob as bids are also the subsidies. 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