For investors in general, and high-achieving professionals in particular, the past couple of quarters have delivered extra doses of financial and economic uncertainty. In the face of heightened inflation, rising interest rates, recessionary threats, and global turmoil, even well-diversified portfolios have been taking a hit.
What’s an investor to do? Watch our webinar, in which Michael Evans of Cogent and Kevin Grogan of Buckingham Wealth Partners have a conversation about how to better prepare yourself and your financial house for today’s volatile markets.
As a financial author and Buckingham’s Managing Director of Investment Strategy, Kevin will interpret today’s unsettling news, and help you consider your next best steps as an investor. Why are rising interest rates in the bond markets both good and bad news for investors? How can we incorporate select alternative investments to further strengthen your portfolio? What are Black Swan events, and how should they be factored into your investment plans?
You’ll learn about all these topics and more in our Cogent Conversation with Kevin.
You Define Success. We Help You Achieve It.
To continue the conversation, reach out to us today. We’d be happy to mail you a copy of Kevin’s book, “Your Complete Guide to a Successful and Secure Retirement.” We also invite you to set up time to meet with our team at Cogent Strategic Wealth, so we can create a plan to help you achieve your financial and lifestyle goals. Schedule an intro call today.
Do you have confidence you are taking the right steps during the current volatility and uncertainty?
We are good at helping successful high-achievers, like you. Take us up on our offer of our Second Opinion Service.
We’ll take a good, independent look at your existing financial goals, circumstances, and portfolio, assessing several critical details that you may never have considered, but that get to the very heart of a solid investment experience.
Much like how you would receive a second opinion from a medical doctor to ensure your treatment is appropriate, we too take a problem-solving approach, objectively reviewing the plan and sharing what we’ve learned.
Relevant information we share…
- Do you really know what is in your portfolio; and, bottom line, how it’s done so far?
- Are you taking on too much or suffering from too little investment risk?
- Are you paying too much in fees?
- Are your investments well-aligned with your life goals?
- Is your plan specifically tailored to you and is your plan on course?
- Are you living Life on Your Terms?
Transcript of the webinar
Hello, everyone. Welcome to Cogent Strategic Wealth’s Webinar: What Should investors do now, in light of high inflation, market volatility, and possible recession? We want to bring to you some information that you can use, you can digest and, actually, make it actionable for you. Hi, I’m Michael Evans. I’m the Founder and Fiduciary Wealth Manager at Cogent Strategic Wealth.
Today, we will explore what investors can do to better position themselves for these challenging circumstances that we find ourselves in today. At the end of the webinar, I really hope that you feel better educated, that as an investor you understand a little bit more about the situation we find ourselves in. Then also, you feel empowered to take the prudent next steps for you, both personally and maybe professionally to ensure that you survive and thrive through the present chaos.
At the end of this webinar, we really hope you have this better understanding and we’re going to share some things with you. Some ideas, some other things that you can take action, but we’ll also have some resources that we’ll make available. Stick around to the end and you’ll hear about some special offers that we’re going to have for you. Today, I just like to say how excited I am to have Kevin Grogan joining us. Hello, Kevin.
Kevin: Good to be with you, Michael.
Michael: Great, Kevin. It’s wonderful to see you. Kevin Grogan is not only a long term friend of mine, but he’s also the Managing Director of Investment Strategy for Buckingham Wealth Partners. Cogent is affiliated with them. While we’re a boutique firm we also appreciate the large organization that we’re a part of that helps us serve our high achieving successful professionals so much better.
Kevin works with a group that’s called the Investment Policy Committee, which really helps us better be able to position our clients for great success in their investing. Kevin does so much. One of the things he does is read, analyze, and work on the latest research for investments and finance. I’m so glad he does that, even though I love to read it, I’m just happy Kevin is the one that does this.
Kevin’s able to draw practical applications though that we can use with our clients to improve the structure of their portfolios and achieve their goals. If you agree with me, that would also improve their life in some ways and the others around them. Kevin’s a member of the, as I mentioned before the firm’s Investment Policy Committee, and he really leads their investment strategy, portfolio management, and fixed income teams, and that’s really beneficial to us.
One of the things I think Kevin is really good for me is that he’s an interpreter. He takes this evidence based research that we use to implement our financial portfolios, mine, the entire Cogent teams and all our clients. Kevin helps us digest what’s important, apply what needs to be applied, and be real able to reassess and educate ourselves on what comes out and what’s new in light of circumstances and also solutions as investors.
Today I’m just really excited to get into a dialogue with Kevin. Kevin’s written three books, fantastic books, all of them. Hint, no spoiler alert here. We’re going to offer these books to you at the end. One of them is a book that I believe Kevin and Larry wrote back in 2010 that I read right when it came out. It’s called The Only Guide You’ll Need to The Right Financial Plan.
He also has an interesting book that takes a little different look at financial planning and portfolio construction called Reducing The risk of Black Swans. I think it’s really interesting how Kevin helps apply the science to capture returns with less volatility. Who doesn’t want to get higher returns with less risk? That’s the holy grail of investing.
Then, of course, his most recent book, which I really, really like with Larry Swedroe is, You’re Complete Guide to a Successful and Secure Retirement. Wall Street Journal throughout a great accolade to him and named it “the Best Retirement Book in 2019”. Kevin cheers to you, fantastic that you’ve brought all this information to consumers and helped educate them both through working with Buckingham’s Strategic Wealth and us on the Buckingham Strategic Partner side. Cheers. Thank you.
Kevin: It’s my pleasure, Michael. Of course, I’ve enjoyed getting to know you over the past 10 plus years and some of your clients as well. It’s been a great relationship over the years.
Michael: Kevin, I appreciate that so much. Kevin, one of the things that we are going to delve into is what to do about inflation and higher rates and other things. Just tell me what draws you into this. What makes you want to write these great books? What makes you want to educate consumers like you do?
Kevin: Sure. I’ve always had an interest in market. I think that’s really where it starts going all the way back to when I was pretty young into my teenage years, always enjoyed paying attention to what was happening in markets. One of the things that attracted me to Buckingham in the first place, really the broader advice business is just getting to have deep relationships with clients and getting them to be able to achieve their goals over a long horizon.
One of the things I think about is that, for the most part, a lot of our clients were not overnight successes in terms of getting wealth overnight. It was through a long arduous process of being really good at whatever the craft is. Whether that’s a lawyer, dentist, doctor, business owner, whatever it is, it took a lot of time and a lot of hard work in order for them to accumulate their wealth. Then they’ve come to us, either you Michael, or to Buckingham more broadly to trust us to take it from there.
To invest their assets in a prudent way, to help them achieve their goals, knowing that they did the right things on the front end in terms of generating the well, setting aside their assets, being good stewards up to that point, but now trusting us on the go forward to do what’s right to help them achieve their goals.
Michael: Kevin, that’s so admirable. Thank you so much for assisting my clients and my own personal family. I really appreciate the depth and the time that you’ve gone into so many things with me to make sure that we look at what the trade offs are. Understand what the benefits could be, and educate consumers, including myself and my family on how to make prudent decisions to go forward in light of the information we have. Kevin, cheers to you. How fantastic is that? Thank you.
One of the things that we hear a lot about is market declines. I think investor psychology is really, really an interesting field. Something that we talk about often in our study groups and other things, but we look at the decline that we’re in today and for whatever reason, the multitude of things that are out there, Kev, how do you think this decline differs from previous market declines that investors maybe have gone through in the past?
Kevin: Sure. As I think about it, I think there are some differences and there are some similarities. Starting with the differences, as I think about the last three bigger declines that we’ve seen would be the tech bubble bursting all the way through 9/11. That’s one big crisis we had. We had the financial crisis in ’07, ’08, and then we had the COVID economic decline that happened in February, March, April, 2020.
After all of those events, the Federal Reserve stepped to help markets, help the economy, but by extension help markets by cutting rates in all three instances, and then after the financial crisis, as well as the COVID crisis, do a good bit of additional stimulus on top of just cutting rates in the form of quantitative easing.
What’s different about this market pullback, and I think at this point, it is a pretty major pullback in the market so far this year. US stocks is off north of 20% so far this year, that’s a pretty big decline in the market. The difference this time is that the Federal Reserve isn’t helping. In fact, it’s going the other direction with the Federal Reserve raising rates because inflation has been very, very high over the past 12 to 18 months. The Federal Reserve isn’t coming to the market’s rescue this time. The Federal Reserve is part of what’s cooling off financial markets so far this year. That’s I think the big difference. I think, though one similarity with prior declines is that you never know when things will come back, or when the worst of it will be over.
As you think about, say just the most recent crisis, we have the COVID one. The market pulled back February, March, April of 2020, but started coming back well before it felt safe to get back in, well before shots started going into arms from a vaccine perspective. You never really know when these things will turn around. By the time it feels safe, the market will have already come back. That’s I think one similarity across each of those different declines is that you never know when it’s going to be safe to get back in.
Michael: Kevin, that’s a great perspective. Framing it in light of what we saw before and the Fed being able to step in and to be able to add a hand, I really appreciate that perspective because it is different. We don’t often see fixed income going in the same direction as equity product. We really appreciate that, Kevin.
Let’s talk about that. Let’s move into that question. How should an investor think about the safe and secure portion of their portfolio, which you and I both know, is fixed income, if they’re choosing appropriately for what they hold? With rates moving up, how should we think about fixed income in a portfolio?
Kevin: Yes, you’re absolutely right that it’s been a long time since we’ve seen both stocks and bonds have negative returns at the same time. It’s been a historically bad period for fixed income so far this year. If you look at the Bloomberg Aggregate Bond Index used to be the Barclays, and before that was the Lehman Aggregate Bond Index.
The first quarter of 2022 was the worst quarter it has had since 1981, so a really long time since we’ve seen bonds go through such a difficult stretch. Again, as you said, making matters worse, that stocks are down at the same time, which we aren’t really used to in the period since the financial crisis. We’ve seen bonds and stocks move in opposite directions for the most part over the past 14 years.
Now, I’d say in terms of how investors should be thinking about all of this, I think number one, that in terms of the planning that we do for clients, meaning the capital market assumptions that we input into financial plans that contemplate events like this, so it isn’t unheard of that you can see stocks and bonds go down at the same time. That is accounted for within the planning that we all do for clients. I think the first thing is that while, yes, it’s never fun to go through, it is accounted for in the plan.
Secondly, I think with respect to the negative returns of fixed income, while it is painful in the short run, I would say over the long run, it’s, actually, good news for most investors because if you have a longer horizon, if we are going to see higher expected returns on fixed income. On balance, that’s a good thing for retirees. That you can, actually, get a return from the safe portion of your portfolio that you wouldn’t have been able to get before. Now, again, it’s not fun in the here and now, but as you reinvest your fixed income over the long run, it’s, actually, a better thing for end investors.
Michael: Yes, I agree. I think we’ve been punishing savers, people that had cash, or had large holdings in fixed income for quite some time. It would be nice for this to normalize a little bit, I believe. Kevin, that’s very interesting about the fixed income and the allocation. I also like you pointing out about the financial plan.
One of the things that I find particularly gratifying about being a financial advisor is to sit down and distill just where clients are at when they come to us, where their families at, what their particular circumstances are, what they have, and where they have it. Also, what their goals are, and then to build a financial plan, a sophisticated comprehensive financial plan, not one that just says, “If I get X return over the years, I’m going to have so much if I take 4% out later.”
That’s wonderful, but that’s not very prudent way to look ahead. As you say, financial planning is wonderful, especially when it has a comprehensive Monte Carlo feature that looks ahead and does anticipate even hard times such as this with declining different portions of your portfolio. Thanks for pointing that out. Something I really like to do, I look at my own plan and all of our clients quite often and it’s really important, very important.
The reason why the interest rates are being backed up by the Federal Reserve, it seems as if the current media is saying that the Fed is a little behind the curve. They kept rates lower, longer than they maybe should have. Now that inflation has reared up, it’s appeared within our lives that the Fed might be a little behind.
Thus, they’re going at a faster clip to normalize rates, if not even start to tighten. When you think about investment portfolios, and what the clients have, Kevin, what type of investments would help protect investors from high inflation if it was something that they were prone to be susceptible or vulnerable to?
Kevin: Sure thing. I think the main investment that comes immediately to mind are investment called TIPS, or Treasury Inflation Protected Security. These are bonds that are issued by the US Treasury that aren’t explicitly linked to inflation. You get whatever the yield is quoted on that bond, and then whatever inflation winds up being. Particularly, shorter-term TIPS are really the best hedge that’s out there for inflation.
Now, of course, the drawback to TIPS is that they’re relatively low expected return. Although, at least right now, they are earning what’s called the Positive Real Yields. You’re earning a small return that’s in the positive territory plus whatever inflation winds up being, which is a good solution. Although, again, you don’t want it for a huge fraction of your portfolio, because it is going to be a lower expected return. Again, it will do well in periods of unexpectedly high inflation.
Same would be true of commodities. We’ve seen both TIPS and commodities in particular do really, really well so far this year. That’s because inflation was much, much higher than the market expected coming into this year. Commodities historically have had that property that when inflation is unexpectedly high, they will tend to do really well.
We don’t generally recommend huge allocations to commodities because they are very, very volatile, so unlike short-term TIPS, commodities will move around a lot and they can go through long periods where they deliver negative returns as they did for most of the 2010s up until we started to see inflation pick back up here in the early 2020s. You do want to moderate the size of the allocation, but that can be something to consider if you are particularly concerned with inflation.
The third thing that often comes up in terms of people asking about potential inflation protection would be equities. Equities aren’t a great hedge against inflation over the short-term, because as we saw this year, we’ve seen inflation run very high, and yet, equities have had negative returns over the very, very long-term.
Stocks have tended to outpace inflation, not necessarily because they’re directly linked with inflation, just that they deliver a high enough of a risk premium to be higher than what inflation has wound up being historically. Those are the three things that you can think about, are over the long-term, an allocation to stocks can be helpful, a small allocation to commodities, and then investing a portion of your fixed income into TIPS would be the three things to consider during periods of high inflation.
Michael: Oh, fantastic. Thanks for that, Kevin. One of the things I do every birthday that I celebrate, as I look back, and I see when I was born, what inflation has done since then it’s been about 3.9% for me in my life since I was born. What that equates to, for $1, when I was born, you need to have $9 to have about the same purchasing power. If you look at the S&P 500, just to use a general well-known benchmark for that, since 1965, it’s up a little over 10%.
To think about that in terms of protecting wealth over a long period of time, it’s actually very interesting. Of course, small and value are of a higher proportion during that period also. While inflation can be uncomfortable, one of the hedges, as you said, is a phenomenal, well-diverse, globally diversified portfolio that leans towards small and value over a long period of time. It can produce multiple over what you get.
Kevin, when you think about fixed income in a portfolio it has its purpose, right? It’s a balance. That’s what allows us to take the risk. Are there any other things out there? I’ve read your book about Reducing the Risk of Black Swans that you wrote. Are there other products out there besides equities and fixed income that an investor may want to consider including in their portfolio?
Kevin: There are. The other class of investments that we would think about would be alternative assets. That’s obviously a huge umbrella that could capture lots of different things. I think it’s fair to say that we’re still quite skeptical of the vast majority of alternative investment strategies that are out there. We do think there are some that can make sense to add to a portfolio, that should be expected to outperform safe, fixed income, but while still having very low correlation with equities. I wouldn’t gloss over that second piece because lots of times you can see alternative investment strategies that are out there that appear to have great returns, but then when the stock market’s down, they’re down right along with it. That’s not really what you want. If you’re investing in an alternative asset, you’re accepting that generally higher fees, generally less liquidity than what you can get in traditional markets. You want that portion of the portfolio to really be there from a diversification perspective when stocks are down.
We recommend a menu of different alternative assets. The heaviest allocations tend to be more towards private credit type of strategies. Again, these strategies are more complex. They are more expensive and they do have less liquidity. You don’t want to go into these things lightly. We think they can add value to the portfolio and they have done well on a relative basis so far this year when stocks and traditional bonds have been down.
Michael: Kevin, thanks. I think what you’re saying is, to diversify your sources of return in a portfolio, it’s imperative to do that, but you also have to be very particular about how you implement. Is that correct?
Kevin: That’s absolutely right. Again, I think there’s lots of things that fall under the umbrella of alternatives. You just need to be careful and to make sure that what you’re investing in isn’t just equity exposure in an expensive disguise. That’s what you really need to watch out for.
Michael: I can appreciate that. One thing, I’m disappointed in our community of people that hold themselves out as financial advisors, many of them are merely pushing products, things such as hedge funds, index annuities, sometimes some other types of opportunities, insurance and other things, that all they want to do is sell you a product, not deliver a solution for your lifetime.
I think the marketing arm of the product developers and all sometimes cross the line in that they’re better incentive to sell the product than you should be to buy it. Thank you, Kevin. You’ve been one of the people that have been great to educate me and my clients on what’s appropriate and what’s not, so we can make, as consumers, really good decisions for ourselves that have long-term tangible effects for us. Thank you for that. I appreciate it.
Kevin: My pleasure. I think you’re absolutely right with respect to the difference between offering products and offering service and advice. There is a clear distinction between the advisors who are pushing product versus the ones that don’t. I think being on the fiduciary side of the fence, as you and I are, makes it very easy to sleep at night with what we do for a living on a day in day out basis. Just for frame of reference, Buckingham, Cogent, neither of us get any revenue from the funds or the products that we recommends to clients. Our only source of revenue is the fee that we charge our clients which we feel great about in terms of the value that we provide and the fact that it’s free of most of conflicts.
Michael: The one thing I’ll take it further there, Kevin, is both you and I own many of the same portfolios as our clients do, just set up correctly for our own iterations of our circumstances and everything. We, actually, invest in the same way that we advise our clients, own the same products, and I think that’s also a differentiator. One, we’re not compensated inappropriately for selling or pushing certain products, but we’re also sitting on the same side of the table.
When times like this, when markets go down, when things do get uncomfortable due to pandemics or other extraordinary events, you and I feel the same pain, our clients do. We also have the beauty and ever of the education in the research and we’re able to articulate to others so that they too can survive and thrive. That’s one of the things that I don’t just have to have empathy. I can also have sympathy for them because my account’s down also. I appreciate that.
In order to be a long-term investor and get the goodness that capitalism delivers through financial markets, I do believe it’s important that we have a plan so that we can monitor ourselves and not do something that’s inappropriate for you in the worst time so that you don’t have the ability to recover later on. I just find it my life’s mission to help people better understand the science and what has happened in the past and what we could expect going forward. I appreciate you, Kev, helping me do that for others.
Kevin: Absolutely. I would just co-sign what you said there in terms of, we don’t recommend anything in client portfolios that we’re not owning ourselves. If you looked at, as an example, Buckingham’s 401K plan, it’s invested in the exact same types of funds that we’re recommending for our clients and same with the personal portfolio as well.
Michael: Fantastic. Fantastic. Well, appreciate that. Kev, well, one of the things you have mentioned is the Fed is moving and they’re moving because of interest rates. When we think about inflation and I’m not going to ask you to have a crystal ball, you’ve told me a couple times before that yours is just as cloudy as everybody else’s, how do you look at inflation and how do you view it within a financial plan and a portfolio? What do you see coming down the pipeline in some way for investors?
Kevin: As you said, we are not big on predictions, but if you looked at what the market is forecasting for inflation, which again, the market could be wrong. The market was wrong a year ago thinking that inflation would’ve moderated by now, and the latest inflation print we saw was from May, saw inflation still at north of 8%, 8.5%. I think was at 8.6%, but if you look at what the markets forecasting, for say the next 5, 10 years, it’s looking at inflation in the mid-twos, which is still north of the Fed’s long-run target.
I think we could all live with inflation of 2.4%, 2.8% somewhere in that range, just not at this crazy high 5% to 8% level. Of course, it’s very, very difficult to predict where things will go from here, but if you read most macroeconomic forecasts that are out there, most people seem to think that inflation either peaked with that May report or is likely to have peaked, in terms of a year over year number with the June or July report.
I realize I’m hedging a little bit here, but basically saying that we may continue to see inflation in the eights for the next two or three months and on a year, over year basis, but then should start to come down after that likely due to a combination of factors. Partially, the Federal Reserve tamping down demand by raising rates, but we’ve also started to see some energy prices start to come down a bit over the past few months.
It’s possible that we’ve been through the worst of it, although, again, the market was thinking that three or four months ago, when that turned out to not be true. You never really know how these things will turn out, but there are some signs that things are improving from an inflation point of view.
In terms of the investor’s perspective, you can’t really control what inflation is going to be. The best you can do is come up with a portfolio that tries to protect against inflation by having things like tips or commodities that are in the portfolio already for when inflation does rear its ugly head, and then you’re protected against it.
Michael: Kevin, when you talk about that as a consumer, as an investor, tell me what moves do you think they can make to start to wrap their arms around where they’re at and what they should be doing proactively here? Seeing higher inflation is what we’re living with. Possibility of a recession is coming. We don’t know and maybe we’re already in it. We’re not sure, but just all these different things, this chaos that we see in front of us, what should investors and people do on a personal finance perspective during this period?
Kevin: I think there’s a couple areas where our advice likely has changed or is about to change based on the inflation that we’ve seen and the rising interest rates that we’ve seen. For the last 10 or 12 years when an investor would come to me and say, “Hey, I’ve got this extra money to either invest or pay off my mortgage, which should I do?”
For the most part, our advice has been to go ahead and pay off the mortgage because if your mortgage, even if it’s at a low level at 3% or 4%, if all you can earn on fixed income is zero or less than 1%, then a lot of times it makes sense to just go ahead and pay off the mortgage.
Now, we’re getting to a tipping point where you can earn 3%, 4% on fixed income and maybe your mortgage is only at 3%. In that case, it gets to be more of a difficult call as to whether or not to pay off the mortgage or invest. That’s one area where this rising rate, high inflation might change some of our advice.
The second area that I would think about is not so much general inflation, but specifically on home price appreciation is to take another look at your homeowner’s insurance. If you purchase your home for $500,000 or $1 million, depending upon what your local market is looking like, even if you just bought it five, seven years ago, that home price could have doubled or more in that stretch of time. Again, depending upon your markets, you want to make sure that you still are covered enough from a homeowner’s insurance perspective. If there is some disaster that fulfills your home, that you’re insured enough to rebuild and replace that home. You need to just check on that and sure that you have enough homeowners insurance to protect the now current value of your home, or more specifically, whatever it would cost to replace your home. Now, we’ve seen inflation in labor costs, we’ve seen inflation in a lot of the labor materials that go into building a home. It’s worthwhile to double check to make sure you still have enough homeowners insurance to cover your home. Of course, you can work with Michael or Kelly on that.
Michael: Kevin, that’s fantastic. I love both of your points. One, it’s almost always the decision of the trade offs when you have money. Where should you apply it and what is best for your situation? I really appreciate that. I’ve written extensively on in defense of a home mortgage. We have that to share with anybody on here. Just send us an email. After you watch this, I’ll be happy to show you the trade offs and all about why having some leverage appropriate amount on your house could actually help your financial plan where you’re going.
Then the second thing about reviewing the other parts of your financial life. We’ve mostly focused on the portfolio today. There is so much more in a comprehensive wealth management plan than just the investments. There’s insurance products, there’s tax efficiency, there’s the risk management, as we talked about, but many of them including disability and life insurance and many other things. Also appropriately, insuring your home, as you said, Kevin, very important. Thanks.
We’re big, big fans of doing a review on a schedule. We do that for all our clients at Cogent. We would compel everybody on this webinar to make sure that they also look at those things for themselves. They need review. There’s tax law changes. There’s often situational changes in your lives, all of those things should come together and should be reviewed, so thanks, Kev. Appreciate it.
Kevin, I’ve written recently on a piece of the 20 steps to take now to prepare for a recession. I’m not making a prediction that we are in or going to enter a recession, but historically, when the Federal Reserve has raised rates, it sometimes portends to a slowdown in the economy. Some of the things that I love to talk about is building up your emergency rainy day fund, to make sure you can survive and thrive through anything. I would establish or even increase your retirement plan contributions that you had.
Like you said, review your insurance products for appropriate levels, but also your estate plans. It’s a great time to do that now. We just came out of COVID. We saw how devastating things can be looking at that. Kevin, would you tell us a little bit about portfolios though and we’ll share the 20 steps if anybody wants it when you reach out afterwards, but would you talk a little bit about the things we can do proactively when markets pullback such as rebalancing or tax loss harvesting in a portfolio?
Kevin: Yes, happy to talk about both of those and just a reminder too that as you think about what the stock market has done already is that is another thing that might forecast a recession coming in the economy. Because the market is always forward looking, so the fact that the market is already down 20% is basically telling you that the market is afraid. That we’ll see some economic pullback.
In terms of what you can do in your portfolio when the market is down, I think you hit on a couple of them. One would be consider rebalancing. Now, I’d say one interesting or unfortunate aspect of the current environment is you’ve got both stocks and bonds down at the same time. What you’re doing when you rebalance is you’re selling what has done relatively well and buying what has performed relatively poorly.
Right now you’ve got an environment where both sets of traditional assets are down. There may not be an opportunity to rebalance at this point in time, but that’s something we monitor for on a regular basis. That is something that we’re on top of, if it makes sense to rebalance, we will reach out.
Then the second thing would be tax loss harvesting. Which is where you essentially sell an asset that has declined in value, you realize that loss and then you buy another asset that is similar, but not identical to the original asset and invest in that for a period of time. You still have the same exposure.
Economically, you’re basically at the same spot, but you’ve now realized that loss which you could use to offset income to some degree each year. For the most part, also used to offset future capital gains that you may have in your portfolio. It helps you in the future to offset future taxes.
Michael: Fantastic. Thank you for that, Kevin. As working with a fee-only fiduciary advisor, they should be taking those steps automatically. I believe that should be written into your investment policy statement that you have for managing your assets and make sure it’s done appropriately.
Not just on a calendar, not just every November or every May, I think it should be done opportunistically throughout the year as markets change because those things can lessen the amount of taxes that you pay or keep you in your seat with the appropriate amount of risk with the volatility in the market. Appreciate that. Kevin, anything else that you have on your mind before I wrap this up today. I really enjoyed it so far, but anything else you’ve been thinking about lately?
Kevin: I’ve enjoyed the time. The main things I leave you with are just always remember what your time horizon is. Even though 2022 has been really rough from a markets perspective, again, seeing stocks and bonds both down at the same time, presumably you weren’t planning to spend your entire portfolio in 2022. Most likely you were planning to keep that portfolio for the next 5, 10, 20, maybe longer years in your life.
Over the long run, what we’ve seen is that the stock market always recovers eventually, just like we will eventually have a recession. Don’t know whether it’ll be this year, next year or even beyond that. You know that eventually we’ll have a recession and you know that eventually the stock market will recover. The best advice we can give is to, A, stick to your plan, but, B as we talked about earlier, focus on having a diversified sources of return.
Meaning, not just US stocks, include international stocks. Not just large cap stocks, also include small cap stocks. If you’re so inclined, not just stocks and bonds, but also incorporate an allocation to alternatives. These can all help insulate you against the market declines that we’ve seen this year and potentially in future years. No matter the strategy that you’re in, it can always go through a period where it performs in a disappointing way. The key to a successful long run strategy is to stick with it because everything eventually recovers.
Michael: Fantastic. That’s really prudent advice and very, very, very good long-term perspective. I appreciate that so much. Well, Kevin, I just wanted to say thank you. I’m going to wrap this up here with some actionable items that you can take as a high achieving successful professional. You, actually, can do things appropriately now that you can control, as Kevin said, and ignore maybe some of the noise in the process.
Not easy to do. We understand that, but the things you can actually do are the important things that you should focus on. We hope that by watching this video, you have confidence to stay the course and keep investing in a way that’s appropriate for your circumstances, and also as Kevin said, focus on the long-term.
Because at Cogent we really work as a partner with our clients. We want to make sure this isn’t just a said and forget, it’s, actually, serving as a guide to you as a successful professional, so that you know you have an expert. An expert not only on the markets and on other things, but also an expert on you, so that we can help you get to where you want with the highest probability of success and having a partner over the long-term that can be objectionable and really work well with you.
Let’s talk about some steps that you can take today. The one I really, really like and I do this with my own family, my wife sometimes requires a glass of wine while we do this, but is review your current situation. I call it a family financial audit. I really like when people sit down in a family and they, actually, look through and see where the issues are, what you have, what you own, where your risk lies, maybe look at your employment, everything from your income and spending levels to your banking and investment accounts, even your company retirement plans, mortgage debts, all of that. Take an inventory, see where you’re at and really become knowledgeable and discuss it amongst yourselves.
In reviewing your situation, I also think you should prepare yourself for any volatility to come. I’m not saying that we are going to go lower or we’re going to go higher, I’m just saying to be a successful investor, you need to be able to survive and thrive through it. If you’re a business owner or a high-end professional that’s in a cyclical business, I would say you want to be able to shore up your rainy day fund.
Keep that as highly liquid, FDIC insured. Keep an appropriate amount. I myself keep a year of spending in there. I have a business, two homes and a lot of people counting on me. I want to make sure that I can survive and thrive no matter what happens. I think you should take those same steps. Beef up your rainy day fund.
Then also review your financial investment plan with the tips that Kevin has given us today. Look at the amount of risk you take, how you can diversify those sources of return and just see if your assumptions are correct. I always believe that high achieving successful professionals have a optimistic outlook, so I often think an objective second opinion is always important. For you on the call here, on this webinar watching and you’re watching it and in the future, I’d like to offer you our second opinion service. Our second opinion service, we’ll look at where you’re at and where you’re going. It’ll look at your resources that you have to bridge the two, and then we’ll have a frank conversation about what is good, what’s bad, and what can be improved. I promise you, if you’re on the right track, we’ll let you know. If you aren’t, and you need to make some adjustments, we’ll help you with those ideas.
You really want to know, are you taking on too much investment risk? Are you suffering from too much or too little returns in your portfolio? Are you paying too much in fees? Or is even as Kevin and I talked about previously, are the investments well aligned with you and your family’s life goals? I think that’s so important.
Give us a call reach out to us cogentsw.com. Or you can send an email to conversations at cogentsw.com, and we’d love to sit down. I want you to be proactive and ready for what’s to come not having a crystal ball, just taking the prudent steps that you can take. Remember, life is uncertain, markets are even more precarious, this means building wealth has no shortcuts. It requires a really solid investment approach. A long-term perspective, as Kevin has mentioned multiple times, and also discipline to stay the course.
Instead of leaving your financial future to chance, you need to have a plan. A short term one to get through the chaos, and a longer-term one to accomplish all that’s important to you and your family. Remember, others are counting on you, and Cogent may be a portion of the solution to help you get to where you’re going. Thank you very much. Remember, reach out to us. If you’d like one of Kevin’s books, we’d be more than happy to mail the complete guide to a successful and secure retirement.
Honestly, this is pretty much a manual for what we do. If you’re a busy professional and your time is not as ample and open for you to do it, come talk to a fiduciary fee-only financial advisor like us at Cogent, and make sure that you get your house in order, and that you position yourself for success. Give us a call 312-382-8388 or email conversations@cogent sw.com. Thank you so much, Kevin, for joining us. I really appreciate your time.
Kevin: My pleasure. It’s great to be with you, Michael.
Michael: Great. Thank you to all of you for joining us. We really appreciate this cogent conversation on “How to best prepare yourself and your financial house to be able to survive and thrive through anything. Have a good day, thank you.
The opinions expressed by featured authors are their own and may not accurately reflect those of Cogent Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
© 2022, Cogent Strategic Wealth®