November 25, 2024 • 35 mins
Mail Bag with Brian Regan – Senior Portfolio Manager Brian Regan joins Jeff Perry
and Russ Ball to answer client questions. The episode begins with Brian responding to a
70-year-old client who has approximately $100K in Verizon stock and very much enjoys
the dividend of 6.5%. Brian provides the pros and cons of having such a concentrated
position. The next client question comes from a couple in their 40’s who are saving for
retirement primarily using 401Ks. They want to know if they should add international
stock funds to their retirement accounts. Brian shares why this is a good idea despite a
recent history of lagging returns for international funds.
The AMR Team is seeking your opinions on the Something More podcast. To participate
in our survey, please click the following link: https://lnkd.in/ekcsvPaM
For more information or to reach Chris Boyd, Russ Ball or Jeff Perry, click the following
link: https://www.wealthenhancement.com/s/advisor-teams/amr
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:03):
The following is paid programming.
Welcome to Something More with Chris Boyd.
Chris Boyd is a Certified
Financial Planner
Practitioner and Senior
Vice President and
Financial Advisor at Wealth
Enhancement Group,
one of the nation's largest
registered investment advisors.
We call it Something More
because we'd like to talk
not only about those
important dollar and cents issues,
but also the quality of
(00:24):
life issues that make the
money matters matter.
Here he is, your fulfillment facilitator,
your partner in prosperity,
advising clients on Cape
Cod and across the country.
Here's your host, Jay Christopher Boyd.
Welcome to another edition
of Something More with Chris Boyd.
I'm Jeff Perry.
(00:44):
I'm sitting in for Chris for this episode.
Chris is at a convention,
a financial services,
financial planning convention this week.
And so I'm sitting in and
joining me is Brian Regan.
Brian is a member of Team AMR.
He is a senior portfolio
manager with Wealth
Enhancement Group and a
regular guest on our show.
(01:04):
Thanks for joining us, Brian.
Hey, guys.
How are you doing?
great also joining us is
russ ball the newest
addition to team amr russ
thanks for working the
control panel and joining
us for this episode of
course happy to be here for
the people who click the
podcast link they'll see
the title of this episode
is mailbag with brian regan
(01:26):
and what that means is
brian's going to handle a
couple of questions that
have come from clients and
give us a uh his opinion
and we'll have a dialogue on the issue
Brian,
this first one came from a recent
client review.
What that means for the
listeners who don't know is
at least annually,
we sit down with a prolonged meeting,
(01:46):
a couple hour meeting with
our clients to go over
their financial plan that
they have in place and
discuss if they have any
changes to their life or
anything that they're concerned about.
We follow up with any things that we see.
And this particular client,
is a big fan of yours.
He watches all of the
webinars on the markets and the economy.
(02:07):
He just, you know, he loves that.
Not everybody loves to dig in that stuff.
I know you do,
but he just loves learning more about it.
And so this issue that I'm
going to describe
has come up repetitively in
his annual reviews and
conversations with him.
And he's kind of been,
I won't say stuck that's,
but it's the best word I
can come up with.
(02:27):
He keeps hesitating on doing
something that we are
suggesting that he do.
And this year it came up
again and he seemed more, um,
interested in doing
something with this part of
his portfolio.
and he asked us, he said, would you just,
would you pass this question by Brian?
And I said, you know what,
(02:49):
how about if we pass this
question by Brian on the
podcast and let him answer it?
And he just, he loved the idea.
So, uh,
we know he'll be listening to the
answer and, uh, we'll see how it goes.
So let me, let me, I know, you know,
the question because I
formatted it to you, but, um, let me,
for our listeners, uh,
(03:09):
Read what I sent you.
So this is a client who's
about seven years old.
He's got about one hundred
thousand dollars in Verizon stock.
He was an employee of
Verizon and like many
employees of corporations,
he acquired stock over the years.
And he very much likes every
quarter getting a dividend
of about fifteen hundred,
sixteen hundred dollars.
(03:30):
It's the dividend on the stock right now.
Annualized is about six
point five percent.
client is looking for income
but he's concerned about
the risk of this individual
stock verizon a potential
decline in the value of
verizon and thus maybe they
don't have the ability to
continue to pay uh their
(03:52):
dividend as a side note
which I didn't write in the
email brian we
When during this discussion
that we have with this client,
the issues of the former
issues with AT&T comes up
because he was in a holder
of AT&T and similar
concerns and AT&T
ultimately in the past had
cut their dividend and
(04:13):
shocked some people who had
bought the stock.
So that comes up in the context.
Overall,
the client has a moderate risk profile.
He's not afraid of risk,
but as he's getting older,
he's becoming more conservative thinking.
the question is what would
you suggest he do I think
knowing that he likes the
income stream what would
(04:34):
you suggest he do with this
hundred thousand dollars of
verizon stock all right so
I'm gonna get in the
verizon I I'm not gonna
leave rick hanging um so
before I do that I do want
to get into uh some of the
reasons on why I don't
recommend buying a stock
(04:55):
just for the dividend yield.
As a general rule of thumb,
I don't think that's a good idea.
Now,
oftentimes the dividend yield is high
because a dividend cut is imminent.
You mentioned AT&T, that did happen.
It tanked the stock at the time.
I believe they have the
dividend if I'm remembering correctly.
(05:16):
so sometimes the high
dividend yield uh could
mean that it's just you
know it's just a mirage
this is a temporary thing
it's it's gonna be you know
cut in half in the case of
at t it's some some future
point in time probably very
soon um that's oftentimes
what the what the market is
saying when it cuts the
price down so much uh that
the dividend yield looks
(05:36):
high now that's not always
the case and we'll get into
you know verizon specific
um after a few more points
Now,
there's a few reasons why I don't like
buying stocks just for the dividend.
Dividend-oriented funds and
stocks chronically
underperform stocks that do
not prioritize dividends.
Now,
there's four things that you can do if
(05:56):
you're a company with your cash flow.
You can reinvest in the business.
That means more growth.
So if you're prioritizing the dividend,
you're probably not going
to grow that much.
You can pay down debt.
That makes your business more secure.
You're far more likely to go
bankrupt if you have a lot of debt.
You can buy back stock.
This is
Really the same thing as a dividend,
except it's much more tax efficient.
You're going to get a capital gain.
(06:17):
You can decide when to pay
that tax on your own rather
than getting it quarterly
as the client is getting.
And the last thing you can
do is pay a dividend.
Prioritizing a dividend at
the expense of these
matters can lead to worse
overall performance,
and that seems to be the case.
If you look at any
dividend-oriented fund just
(06:37):
against the S&P
I think it's important to
keep those things in mind.
So Brian, when you see a company,
any company that's
maintaining a high dividend, what,
what are you thinking?
Cause they know these choices as well.
Are you thinking that they,
(06:58):
what are you thinking?
I don't want to put words in your mouth.
Why would a company pay a
dividend so large when they
have these other options,
which fundamentally might
be better for the health of
the corporation?
Well,
it might be the right thing to pay a
dividend, right?
It might be a very mature
company that isn't going to
grow very much.
They don't have a lot of
options to reinvest in their business.
(07:20):
They might have a very
reasonable balance sheet
where it doesn't make a
whole lot of sense to pay down more debt.
They might be buying back stock too.
Maybe they're doing half and half.
Maybe they're paying a
dividend for the certain
amount and maybe they're
buying back stock.
This is another problem
generally with the dividend yield.
Sometimes I'll see a company
is buying back
twice as much stock as
(07:41):
they're paying a dividend.
It looks like the dividend's
very low when people just ignore it,
thinking that the
dividend's not high enough.
One percent's not nearly enough for me,
when in reality,
the return to shareholders
is more like three,
three and a half percent
when you put in the buyback yield.
Getting back to some of the
things on how to create cash flow, which
(08:03):
is oftentimes a problem when
people are thinking about dividends.
They like the cash flow, right?
They want to create a new
paycheck and retirement.
Well,
it would have been far better to hold
Google, for example,
which only recently started
paying a dividend over the
last ten years and sell the
shares as needed than to hold Verizon.
You know, over the last ten years,
Google's up five hundred
fifty two percent and
(08:23):
Verizon's only up thirty
seven and a half percent.
And that's total return that
includes dividend.
So you're much better off
holding the stock and
selling some shares as
needed and creating a
paycheck that way rather
than rather than taking the
dividend and my final point
on this before we get into
verizon specifically is if
you really want income and
stability you're probably
better off moving up in the
(08:44):
capital structure and
buying fixed income
especially where rates are
today right so uh this is
going to come into play
when we start thinking
about the value of verizon
but if you just buy the I
shares high yield index for example
It's outperformed Verizon
over the last ten years
while being higher in the
capital structure.
Could you define for our
listeners who may not be
(09:05):
familiar with the term that you're saying,
capital structure,
higher in the capital structure?
Sure.
So the capital structure
means the best way to think
about it is the priority of payments,
right?
So you are contractually
obligated to pay your
interest expense on your debt.
That is something that has to happen.
If you can't do that,
you go bankrupt and the
(09:26):
equity goes to zero.
So that is,
it's much more likely to be paid.
And if it isn't,
then the company's bankrupt
and the equity of the
company isn't worth anything anyways.
So it's a much safer asset
for that reason.
It should be less volatile
for that reason.
And we see that fixed income
is very much less volatile than equity.
(09:47):
And dividends, for example,
they are returns to shareholders,
equity returns.
They are not contractually
obligated to pay that.
So they can just cut it, right?
You can't cut the payment to fixed income.
You can cut the payments to
equity holders.
right it's perfectly fine
perfectly legally you will
not go bankrupt um so
there's much more stability
(10:08):
in buying fixed income and
if the yields are similar
and there's no growth uh
all things equal I I mean I
I would much rather hold
the fixed income instrument
right and to put this to
the extreme example if a
company does go bankrupt
dividends are long gone and
shareholders they're the
shares that they own
they're last on the list of
to be fed right at the bankruptcy table
(10:28):
Right.
And there's a good chance
you're going to get
something back in your fixed income,
especially if it's a secured asset.
Senior secured assets
generally return about
eighty percent of the
capital in bankruptcy.
So they're much they're much more stable,
much more reasonable assets
to hold if you're looking
for quote unquote income.
OK, let's dig into Verizon itself now.
(10:50):
What we're going to talk
about isn't a
recommendation to buy a stock.
It's not a recommendation to sell a stock.
We're giving Brian's
thoughts on the question
that this particular client
make and past performance
is certainly not any
predictor of future results.
Right.
So that's important.
And despite everything I just said, rarely,
(11:11):
but sometimes,
a high dividend yield can
represent an overlooked stock.
I think it's important to say it's rare,
but sometimes it happens.
It's worth looking,
especially if it's a mature,
well-known company with few competitors.
Oftentimes, it's just overlooked.
(11:31):
Could just be a money machine, right?
Not popular in the current
stock market popularity contest.
It's rare, but it happens.
When it does happen,
I love to take advantage of it.
That being said,
we do own Verizon for
clients that we manage
money for on a
discretionary basis for
(11:52):
individual stocks.
So let's get in the why.
The dividend of six point
four six percent is five
times higher than the overall market.
So it's not even close.
This is much, much,
much higher than the S&P five hundred,
for example.
So that is an indication
that if it can pay the dividend, it is.
probably very cheap and has
(12:14):
the opportunity for capital
gains going forward because
it's very cheap the
dividend is very well
covered by the cash flow so
the free cash flow runs
about three and three to
five billion dollars a
quarter while the dividend
is two point eight billion
so you can see that three
to five billion is higher
than the two point eight
billion uh so you know
(12:35):
there's it can reasonably
you know pay the div
continue to pay the dividend
If interest rates come down,
particularly long rates or
spreads continue to tighten.
And by spreads,
I mean the difference
between a high yield
instrument and a treasury instrument.
If that difference continues to come in,
I would expect decent price
movement in this company to
(12:57):
accompany the dividend, which is great.
Right.
So I'll give you an example.
We initiated the position
much lower than the stock
currently is now.
which is great.
And the expectation was that
as interest rates came down,
I would get price appreciation.
Now,
you might get the sense that I'm not
planning on being in this stock forever.
(13:19):
And that makes sense.
I have a thesis that it's underappreciated,
partly because it's viewed
as somewhat of a fixed
income type instrument and
that as rates come down,
the price will appreciate
as the price appreciates.
I likely won't want to be in
this stock further as we
(13:41):
realize that price appreciations.
Now, all that's good, right?
But there's real concerns about the stock.
don't think it's an obvious
hold um I I would say that
I am looking at this as a
as a source of funds if I
find a better opportunity
right now I mentioned that
we bought it lower we've
had some appreciation we've
(14:03):
owned it for a little over
a year and a half um I've
been I've been happy with
it so far uh it's not like
I have an itchy trigger
finger on it but if I find
something that is
consistent and going to
grow for a long period of time
this might be a way that I
fund that new purchase.
So I don't think it's an obvious hold.
The growth is flat to negative,
(14:23):
which is unsurprising, right?
It pays a high dividend,
not reinvesting in the business as much.
So it's not growing as much.
So any price appreciation
would have to come from
that change in rates,
or they would have to cut
costs pretty dramatically
to grow the bottom line.
Cutting costs would
presumably make them less
competitive in the future.
This is an important point,
especially since...
(14:45):
sprint and t-mobile merged
to be to be a very
competitive uh third
provider of of cell service
uh in this country right
there's really the big
three there's t-mobile
there's at&t and verizon
before the merger that was
really at&t and verizon now
there's a there's a much
(15:06):
more bigger competitive threat
There's a lot of evidence
throughout the history of
the stock market that a
duopoly is great and you
add a third competitor and
things start to get a lot
hairier for these stocks.
Now, there's a lot of debt on the business,
right?
I said that we could pay
down debt and make the
(15:26):
company more secure.
This company has a lot of
debt on the business.
This company has more debt
on the business than AT&T
does to your prior point, right?
With a lot of it coming due in the next
What does that mean?
Well,
it doesn't mean that they're not
going to be able to pay it.
They have about twenty
billion coming in the next twelve months.
I mentioned that they only
have three to five billion
(15:48):
in cash flow per year.
So they're going to have to
refinance the debt similar
to how you would refinance a house.
They're not going to pay
down the principal
completely with their cash flow.
What they're going to do is
finance that money with
higher yielding debt than
they currently have just
because rates have gone higher.
(16:09):
They are an investment grade company.
I don't expect this to be a problem.
But you can see that over
the last few years,
as rates have gone higher,
this has eaten into their
net income as interest
rates have moved higher.
So that's another reason to
be concerned about the
future of this company.
If we're already growing at
flat to negative,
this can only be a bad thing.
(16:31):
And aren't they making a big
acquisition soon?
They are.
They're buying Frontier Communications.
This is going to be my next
point for twenty billion
dollars in alt cash.
So the transaction will need
even more financing.
Most acquisitions turn out
to be a bad idea.
I do not know enough about
frontier communications and
Verizon's business to make
(16:51):
a judgment on whether or
not it's going to be a bad idea.
But I do know that about
seventy five percent of
acquisitions end up being
poor acquisitions.
So.
You know,
I wouldn't bet on a two fifty
hitter getting a hit when
he comes up to the plate.
And, you know,
that seems to be the odds
that I'm handed here.
(17:11):
You know, and moreover,
I know for I know for a
fact that my my interest
costs are going to are going to go up.
So the bottom line is, you know,
I've held the stock for a
year and a half.
For me, that's not a long time.
uh and done fine with it uh
but it would likely be a
source of funds because it
does have some hair on it
uh the dividend seems safe
for now but there's a lot
of debt in the business um
(17:32):
and we're hoping to benefit
more from lower interest
rates which seem less
likely now than they seemed
uh you know uh probably a
year ago to me so um we've
done well in it uh I'm
happy about that uh
There is some hair on the stock.
If interest rates continue to move lower,
(17:53):
that would be very good for the stock,
but I think that's less
likely to happen than it
has in the last year.
We see spreads at historic tights.
We see
you know,
inflation expected to move higher
now in twenty twenty five,
at least by a little bit.
And those things are not
good for the downward
trajectory of interest rates.
(18:14):
So the reasons why we like
the stock in the first
place are largely going away.
And there's been some price appreciation,
price appreciation.
So the stock's fine.
I don't love it.
I wouldn't own it just for the dividend.
Yeah.
And just kind of a side
comment here about
financial planning principles generally.
we attempt to discourage individuals,
(18:36):
clients who have a
concentrated holding in a
single holding and for, you know,
it depends on the size of their assets,
depends on their net worth
and how it fits into their
whole financial plan.
But generally we don't like
to have our clients have a
single holding represent
more than five percent, for example,
of their entire portfolio.
And so, you know,
(18:56):
that's an individual situation.
We're not going to get into
the details of this client,
but if it's a,
If you acquire a lot of stock,
like in this case,
this individual did while
they're working.
And so it's normal that
clients and prospects come
to us and they're retiring
and they have a less company stock.
And one of the common things
that we discuss with them is,
is it prudent to have all of the stock,
(19:19):
all this value,
all these assets in one holding,
even if you love it,
even if you don't have any
concerns about it,
maybe you worked in the industry forever.
You're confident in the
trajectory of this company.
It's not prudent for the
principles of
diversification to have so
much of your assets
invested in one company.
The risk is just too great.
(19:40):
Russ,
you probably see that with some
people that you've been
talking to where they have
a concentrated holding and
the advice that we typically give them.
Definitely.
I think that's been a
conversation I've been
having a lot recently.
Also,
we talked about it on our recent
podcast episode,
some of the risks of having
too much in one specific stock.
But it's also one stock,
(20:02):
but also a specific sector.
So it could be a lot of
different companies,
but they're all
concentrated in one specific group,
maybe a telecom, maybe technology.
Obviously,
technology has done really well.
uh, recently, but maybe, maybe Brian,
you have any thoughts on, um,
sector diversification and
maybe certain limits that
you'd want to cap yourself
(20:23):
at if you're looking at one
specific industry.
Well, I,
I don't want to talk about
specific capsule limits because I,
I don't like to talk about hard rules,
but I will say that I,
I see this mistake a lot.
Um,
I see people hold Verizon
and TNT and T-Mobile,
and they think they're diversified.
You know, when you add them up,
(20:44):
it's a very significant
amount of a portfolio.
I see people on Verizon and
MasterCard a lot.
It's essentially the same business.
You know, you can see,
especially these days,
you can see a lot of Nvidia, a lot of AMD,
and then they'll have a
semiconductor ETF.
And, you know,
what I like to call it is
the illusion of diversification.
(21:04):
But sometimes you'll see
people with three or four dividend ETFs.
And when you look into the top holdings,
they're all the same company.
So, you know,
I call it the illusion of
diversification.
It's not you're not really diversified.
It just looks like you are
because you have four tickers.
But you're very concentrated
in a sector or a type of investment.
(21:25):
And when that goes out of
favor for one reason or another, you know,
you're going to feel it
more than you probably expect.
Oh, thank you.
Thank you, Brian,
for your comments on that one.
Let's go dig into the
mailbag and ask the next question.
So this is a couple who are
in their forties and
they're saving for retirement.
Like most people,
(21:46):
they're using their four or one case,
which is real common.
Their risk tolerance is high.
They're very tolerant of taking risks.
They know they get a long
runway here and they don't
expect to use these funds
until they retire.
They have four or one K
funds in a model portfolio.
one of their choices and it
has twenty five percent
(22:07):
exposure to international
stock funds so they were
digging in they were doing
their research which I love
to love to hear that people
are looking at what's
inside of these funds and
they believe that they
found that the return on
international stock funds
has lagged the US stock
funds for a long time and they're asking
They understand diversification,
(22:28):
what we were just talking about,
in this case being
diversified to
international investing as well.
But they're asking,
should they continue to
keep a portion of their
funds in their retirement
account exposed to
international equities
after a period of long underperformance?
And if so, why?
And if not, why not?
(22:50):
It's a great question and
one that I ask myself all the time,
honestly.
I wrote down some thoughts
for the pro all US argument
and the pro international
diversification argument.
And then I'll tell you how I
personally treat it and how
we treat it from the vast
majority of our clients.
(23:11):
So the pro all US,
this particular couple is correct.
UF stocks have done much
better than international
stocks over a significant period of time.
For this analysis, I looked back
I believe it was a ten-year period,
and I think there was a
thirteen percent return on
the S&P five hundred and the MSCI,
All Country World Index,
(23:31):
ex-US was up maybe just
over four percent.
So there was a big,
big difference between
international and US over
the last decade.
And, you know,
ten years to me is not a
short period of time.
I'm constantly preaching
this thing for the long term.
And most people incorrectly,
when I say that, think, you know,
three months to two years is a long time,
(23:52):
but no, I'm thinking much more than that.
And this couple seems to be
on the right page, right?
They're thinking over twenty years,
they're looking back over ten years.
You know,
it's really hard when you look at
this past data and say,
It makes sense to invest
internationally when you
look at the performance data.
(24:13):
In addition,
there's a really good argument
that large cap domestic
stocks generate enough
revenue from international
countries where it's
unnecessary to further
diversify into those markets.
This was a popular stance
from Vanguard's John Bogle
before he died.
You know, the other thing is U.S.
has a relatively attractive demographics,
(24:33):
at least now,
compared to the rest of the
world because of the
increase in immigration that we've had.
We have generally younger
demographics than a lot of
the developed world,
and especially that of
something like China.
So, you know,
that's the argument for all U.S.
And I think it's a strong one.
So I'm going to make the
(24:54):
argument for international
diversification.
Brian,
I want you to dig into that a little
bit more about Vanguard's posture.
And, you know,
you've shared it with before.
But for people who haven't
heard you before,
why are you saying that a
positive for all U.S.
already kind of gives you
some exposure to foreign markets?
(25:15):
Well, you're going to get exposure.
Let's say some company
domiciled in New York City
is a multinational corporation, right?
That means they sell in Europe,
they sell in China, they sell in Japan.
They're going to have
currency exposure in all
(25:36):
those countries because
they transact in euros or yen or won.
And they're going to have
exposure to the consumer in
all those countries as well.
And I looked at this recently,
and don't mark my words
because I'm doing this off
the top of my head,
but I think about thirty
percent of the revenue of
the S&P five hundred is
(25:57):
generated internationally.
So you're going to have a
lot of the benefit of the
international consumer just
by holding the largest five
hundred stocks in the United States.
Very good.
Thank you for adding that
commentary on that.
So go to the other argument
of why we should have
direct international
(26:18):
exposure in our portfolios.
Yeah, so ten years is a long time.
I mentioned that earlier with the U.S.,
But most of us are probably
going to be investing for
longer than ten years.
I hope to be investing for
the next sixty years of my life,
for example.
That means I'll have a very,
very nice long life,
one that I could be proud of.
(26:39):
But in reality,
I'll probably be investing
for longer than those sixty years.
Because I hope to get to a
point where I'm investing
for my heirs to a certain degree.
So if you're older and you're thinking,
I don't have ten years,
the likelihood that you're
investing for longer than
ten years is probably very, very,
very high.
Oftentimes we see that
(26:59):
people are outliving their money.
So you might want to think
in increments that are much
longer than ten years.
And I will say that, you know,
I'll admit that ten years is a long time.
If an investment's not
panning out over ten years,
you might want to rethink your thesis.
Now, why is that important?
There are long stretches
(27:20):
where international stocks have performed,
including the late eighties
and the early two thousands.
Now that the late eighties
and the early two thousands,
that's well within my lifetime.
You know,
and that's long within the time
that my parents, for example,
have been investing.
So you might want exposure
to take advantage of those opportunities.
(27:40):
You know,
if a client's investing for many decades,
this is evidence that it
might be helpful to have an
international allocation.
Many people believe that
part of the reason for the
international
underperformance has been
the extent of dollar strength.
And if the dollar to weaken,
an international would benefit.
This is a reasonable argument.
And year after year,
I hear people say that the
(28:02):
dollar is too strong
relative to global interest rates.
And that's fine.
Now,
the problem is the dollar keeps
getting stronger and
stronger relative to
international companies.
So we can't see if this thesis is true.
But what this is important
for is saying that all the
(28:22):
data that I've talked about
is historical data.
This says nothing about
what's going to happen in the future,
right?
We talked about the returns
over the last ten years.
We talked about returns
outperforming in the late
eighties and the early two thousands.
That was all a long time ago,
and we need to be forward
looking as investors.
This argument is a good
argument about being forward looking now.
(28:43):
There's also a very good
argument that international
stocks are much,
much cheaper than domestic stocks.
The price to earnings ratio
is about eight turns cheaper.
And the dividend yield is
about twice that of domestic stocks.
So, you know,
on those two very common use
metrics for valuation,
international stocks are much,
much cheaper.
I would argue that there's
(29:04):
some good reasons for this.
Mostly that they're not growing as quick.
And they're not growing as
quick because they don't have...
technology industry that is
as robust as ours here in
the United States.
Now,
how do we put all this together?
(29:25):
And, um, you know,
what do I do personally?
And what do we do for our clients?
Well, personally,
I do have some
international stock positions.
So the way my personal portfolio is,
which I become more and
more convinced that it's
helpful for people to tell
them what am I'm doing with my money?
I invest very much alongside
with our clients,
(29:46):
but about half my
investment portfolio is an
index funds and about half
of it is an individual stock positions.
so on the index funds you
can say for all intents and
purposes that I'm in the s
p and on on my individual
stock positions I have
international stocks in
there now I why do I think
(30:08):
that's good well
I don't do it specifically
because I want
international diversification,
even though I think that's
an added benefit.
I do it because I think
they're some of the best in
class companies.
And I want to buy the best
in class companies when it
comes to my individual stock portfolio,
regardless of where they
are domiciled in the world.
Um, not necessarily, regardless,
(30:29):
there are certain reasons
why I wouldn't want to hold
Chinese stocks, for example,
even if they tend to be very,
very good companies.
But generally speaking, I want to hold, uh,
the best companies in, in,
in reasonable and reasonable countries.
Um, and that ends up being about of my,
my individual stock, uh, portfolio.
Uh,
(30:52):
Now,
for our ETF mutual fund portfolios for
individual clients,
we utilize an active mutual
fund that's pretty concentrated.
So what do I mean by that?
Well,
some of the best companies in the
world that I mentioned that
I might have in my
individual stock portfolio
are going to be some of the
top holdings in this active mutual fund.
And that's one of the
reasons why we choose to use that.
(31:13):
We've been underweight
international against the MSC Acqui Index,
which is
The reason of which is I'm
really stripping out China.
I don't really like being in
China exposed stocks.
As a replacement,
I've chosen to be in
emerging market bonds.
And that's been really great
for us because in recent years,
(31:35):
it's giving us about the
same amount of return as
those emerging market stocks,
but with much, much, much less risk.
And that's benefited for us.
So that's how I do it personally.
And that's how we're doing
it for the vast majority of our clients.
Russ,
did you have any questions for Brian
on the subject of investing
internationally?
(31:56):
Yeah,
I guess when you're looking at
opportunities to invest internationally,
are you looking at, you know,
you mentioned specific
companies that you just
think are really good companies.
That makes a lot of sense.
Are you ever looking at
specific regions as
potential areas where
opportunity can evolve
based on the growth story or, for example,
with some of the
(32:16):
nearshoring developments
that have gone over the
last several years?
I know a lot of analysts
look at emerging markets as
potentially higher opportunities.
higher growth opportunities
than developed international markets.
What are your thoughts on that?
I think the story is
different when you think
about funds and it's
different versus individual stocks.
(32:38):
when I buy international
stocks the individual
stocks of the individual
companies I don't think of
it any differently than I
think of my uh allocation
to domestic stocks I'm
looking for consistent
companies with growth so uh
you know what is what does
that mean well think about
some companies in domestic
markets that might have
near monopolies uh think about
(33:01):
companies that are
predictably growing margins
that trade at fair prices.
That's what I'm doing when
it comes to the individual market.
Now,
that has very little to do with
short-term trends.
It's more about what I
expected to do in the long term.
Now, when it comes to funds,
we do have a strategy
(33:23):
called the Sixty Forty Core Explore.
Now, the Core Explore is
The core part of that
portfolio is the strategies
that we would utilize
because we like them for the long term.
the explore part of that
portfolio would try to take
advantage of some short term opportunity.
So in that explore part of that portfolio,
(33:46):
which is a relatively small part,
but it ends up to be about
fourteen percent of the portfolio,
we're trying to take
advantage of some of the
things that you mentioned.
And sometimes that might end
up having an allocation to
an international ETF or mutual fund.
For example, we've been in
a japan focused etf in the
(34:07):
last couple years in that
we've been in an india one
and more recent past so you
know those types of trends
could could end up in that
in that portfolio great
Thank you, Brian,
for taking on a couple of
our client listener
questions and digging into them.
I enjoy your commentary always,
(34:28):
and I know our listeners do as well.
And thank you for listening
to our podcast today.
If you'd like to give us
your opinion on our podcast,
in the show notes of this
episode is a link to a survey.
And we'd like to know what
you think about the topics
that we talk about,
maybe what you'd like to hear.
If you'd just take a minute
and complete that survey,
we would really appreciate it.
(34:49):
Until next time,
keep striving for something more.
thank you for listening to
something more with chris
boyd call us for help
whether it's for financial
planning or portfolio
management insurance
concerns or those quality
of life issues that make
the money matters matter
whatever's on your mind
visit us at
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(35:11):
or call us toll free at
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You're listening to
Something More with Chris
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Christopher Boyd provide
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(35:31):
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The following is paid programming.
Welcome to Something More with Chris Boyd.
Chris Boyd is a Certified
Financial Planner
Practitioner and Senior
Vice President and
Financial Advisor at Wealth
Enhancement Group,
one of the nation's largest
registered investment advisors.
We call it Something More
because we'd like to talk
not only about those
important dollar and cents issues,
but also the quality of
(00:24):
life issues that make the
money matters matter.
Here he is, your fulfillment facilitator,
your partner in prosperity,
advising clients on Cape
Cod and across the country.
Here's your host, Jay Christopher Boyd.
Welcome to another edition
of Something More with Chris Boyd.
I'm Jeff Perry.
(00:44):
I'm sitting in for Chris for this episode.
Chris is at a convention,
a financial services,
financial planning convention this week.
And so I'm sitting in and
joining me is Brian Regan.
Brian is a member of Team AMR.
He is a senior portfolio
manager with Wealth
Enhancement Group and a
regular guest on our show.
(01:04):
Thanks for joining us, Brian.
Hey, guys.
How are you doing?
great also joining us is
russ ball the newest
addition to team amr russ
thanks for working the
control panel and joining
us for this episode of
course happy to be here for
the people who click the
podcast link they'll see
the title of this episode
is mailbag with brian regan
(01:26):
and what that means is
brian's going to handle a
couple of questions that
have come from clients and
give us a uh his opinion
and we'll have a dialogue on the issue
Brian,
this first one came from a recent
client review.
What that means for the
listeners who don't know is
at least annually,
we sit down with a prolonged meeting,
(01:46):
a couple hour meeting with
our clients to go over
their financial plan that
they have in place and
discuss if they have any
changes to their life or
anything that they're concerned about.
We follow up with any things that we see.
And this particular client,
is a big fan of yours.
He watches all of the
webinars on the markets and the economy.
(02:07):
He just, you know, he loves that.
Not everybody loves to dig in that stuff.
I know you do,
but he just loves learning more about it.
And so this issue that I'm
going to describe
has come up repetitively in
his annual reviews and
conversations with him.
And he's kind of been,
I won't say stuck that's,
but it's the best word I
can come up with.
(02:27):
He keeps hesitating on doing
something that we are
suggesting that he do.
And this year it came up
again and he seemed more, um,
interested in doing
something with this part of
his portfolio.
and he asked us, he said, would you just,
would you pass this question by Brian?
And I said, you know what,
(02:49):
how about if we pass this
question by Brian on the
podcast and let him answer it?
And he just, he loved the idea.
So, uh,
we know he'll be listening to the
answer and, uh, we'll see how it goes.
So let me, let me, I know, you know,
the question because I
formatted it to you, but, um, let me,
for our listeners, uh,
(03:09):
Read what I sent you.
So this is a client who's
about seven years old.
He's got about one hundred
thousand dollars in Verizon stock.
He was an employee of
Verizon and like many
employees of corporations,
he acquired stock over the years.
And he very much likes every
quarter getting a dividend
of about fifteen hundred,
sixteen hundred dollars.
(03:30):
It's the dividend on the stock right now.
Annualized is about six
point five percent.
client is looking for income
but he's concerned about
the risk of this individual
stock verizon a potential
decline in the value of
verizon and thus maybe they
don't have the ability to
continue to pay uh their
(03:52):
dividend as a side note
which I didn't write in the
email brian we
When during this discussion
that we have with this client,
the issues of the former
issues with AT&T comes up
because he was in a holder
of AT&T and similar
concerns and AT&T
ultimately in the past had
cut their dividend and
(04:13):
shocked some people who had
bought the stock.
So that comes up in the context.
Overall,
the client has a moderate risk profile.
He's not afraid of risk,
but as he's getting older,
he's becoming more conservative thinking.
the question is what would
you suggest he do I think
knowing that he likes the
income stream what would
(04:34):
you suggest he do with this
hundred thousand dollars of
verizon stock all right so
I'm gonna get in the
verizon I I'm not gonna
leave rick hanging um so
before I do that I do want
to get into uh some of the
reasons on why I don't
recommend buying a stock
(04:55):
just for the dividend yield.
As a general rule of thumb,
I don't think that's a good idea.
Now,
oftentimes the dividend yield is high
because a dividend cut is imminent.
You mentioned AT&T, that did happen.
It tanked the stock at the time.
I believe they have the
dividend if I'm remembering correctly.
(05:16):
so sometimes the high
dividend yield uh could
mean that it's just you
know it's just a mirage
this is a temporary thing
it's it's gonna be you know
cut in half in the case of
at t it's some some future
point in time probably very
soon um that's oftentimes
what the what the market is
saying when it cuts the
price down so much uh that
the dividend yield looks
(05:36):
high now that's not always
the case and we'll get into
you know verizon specific
um after a few more points
Now,
there's a few reasons why I don't like
buying stocks just for the dividend.
Dividend-oriented funds and
stocks chronically
underperform stocks that do
not prioritize dividends.
Now,
there's four things that you can do if
(05:56):
you're a company with your cash flow.
You can reinvest in the business.
That means more growth.
So if you're prioritizing the dividend,
you're probably not going
to grow that much.
You can pay down debt.
That makes your business more secure.
You're far more likely to go
bankrupt if you have a lot of debt.
You can buy back stock.
This is
Really the same thing as a dividend,
except it's much more tax efficient.
You're going to get a capital gain.
(06:17):
You can decide when to pay
that tax on your own rather
than getting it quarterly
as the client is getting.
And the last thing you can
do is pay a dividend.
Prioritizing a dividend at
the expense of these
matters can lead to worse
overall performance,
and that seems to be the case.
If you look at any
dividend-oriented fund just
(06:37):
against the S&P
I think it's important to
keep those things in mind.
So Brian, when you see a company,
any company that's
maintaining a high dividend, what,
what are you thinking?
Cause they know these choices as well.
Are you thinking that they,
(06:58):
what are you thinking?
I don't want to put words in your mouth.
Why would a company pay a
dividend so large when they
have these other options,
which fundamentally might
be better for the health of
the corporation?
Well,
it might be the right thing to pay a
dividend, right?
It might be a very mature
company that isn't going to
grow very much.
They don't have a lot of
options to reinvest in their business.
(07:20):
They might have a very
reasonable balance sheet
where it doesn't make a
whole lot of sense to pay down more debt.
They might be buying back stock too.
Maybe they're doing half and half.
Maybe they're paying a
dividend for the certain
amount and maybe they're
buying back stock.
This is another problem
generally with the dividend yield.
Sometimes I'll see a company
is buying back
twice as much stock as
(07:41):
they're paying a dividend.
It looks like the dividend's
very low when people just ignore it,
thinking that the
dividend's not high enough.
One percent's not nearly enough for me,
when in reality,
the return to shareholders
is more like three,
three and a half percent
when you put in the buyback yield.
Getting back to some of the
things on how to create cash flow, which
(08:03):
is oftentimes a problem when
people are thinking about dividends.
They like the cash flow, right?
They want to create a new
paycheck and retirement.
Well,
it would have been far better to hold
Google, for example,
which only recently started
paying a dividend over the
last ten years and sell the
shares as needed than to hold Verizon.
You know, over the last ten years,
Google's up five hundred
fifty two percent and
(08:23):
Verizon's only up thirty
seven and a half percent.
And that's total return that
includes dividend.
So you're much better off
holding the stock and
selling some shares as
needed and creating a
paycheck that way rather
than rather than taking the
dividend and my final point
on this before we get into
verizon specifically is if
you really want income and
stability you're probably
better off moving up in the
(08:44):
capital structure and
buying fixed income
especially where rates are
today right so uh this is
going to come into play
when we start thinking
about the value of verizon
but if you just buy the I
shares high yield index for example
It's outperformed Verizon
over the last ten years
while being higher in the
capital structure.
Could you define for our
listeners who may not be
(09:05):
familiar with the term that you're saying,
capital structure,
higher in the capital structure?
Sure.
So the capital structure
means the best way to think
about it is the priority of payments,
right?
So you are contractually
obligated to pay your
interest expense on your debt.
That is something that has to happen.
If you can't do that,
you go bankrupt and the
(09:26):
equity goes to zero.
So that is,
it's much more likely to be paid.
And if it isn't,
then the company's bankrupt
and the equity of the
company isn't worth anything anyways.
So it's a much safer asset
for that reason.
It should be less volatile
for that reason.
And we see that fixed income
is very much less volatile than equity.
(09:47):
And dividends, for example,
they are returns to shareholders,
equity returns.
They are not contractually
obligated to pay that.
So they can just cut it, right?
You can't cut the payment to fixed income.
You can cut the payments to
equity holders.
right it's perfectly fine
perfectly legally you will
not go bankrupt um so
there's much more stability
(10:08):
in buying fixed income and
if the yields are similar
and there's no growth uh
all things equal I I mean I
I would much rather hold
the fixed income instrument
right and to put this to
the extreme example if a
company does go bankrupt
dividends are long gone and
shareholders they're the
shares that they own
they're last on the list of
to be fed right at the bankruptcy table
(10:28):
Right.
And there's a good chance
you're going to get
something back in your fixed income,
especially if it's a secured asset.
Senior secured assets
generally return about
eighty percent of the
capital in bankruptcy.
So they're much they're much more stable,
much more reasonable assets
to hold if you're looking
for quote unquote income.
OK, let's dig into Verizon itself now.
(10:50):
What we're going to talk
about isn't a
recommendation to buy a stock.
It's not a recommendation to sell a stock.
We're giving Brian's
thoughts on the question
that this particular client
make and past performance
is certainly not any
predictor of future results.
Right.
So that's important.
And despite everything I just said, rarely,
(11:11):
but sometimes,
a high dividend yield can
represent an overlooked stock.
I think it's important to say it's rare,
but sometimes it happens.
It's worth looking,
especially if it's a mature,
well-known company with few competitors.
Oftentimes, it's just overlooked.
(11:31):
Could just be a money machine, right?
Not popular in the current
stock market popularity contest.
It's rare, but it happens.
When it does happen,
I love to take advantage of it.
That being said,
we do own Verizon for
clients that we manage
money for on a
discretionary basis for
(11:52):
individual stocks.
So let's get in the why.
The dividend of six point
four six percent is five
times higher than the overall market.
So it's not even close.
This is much, much,
much higher than the S&P five hundred,
for example.
So that is an indication
that if it can pay the dividend, it is.
probably very cheap and has
(12:14):
the opportunity for capital
gains going forward because
it's very cheap the
dividend is very well
covered by the cash flow so
the free cash flow runs
about three and three to
five billion dollars a
quarter while the dividend
is two point eight billion
so you can see that three
to five billion is higher
than the two point eight
billion uh so you know
(12:35):
there's it can reasonably
you know pay the div
continue to pay the dividend
If interest rates come down,
particularly long rates or
spreads continue to tighten.
And by spreads,
I mean the difference
between a high yield
instrument and a treasury instrument.
If that difference continues to come in,
I would expect decent price
movement in this company to
(12:57):
accompany the dividend, which is great.
Right.
So I'll give you an example.
We initiated the position
much lower than the stock
currently is now.
which is great.
And the expectation was that
as interest rates came down,
I would get price appreciation.
Now,
you might get the sense that I'm not
planning on being in this stock forever.
(13:19):
And that makes sense.
I have a thesis that it's underappreciated,
partly because it's viewed
as somewhat of a fixed
income type instrument and
that as rates come down,
the price will appreciate
as the price appreciates.
I likely won't want to be in
this stock further as we
(13:41):
realize that price appreciations.
Now, all that's good, right?
But there's real concerns about the stock.
don't think it's an obvious
hold um I I would say that
I am looking at this as a
as a source of funds if I
find a better opportunity
right now I mentioned that
we bought it lower we've
had some appreciation we've
(14:03):
owned it for a little over
a year and a half um I've
been I've been happy with
it so far uh it's not like
I have an itchy trigger
finger on it but if I find
something that is
consistent and going to
grow for a long period of time
this might be a way that I
fund that new purchase.
So I don't think it's an obvious hold.
The growth is flat to negative,
(14:23):
which is unsurprising, right?
It pays a high dividend,
not reinvesting in the business as much.
So it's not growing as much.
So any price appreciation
would have to come from
that change in rates,
or they would have to cut
costs pretty dramatically
to grow the bottom line.
Cutting costs would
presumably make them less
competitive in the future.
This is an important point,
especially since...
(14:45):
sprint and t-mobile merged
to be to be a very
competitive uh third
provider of of cell service
uh in this country right
there's really the big
three there's t-mobile
there's at&t and verizon
before the merger that was
really at&t and verizon now
there's a there's a much
(15:06):
more bigger competitive threat
There's a lot of evidence
throughout the history of
the stock market that a
duopoly is great and you
add a third competitor and
things start to get a lot
hairier for these stocks.
Now, there's a lot of debt on the business,
right?
I said that we could pay
down debt and make the
(15:26):
company more secure.
This company has a lot of
debt on the business.
This company has more debt
on the business than AT&T
does to your prior point, right?
With a lot of it coming due in the next
What does that mean?
Well,
it doesn't mean that they're not
going to be able to pay it.
They have about twenty
billion coming in the next twelve months.
I mentioned that they only
have three to five billion
(15:48):
in cash flow per year.
So they're going to have to
refinance the debt similar
to how you would refinance a house.
They're not going to pay
down the principal
completely with their cash flow.
What they're going to do is
finance that money with
higher yielding debt than
they currently have just
because rates have gone higher.
(16:09):
They are an investment grade company.
I don't expect this to be a problem.
But you can see that over
the last few years,
as rates have gone higher,
this has eaten into their
net income as interest
rates have moved higher.
So that's another reason to
be concerned about the
future of this company.
If we're already growing at
flat to negative,
this can only be a bad thing.
(16:31):
And aren't they making a big
acquisition soon?
They are.
They're buying Frontier Communications.
This is going to be my next
point for twenty billion
dollars in alt cash.
So the transaction will need
even more financing.
Most acquisitions turn out
to be a bad idea.
I do not know enough about
frontier communications and
Verizon's business to make
(16:51):
a judgment on whether or
not it's going to be a bad idea.
But I do know that about
seventy five percent of
acquisitions end up being
poor acquisitions.
So.
You know,
I wouldn't bet on a two fifty
hitter getting a hit when
he comes up to the plate.
And, you know,
that seems to be the odds
that I'm handed here.
(17:11):
You know, and moreover,
I know for I know for a
fact that my my interest
costs are going to are going to go up.
So the bottom line is, you know,
I've held the stock for a
year and a half.
For me, that's not a long time.
uh and done fine with it uh
but it would likely be a
source of funds because it
does have some hair on it
uh the dividend seems safe
for now but there's a lot
of debt in the business um
(17:32):
and we're hoping to benefit
more from lower interest
rates which seem less
likely now than they seemed
uh you know uh probably a
year ago to me so um we've
done well in it uh I'm
happy about that uh
There is some hair on the stock.
If interest rates continue to move lower,
(17:53):
that would be very good for the stock,
but I think that's less
likely to happen than it
has in the last year.
We see spreads at historic tights.
We see
you know,
inflation expected to move higher
now in twenty twenty five,
at least by a little bit.
And those things are not
good for the downward
trajectory of interest rates.
(18:14):
So the reasons why we like
the stock in the first
place are largely going away.
And there's been some price appreciation,
price appreciation.
So the stock's fine.
I don't love it.
I wouldn't own it just for the dividend.
Yeah.
And just kind of a side
comment here about
financial planning principles generally.
we attempt to discourage individuals,
(18:36):
clients who have a
concentrated holding in a
single holding and for, you know,
it depends on the size of their assets,
depends on their net worth
and how it fits into their
whole financial plan.
But generally we don't like
to have our clients have a
single holding represent
more than five percent, for example,
of their entire portfolio.
And so, you know,
(18:56):
that's an individual situation.
We're not going to get into
the details of this client,
but if it's a,
If you acquire a lot of stock,
like in this case,
this individual did while
they're working.
And so it's normal that
clients and prospects come
to us and they're retiring
and they have a less company stock.
And one of the common things
that we discuss with them is,
is it prudent to have all of the stock,
(19:19):
all this value,
all these assets in one holding,
even if you love it,
even if you don't have any
concerns about it,
maybe you worked in the industry forever.
You're confident in the
trajectory of this company.
It's not prudent for the
principles of
diversification to have so
much of your assets
invested in one company.
The risk is just too great.
(19:40):
Russ,
you probably see that with some
people that you've been
talking to where they have
a concentrated holding and
the advice that we typically give them.
Definitely.
I think that's been a
conversation I've been
having a lot recently.
Also,
we talked about it on our recent
podcast episode,
some of the risks of having
too much in one specific stock.
But it's also one stock,
(20:02):
but also a specific sector.
So it could be a lot of
different companies,
but they're all
concentrated in one specific group,
maybe a telecom, maybe technology.
Obviously,
technology has done really well.
uh, recently, but maybe, maybe Brian,
you have any thoughts on, um,
sector diversification and
maybe certain limits that
you'd want to cap yourself
(20:23):
at if you're looking at one
specific industry.
Well, I,
I don't want to talk about
specific capsule limits because I,
I don't like to talk about hard rules,
but I will say that I,
I see this mistake a lot.
Um,
I see people hold Verizon
and TNT and T-Mobile,
and they think they're diversified.
You know, when you add them up,
(20:44):
it's a very significant
amount of a portfolio.
I see people on Verizon and
MasterCard a lot.
It's essentially the same business.
You know, you can see,
especially these days,
you can see a lot of Nvidia, a lot of AMD,
and then they'll have a
semiconductor ETF.
And, you know,
what I like to call it is
the illusion of diversification.
(21:04):
But sometimes you'll see
people with three or four dividend ETFs.
And when you look into the top holdings,
they're all the same company.
So, you know,
I call it the illusion of
diversification.
It's not you're not really diversified.
It just looks like you are
because you have four tickers.
But you're very concentrated
in a sector or a type of investment.
(21:25):
And when that goes out of
favor for one reason or another, you know,
you're going to feel it
more than you probably expect.
Oh, thank you.
Thank you, Brian,
for your comments on that one.
Let's go dig into the
mailbag and ask the next question.
So this is a couple who are
in their forties and
they're saving for retirement.
Like most people,
(21:46):
they're using their four or one case,
which is real common.
Their risk tolerance is high.
They're very tolerant of taking risks.
They know they get a long
runway here and they don't
expect to use these funds
until they retire.
They have four or one K
funds in a model portfolio.
one of their choices and it
has twenty five percent
(22:07):
exposure to international
stock funds so they were
digging in they were doing
their research which I love
to love to hear that people
are looking at what's
inside of these funds and
they believe that they
found that the return on
international stock funds
has lagged the US stock
funds for a long time and they're asking
They understand diversification,
(22:28):
what we were just talking about,
in this case being
diversified to
international investing as well.
But they're asking,
should they continue to
keep a portion of their
funds in their retirement
account exposed to
international equities
after a period of long underperformance?
And if so, why?
And if not, why not?
(22:50):
It's a great question and
one that I ask myself all the time,
honestly.
I wrote down some thoughts
for the pro all US argument
and the pro international
diversification argument.
And then I'll tell you how I
personally treat it and how
we treat it from the vast
majority of our clients.
(23:11):
So the pro all US,
this particular couple is correct.
UF stocks have done much
better than international
stocks over a significant period of time.
For this analysis, I looked back
I believe it was a ten-year period,
and I think there was a
thirteen percent return on
the S&P five hundred and the MSCI,
All Country World Index,
(23:31):
ex-US was up maybe just
over four percent.
So there was a big,
big difference between
international and US over
the last decade.
And, you know,
ten years to me is not a
short period of time.
I'm constantly preaching
this thing for the long term.
And most people incorrectly,
when I say that, think, you know,
three months to two years is a long time,
(23:52):
but no, I'm thinking much more than that.
And this couple seems to be
on the right page, right?
They're thinking over twenty years,
they're looking back over ten years.
You know,
it's really hard when you look at
this past data and say,
It makes sense to invest
internationally when you
look at the performance data.
(24:13):
In addition,
there's a really good argument
that large cap domestic
stocks generate enough
revenue from international
countries where it's
unnecessary to further
diversify into those markets.
This was a popular stance
from Vanguard's John Bogle
before he died.
You know, the other thing is U.S.
has a relatively attractive demographics,
(24:33):
at least now,
compared to the rest of the
world because of the
increase in immigration that we've had.
We have generally younger
demographics than a lot of
the developed world,
and especially that of
something like China.
So, you know,
that's the argument for all U.S.
And I think it's a strong one.
So I'm going to make the
(24:54):
argument for international
diversification.
Brian,
I want you to dig into that a little
bit more about Vanguard's posture.
And, you know,
you've shared it with before.
But for people who haven't
heard you before,
why are you saying that a
positive for all U.S.
already kind of gives you
some exposure to foreign markets?
(25:15):
Well, you're going to get exposure.
Let's say some company
domiciled in New York City
is a multinational corporation, right?
That means they sell in Europe,
they sell in China, they sell in Japan.
They're going to have
currency exposure in all
(25:36):
those countries because
they transact in euros or yen or won.
And they're going to have
exposure to the consumer in
all those countries as well.
And I looked at this recently,
and don't mark my words
because I'm doing this off
the top of my head,
but I think about thirty
percent of the revenue of
the S&P five hundred is
(25:57):
generated internationally.
So you're going to have a
lot of the benefit of the
international consumer just
by holding the largest five
hundred stocks in the United States.
Very good.
Thank you for adding that
commentary on that.
So go to the other argument
of why we should have
direct international
(26:18):
exposure in our portfolios.
Yeah, so ten years is a long time.
I mentioned that earlier with the U.S.,
But most of us are probably
going to be investing for
longer than ten years.
I hope to be investing for
the next sixty years of my life,
for example.
That means I'll have a very,
very nice long life,
one that I could be proud of.
(26:39):
But in reality,
I'll probably be investing
for longer than those sixty years.
Because I hope to get to a
point where I'm investing
for my heirs to a certain degree.
So if you're older and you're thinking,
I don't have ten years,
the likelihood that you're
investing for longer than
ten years is probably very, very,
very high.
Oftentimes we see that
(26:59):
people are outliving their money.
So you might want to think
in increments that are much
longer than ten years.
And I will say that, you know,
I'll admit that ten years is a long time.
If an investment's not
panning out over ten years,
you might want to rethink your thesis.
Now, why is that important?
There are long stretches
(27:20):
where international stocks have performed,
including the late eighties
and the early two thousands.
Now that the late eighties
and the early two thousands,
that's well within my lifetime.
You know,
and that's long within the time
that my parents, for example,
have been investing.
So you might want exposure
to take advantage of those opportunities.
(27:40):
You know,
if a client's investing for many decades,
this is evidence that it
might be helpful to have an
international allocation.
Many people believe that
part of the reason for the
international
underperformance has been
the extent of dollar strength.
And if the dollar to weaken,
an international would benefit.
This is a reasonable argument.
And year after year,
I hear people say that the
(28:02):
dollar is too strong
relative to global interest rates.
And that's fine.
Now,
the problem is the dollar keeps
getting stronger and
stronger relative to
international companies.
So we can't see if this thesis is true.
But what this is important
for is saying that all the
(28:22):
data that I've talked about
is historical data.
This says nothing about
what's going to happen in the future,
right?
We talked about the returns
over the last ten years.
We talked about returns
outperforming in the late
eighties and the early two thousands.
That was all a long time ago,
and we need to be forward
looking as investors.
This argument is a good
argument about being forward looking now.
(28:43):
There's also a very good
argument that international
stocks are much,
much cheaper than domestic stocks.
The price to earnings ratio
is about eight turns cheaper.
And the dividend yield is
about twice that of domestic stocks.
So, you know,
on those two very common use
metrics for valuation,
international stocks are much,
much cheaper.
I would argue that there's
(29:04):
some good reasons for this.
Mostly that they're not growing as quick.
And they're not growing as
quick because they don't have...
technology industry that is
as robust as ours here in
the United States.
Now,
how do we put all this together?
(29:25):
And, um, you know,
what do I do personally?
And what do we do for our clients?
Well, personally,
I do have some
international stock positions.
So the way my personal portfolio is,
which I become more and
more convinced that it's
helpful for people to tell
them what am I'm doing with my money?
I invest very much alongside
with our clients,
(29:46):
but about half my
investment portfolio is an
index funds and about half
of it is an individual stock positions.
so on the index funds you
can say for all intents and
purposes that I'm in the s
p and on on my individual
stock positions I have
international stocks in
there now I why do I think
(30:08):
that's good well
I don't do it specifically
because I want
international diversification,
even though I think that's
an added benefit.
I do it because I think
they're some of the best in
class companies.
And I want to buy the best
in class companies when it
comes to my individual stock portfolio,
regardless of where they
are domiciled in the world.
Um, not necessarily, regardless,
(30:29):
there are certain reasons
why I wouldn't want to hold
Chinese stocks, for example,
even if they tend to be very,
very good companies.
But generally speaking, I want to hold, uh,
the best companies in, in,
in reasonable and reasonable countries.
Um, and that ends up being about of my,
my individual stock, uh, portfolio.
Uh,
(30:52):
Now,
for our ETF mutual fund portfolios for
individual clients,
we utilize an active mutual
fund that's pretty concentrated.
So what do I mean by that?
Well,
some of the best companies in the
world that I mentioned that
I might have in my
individual stock portfolio
are going to be some of the
top holdings in this active mutual fund.
And that's one of the
reasons why we choose to use that.
(31:13):
We've been underweight
international against the MSC Acqui Index,
which is
The reason of which is I'm
really stripping out China.
I don't really like being in
China exposed stocks.
As a replacement,
I've chosen to be in
emerging market bonds.
And that's been really great
for us because in recent years,
(31:35):
it's giving us about the
same amount of return as
those emerging market stocks,
but with much, much, much less risk.
And that's benefited for us.
So that's how I do it personally.
And that's how we're doing
it for the vast majority of our clients.
Russ,
did you have any questions for Brian
on the subject of investing
internationally?
(31:56):
Yeah,
I guess when you're looking at
opportunities to invest internationally,
are you looking at, you know,
you mentioned specific
companies that you just
think are really good companies.
That makes a lot of sense.
Are you ever looking at
specific regions as
potential areas where
opportunity can evolve
based on the growth story or, for example,
with some of the
(32:16):
nearshoring developments
that have gone over the
last several years?
I know a lot of analysts
look at emerging markets as
potentially higher opportunities.
higher growth opportunities
than developed international markets.
What are your thoughts on that?
I think the story is
different when you think
about funds and it's
different versus individual stocks.
(32:38):
when I buy international
stocks the individual
stocks of the individual
companies I don't think of
it any differently than I
think of my uh allocation
to domestic stocks I'm
looking for consistent
companies with growth so uh
you know what is what does
that mean well think about
some companies in domestic
markets that might have
near monopolies uh think about
(33:01):
companies that are
predictably growing margins
that trade at fair prices.
That's what I'm doing when
it comes to the individual market.
Now,
that has very little to do with
short-term trends.
It's more about what I
expected to do in the long term.
Now, when it comes to funds,
we do have a strategy
(33:23):
called the Sixty Forty Core Explore.
Now, the Core Explore is
The core part of that
portfolio is the strategies
that we would utilize
because we like them for the long term.
the explore part of that
portfolio would try to take
advantage of some short term opportunity.
So in that explore part of that portfolio,
(33:46):
which is a relatively small part,
but it ends up to be about
fourteen percent of the portfolio,
we're trying to take
advantage of some of the
things that you mentioned.
And sometimes that might end
up having an allocation to
an international ETF or mutual fund.
For example, we've been in
a japan focused etf in the
(34:07):
last couple years in that
we've been in an india one
and more recent past so you
know those types of trends
could could end up in that
in that portfolio great
Thank you, Brian,
for taking on a couple of
our client listener
questions and digging into them.
I enjoy your commentary always,
(34:28):
and I know our listeners do as well.
And thank you for listening
to our podcast today.
If you'd like to give us
your opinion on our podcast,
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If you'd just take a minute
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we would really appreciate it.
(34:49):
Until next time,
keep striving for something more.
thank you for listening to
something more with chris
boyd call us for help
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(35:11):
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Christopher Boyd provide
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(35:31):
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