Episode Transcript
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(00:00):
Welcome to Something More with Chris Boyd.
Chris Boyd is a certified financial planner, practitioner,
and senior vice president, 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
life issues that make the money matters matter.
(00:22):
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 and thank you for being with us
for another episode of Something More with Chris
Boyd.
I'm here with Jeff Perry, who is my
regular co-host, and Brian Regan, who is,
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we're off with the AMR team of Wealth
Enhancement Group, and Brian is our senior portfolio
manager, always giving great perspective on market conditions
and economic circumstances and how we might want
to navigate that with the way we do
our investing.
And Brian, you recently had a great article
that you posted or had published through Retirement
(01:06):
Daily on thestreet.com, a great topic for
us to talk about because markets have been
quite volatile over the last couple of months
with tariffs are on, tariffs are off, well,
90 days anyway.
And then, well, we've got all these different
sort of variables coming in, you know.
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So how is an investor to navigate these
challenging various possible circumstances?
So maybe you can walk us through.
How should investors be thinking about these circumstances?
Yeah, thanks for having me, guys.
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It's a pleasure to be here.
I really like doing this.
I think it's always fun when we have
good discussions.
So if you guys are familiar, Chris, I
know you are, you own a boat.
If you're familiar with the Atlantic Ocean or
Cape Cod Bay at all, you know that
the winds can change unexpectedly, and before you
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know it, you're in eight-foot surf waves
on a 20-foot boat.
And that's basically what I feel like has
happened in the economy in the last couple
months, right?
Now, it doesn't necessarily mean that you're going
to sink, and I think that's the metaphor
that I use at the beginning of this
article.
How do we position, how do we drive
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our financial boat in order to get through
difficult times?
And as you guys know, that's how we
think about asset allocation.
We're not static with our approach.
We do what we call active allocation, which
typically means that we're going to reconsider the
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asset allocation every quarter and make changes subsequently.
So this article was really about how we
approach the new situation and what we did
about it.
So with that preamble, what did we do?
It was a difficult situation.
I thought that it was a very binary
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situation.
We did this exercise at the Wealth Enhancement
Group where we were trying to game out
different scenarios that could happen, and the more
and more I thought about it, the more
and more I realized that there's really only
two scenarios.
This tariff situation continues to be bad, and
we have a recession, and the markets go
down pretty good.
Or we start to reverse everything we've done.
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And to my pleasure, that's the tact that
has been going on so far.
But I think when you think about asset
allocation as a whole, I think it's a
good idea to think about your duration and
your fixed income positioning first.
And the reason for that is because the
yields and yield curves will change what's going
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to happen in the equity market.
So it's a good idea to get a,
where am I comfortable with my fixed income
position?
And then contrast that with how you want
to position your equity portfolio.
So when we started with the fixed income
portfolio, there was a lot of questions right
at the beginning.
Tariffs are depressionary, and they depress the market,
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but they depress growth, but they're also inflationary
at the same time.
So what does that mean?
Well, it means the longer end of the
curve should probably come down because of less
growth, and it means the shorter end of
the curve should probably go up because of
inflation concerns.
And that means either a flattening curve or
even an inverted curve again.
So you couple that with the fact that
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we might have issues with bond vigilantes, foreign
currencies, foreign countries deciding they might want to
put the U.S. Treasuries in the penalty
box.
Slowing imports, which you might not think that
should affect the Treasury market, but the United
States exports dollars, and those dollars end up
being recycled into U.S. dollar denominated assets.
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So less imports may mean less capital availability
to buy things like Treasuries.
And what if inflation expectations rose due to
increased taxes?
That's ultimately the big one.
So when you put that all together, I
had no feeling or no confidence that I
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could make a judgment on where the long
end of the Treasury curve was going to
go because you have all these inflationary and
technical factors, but you also have the fact
that you would expect growth to slow.
So what we expected was a very, very
volatile Treasury market, and that has been what
we've had over the last month.
So with that analysis, the decision was to
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stay very short in investment grade bonds in
our fixed income portfolio.
Maybe elaborate on when you describe the prospects
of a flat or a flattening or possibly
even inverted yield curve, why that gives merit
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to the idea of emphasizing more on the
short end of the yield curve, shorter term
bonds.
Are they benefited in that circumstance?
Yeah, I mean, I don't know if that's
necessarily going to be the case, but let's
take that.
Let's take that as the base case, right?
That we're going to have some kind of
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inverted yield curve, which means the shorter end
of the curve, which takes less interest rate
risk.
There's less risk in the shorter end of
the curve is going to pay a higher
yield.
That's as close as a free lunch as
you're going to get in this business.
So you're going to get paid a higher
yield and you're not going to take as
much risk.
The benefit of an inverted yield curve is
that process of the longer end coming down
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could be beneficial.
You could get a capital gain from that
as interest rates fall.
But I think what I struggled with is
it's tough to decide because of the technical
factors that I mentioned, like bond vigilantes or
foreign countries holding the U.S. government accountable
or increasing deficits or slowing imports.
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All those things could make it so that
expectation of a falling longer term treasury may
not happen.
And that has not happened, right?
At least over here in the last couple
of months.
So, you know, either way, I want to
be short on the curve.
I don't think that risk is worth it.
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And the benefits, you think, in terms of
the amount of disparity and what you're getting
further out on the yield curve versus the
shorter end, you think that the benefits outweigh
the risks, essentially?
So let's just take a money market fund,
right?
I'm getting four and a quarter.
If I buy a 10-year treasury today,
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I'm getting 460, but that's high compared to
how it's been in the last month or
so, right?
So I was getting closer to four and
a quarter.
So I could take very little interest rate
risk and get four and a quarter, or
I could take a lot of interest rate
risk and get four and a quarter.
That math is getting more attractive for the
longer term every day that ticks by here
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in recent days.
But the math just didn't make sense.
You want to get paid for more interest
rate risk, which is why the yield curve
is typically a little steep.
You should get a little bit of a
liquidity premium for holding longer term bonds.
And just for our listeners, we're recording our
conversation on May 22nd in case things change
(08:51):
materially in the next few days.
It's important to timestamp everything these days.
Yeah, just in case.
Well, so that gives us a flavor for
how you're thinking about bond positioning.
How are you thinking about positioning stocks?
And as you talked about, we're asset allocators.
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We do believe in long-term investment positioning,
but we also, on the edges, like to
do some modest tactical adjustments.
We're not trying to time the markets and
jump in and out with our equity exposure.
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But there are things we do to try
to be responsive to what's happening in the
world around us.
So how does that work its way into
your thoughts around equities today?
Yeah, it's a great setup, Chris.
And I think that's important to know that
these are not wholesale changes.
We're not getting far away from people's risk
profiles.
We're trying to make active decisions within people's
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risk profiles.
And ultimately, the risk profile is going to
decide your, more or less, your long-term
performance.
So I think we're a little unique in
that we don't silo our thinking with fixed
income and equity.
I think that's very common.
If you talk to other allocators, they'll have
whole separate teams that think about fixed income,
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whole separate teams that think about equity.
Even in the home office at WEG, that's
generally how it's set up.
And that's fine.
I'm sure there's good reason for that.
It is the norm.
We're a little unique in that I think
that you need to consider your duration position
when you make your equity position.
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And since we're short in duration for fixed
income for all the reasons that we just
talked about, I want to be a little
bit long in my beta.
So what does that mean?
Beta is a measure of relative volatility versus
the market.
So if I own a stock with a
beta of 1.2, well, it's 20%
more volatile than the S&P 500.
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That's a simple way of thinking about it.
It's important to note that that's based on
backward-looking data.
So even if you look at a one
-year beta or a three-year beta or
a five-year beta, they'll be different.
But quantitatively, this is a reasonable way to
think about positioning your portfolio.
But I also think you need to do
it fundamentally, and I'll get into that in
a minute.
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So why do I think you need to
take more beta exposure if you're very short
in duration?
Well, if interest rates fall, right, longer-term
interest rates fall, I won't get a tailwind
from my fixed income because I'm very short
in duration.
It will be minimally affected.
I'll get my coupon and that's it.
But the cash flows on my equity will
be discounted at a lower rate, which means
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that stocks should go higher.
So even though I'm not getting much from
my fixed income, I'll be getting a benefit
from my equity, and that's the great thing
about diversification, right?
You don't necessarily hit it out of the
park in all aspects because you're not really
diversified.
But what you want to do is you
want to balance the risks so that you
can do well under a lot of environments.
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Now, what if interest rates rise?
My fixed income won't suffer, right?
But under that same logic, my equity will
likely be hurt, but at least I'll be
buffered a little bit by my fixed income.
Both of them won't be hurt at the
same time.
Now, if interest rates rise because growth increases,
well, then I'll probably benefit on both sides,
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right?
I won't get hurt on my fixed income
as interest rates rise, but the earnings expectations
on my equity will probably go up, so
I'll win there.
So under falling interest rates, under rising interest
rates, I think I'm better off if I
have more beta during short duration.
Now, of course, the downside to this would
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be what if rates fall due to decreased
economic growth?
I could be challenged on both sides.
I'm not going to get the benefit on
the income side, and I'm going to get
hurt on my equity side because my earnings
expectation is going to go down.
Now, when I say I'm not going to
get my benefit on my fixed income side,
I'm not going to get a huge capital
(13:08):
gain, but I'm also not going to lose
anything.
So I think this is the best way
to position for both the upside and the
downside, and since we're in this binary situation,
that's something that you need to consider, right?
I want to protect on the downside but
also participate in the upside, and that's the
delicate balance that we're doing here.
Now, if you really want to avoid that
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last scenario, right, where interest rates fall due
to decreased economic growth, then I need stocks
that will grow during all environments.
So even if the economy falters a little
bit, I want stocks that will continue to
grow.
So I think that eliminates small cap, for
example, and that's one of the reasons why
we eliminated small cap in our portfolio.
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I think they're going to be more economically
sensitive.
Now, that does bode well for some of
the biggest, largest stocks with minimal debt that
are capital light asset allocations that have subscription
predictable revenue growth, or in other words, predictability
with growth, as you guys know that I
always preach, right?
It's my favorite thing.
(14:13):
So you can look at high-quality businesses,
and you could do it that way, right?
And we've expressed that in ETF mutual fund
portfolios through an allocation in MGK, which is
a Vanguard mega cap growth index, and the
top names include Apple and Microsoft, Nvidia, Amazon,
Meta, Broadcom, and Eli Lilly.
These are all blue-chip household names.
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Another way that you could increase your beta
and you could do it with a smaller
allocation in your portfolio is by doing more
speculative investments.
So, for example, the ARK Innovation Fund has
a beta of two, so I could allocate,
in theory, a whole lot less to that
and still get my beta up.
The problem with that is I don't think
that's reliable growth.
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I don't think the companies in there are
as solid, so that's why I choose not
to do that.
The top names there include Tesla, Roku, Roblox,
Coinbase.
So that might be a matter of preference
on how you want to get your beta
up, but for me and my clients, I'd
rather focus on the higher-quality companies.
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Is there a difference in – oh, sorry,
just real quick on the follow-up.
Is there a difference in concentration in the
way those two portfolios approach their selections?
Well, they're both fairly concentrated, so that's something
that you want to keep an eye out
for whenever you get more granular in your
asset allocation.
But in this case, we're actually trying to
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look for that, right?
We want to concentrate in the higher-quality
names.
Okay, Jeff.
Brian, in the article that you referenced at
the beginning of the episode, you noted a
couple of sectors that you felt might be
attractive, semiconductors and aerospace and defense.
Do you want to comment on why you
selected to include those in the article?
(16:01):
And by the way, we'll put the article
in the show notes, so if you're listening
and you want to read the whole article,
just look at the show notes and you
can click it.
Yeah, so I think it's important to focus
on growth like we just talked about with
increasing the beta, predictable growth by staying in
good businesses.
But you can really also focus on the
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predictable part of that growth allocation.
And if you want to participate in the
upside and the downside, I think that's important.
And it's also always important to know that
beta is a backward-looking instrument, so it's
not – there's no guarantee that this is
going to hold true on any given day,
month, week, quarter, whatever your timeframe is, right?
So I think it's also important to take
(16:44):
stock in the current fundamental environment.
And I've taken the approach that I think
if we want to participate in the upside,
we need to be more granular in the
sectors that we think are going to outperform.
And the way that we're going to do
that is by expressing preferences in aerospace and
defense through semiconductors as well as utilities.
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So the beautiful thing about that is I
can take more risk in those sectors that
have higher betas by allocating to something very
predictable like utilities.
That's bringing down my beta at the same
time, so you can control your beta in
that manner.
You don't have to just put all your
chips in front of the table.
You can massage it a little bit, I
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guess.
So why do I think aerospace, defense, and
utilities are going to do well as well
as semiconductors?
I think semiconductors is the modern-day oil,
and what do I mean by that?
Most of them are manufactured overseas.
In the 70s and the 80s, we had
an oil embargo.
Most of our oil came from the Middle
East.
What did really well during that time?
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Well, domestic oil producers did exceptionally well.
So by the similar logic, you would think
that semiconductors, which are pivotal for our high
-tech technology companies and our military, would benefit
under any kind of geopolitical or domestic political
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situation that we're going through today.
You've already seen that a lot of the
tariffs have been scoped out in and around
semiconductors, so they're expected to continue to benefit.
It's the same thing with aerospace and defense.
The administration has come out and said that
a lot of the reason that they're doing
this is for national security purposes.
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So what are they telling you?
Well, they're going to continue to prioritize the
defense industry, and you can see that as
the Pentagon budget continues to get funded.
So I think these are good places where
you can have more predictability going forward despite
larger historical betas.
Thank you.
(18:53):
All right, and one thing you didn't talk
about in the article that I know we've
talked about is how sometimes there can be
a tactical consideration of using high-yield bonds
in lieu of equity as a way to
maintain some equity benefit, sensitivity, risk, whatever the
(19:20):
right way to put it.
But with less risk than actually being in
equities.
You didn't really include anything about that in
this article, but would you offer just a
comment or two about that?
Yeah, I think that's an exceptionally good question.
So when you think about your fixed income
allocation, your very short duration should have low
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or no correlation to equities.
Your longer investment grade correlation should be low
to negative.
But your high-yield allocation will have a
positive correlation with equities.
And why?
Because the spread that makes up the difference
between the yield paid on the bond and
the treasury will move with the stock market.
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So given the fact that it's a debt
instrument and not an equity instrument and it
comes first on the waterfall of payments, it's
going to be less volatile, but it is
going to be positively correlated.
So that's why I think this is something
also that's unique to our team that we
are willing to do that isn't necessarily ubiquitous
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across the industry.
When high yield gets high enough, we'll happily
decrease our risk in all our equity portfolio
and take the large yield on high yield.
Now, we did get that opportunity.
We saw a pretty good blowout in high
yield where we were getting close to the
(20:48):
yield on long-term equity returns as we
were getting – that we weren't getting just
a month prior.
So to me, that was a reasonable trade.
I'm going to get equity-like returns and
take less risk.
That's something that we've done in the past.
It's a particularly good move during high-stress
environments because as your equity portfolio is under
(21:09):
more risk, you can actually de-risk the
portfolio and lock in some good expected forward
returns.
I love it.
All right, great stuff.
Jeff, anything you wanted to add before we
wind down?
No, I love your metaphor of the boat.
Of the ship and the waves.
It was right on.
It makes you get a good visual of
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what you're talking about.
Well done, Brian.
Thank you, Jeff.
All right.
Thanks a lot, guys.
Until next time, everybody, 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
(21:50):
matters matter.
Whatever's on your mind, visit us at somethingmorewithchrisboyd
.com or call us toll-free at 866
-771-8901.
Or send us your questions to amr-info
at wealthenhancement.com.
You're listening to Something More with Chris Boyd
Financial Talk Show.
(22:11):
Wealth Enhancement Advisory Services and Jay Christopher Boyd
provide investment advice on an individual basis to
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The information given on this program is general
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(22:33):
conduct their own due diligence before making any
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