Kersten Wealth Management Group - Money Sense 10-11-25

Episode Transcript

Speaker 1 (00:00):
Hello, and welcome to Money Centce. You're listening to the
advisors of Kirsten Wealth Management Group, Kevin Kirsten and Brad Kurston.
Happy to be with you today, Brad. As we head
into the fourth quarter, the market has continued on its
upward rise. I mean I even heard just this morning
partying like it's nineteen ninety nine. We're not quite there
in terms of performance. I think we talked about this
on a previous show. The kind of performance you would

(00:22):
need to be similar to nineteen ninety nine to two
thousand is quite a bit more. But there's parts of
it that feel like that because of the deal making,
a lot of deals over the weekend, and news, unexpected
news and deal making. So the big the Nasdaq in
the last what is it nine months before the peak
in two thousand, doubled, yeah, doubled in value. Now we

(00:46):
do have a Nasdaq that has doubled since the twenty
twenty two lows, but in terms of that last six
month push, even the S and P five hundred was
up almost forty percent in the last six to nine
months before the March of two thousand on the peak.
But we're not quite there yet. We had a nice
third quarter, but the numbers are nowhere near what we

(01:07):
saw in nineteen ninety ninety two thousand. But I do
think it warrants this period of time. Does warrant at
a minimum, a neutral weighting on your risk profile. You
look at if you're a sixty forty investor and in
the lows of twenty twenty two, you flip that to
eighty twenty. Stock to bond, you need to be at

(01:28):
sixty forty today, okay, And especially if you didn't do
anything since then, you're probably ninety stock ten fixed income.
At a minimum, it warrants neutral, if not a little
bit of an underweight to equity, still maintaining equity holdings
without question, especially for someone who's in retire.

Speaker 2 (01:45):
And by doing that you'll be selling a little bit
of what's done well and adding to things that haven't
as you do that rebalance. Take a lover of the
last eleven months since the election. We have four sectors
in the stock market that are negative since the election.
Healthcare is negative one and a half XLP.

Speaker 3 (02:04):
What is XLP? That is a Staples?

Speaker 2 (02:06):
Staples are negative three, Energy is flat, materials are negative four,
and real estate's negative three. So here we have this
boom time, but the boom has been pretty concentrated into
tech up twenty nine since the election. Financials up sixteen
since the election, x communication services up twenty five.

Speaker 3 (02:25):
Xl Y. What's xl Y is discretionary.

Speaker 2 (02:27):
Discretionary that's where Amazon and Tesla are plus twenty and
industrials up sixteen, so it's been a growth rally. Actually,
utilities also up sixteen, so growth plus utilities rally and
kind of concentrated around all these themes of AI and
growth and deal making. Over the weekend, Open AI partnering

(02:47):
with AMD for a new chip deal and talking about
even taking a big stake in AMD, and so it's
not just one chip maker but all chip makers that
have deal making happening, and all of it's revolving around AI.
Even the government's news that they're continuing to look at

(03:08):
rare earth companies, lithium companies, all sorts of companies to
partner with because a lot of these companies are tiny.
I mean, if you see a deal making happening with
a lot of over the last couple of weeks with
the government asking to partner with companies, these companies are tiny.
A billion or less in some cases, and that's why
they need it. They need a big cash and fusion,

(03:29):
they need quick permitting, they need help with some of
the stuff so that we're not getting to the point
where we have shortages or having to rely on foreign
companies and countries for things like rare earths and lithium
and even our electric utility grid. We're going to have
to beef up. And I don't think it's bad that

(03:50):
you have any of these companies partnering with the government,
because in the past it's been the government has been
the roadblock for being able to get new projects done
and get anything done, especially in the energy and utility space.
So anytime we have that news, it's good these companies
are moving on that. The other thing we had over
the weekend is Japan today is surging five percent because

(04:11):
they have a new party in office. They they're calling
it the Liberal Party, But if you if you look
at what the platform was, it was all pro growth,
pro stimulus, pro markets, low taxes. I think one country's
liberal is not the same as another country's liberal because
it was basically a let's let's do what we can

(04:33):
to grow the economy, and it seemed a lot like
the same type of bullet points you'd have for the
Republican Party wanting the government to either do something to
help or get out of the way with the new
Japanese party that's in there. So a big surge today
in all international markets in Japan at five percent.

Speaker 1 (04:52):
Yeah, and so a lot's going on. You mentioned the
the lithium deals, and I mean.

Speaker 3 (05:00):
A couple of our portfolios.

Speaker 1 (05:01):
We don't have it in every single portfolio, but we
did add the lithium ETF which is doubled since April.

Speaker 3 (05:06):
We didn't add it until July.

Speaker 1 (05:08):
It's actually up about seventy percent since July, and that's
as a result of the government just making big investments.
It's not in every single portfolio that we manage, but
in a couple of our models we did add that
in as a result of seeing the writing on the
wall with Trump adding basically government funds to try to
boost up rare earths and lithium so we have enough

(05:32):
of it to build out our infrastructure for the electric grid.
So there's a little bit of push and pull with
Trump because on one hand, he's taking away some subsidies
for electric vehicles and things like that. But on the
other hand, he's making big investments into lithium battery technology.

Speaker 2 (05:46):
Which which you need for the EV So you do
have to look ahead and say, do we even have
the infrastructure and ability to have as many evs as
the government wants us to have or you know, one
side of the government wants us to have, And do

(06:06):
we have the ability to keep the AI infrastructure we're
building up and running. And the answer to that is no.
So they got to get going with if this is
the way the future of the US is gonna look
with a lot of new technology driving the way, you
got to look at the backbone and the infrastructure and
how it's all gonna get powered or you're gonna have

(06:27):
you're gonna have outage, power outages, You're gonna have internet down,
and it's gonna be causing big things to slow down
or shut down, and you just can't have that if
that's the way the economy is gonna be. So the
investment needs to happen there, and it doesn't need to
happen with just giving tax credits to different things.

Speaker 1 (06:44):
So let's let's go back a little bit and go
back to the takeaways from the third quarter DAWSMP, and
Nasdaq all hit record highs in the third quarter ending
what was the.

Speaker 3 (06:54):
Last day of the month about a week ago.

Speaker 1 (06:55):
Here, Tech having Nasdaq rose eleven point two percent, SMP
was eight point one, DIW was five point two. Nastec
performance was fueled by continued strength in the Magnificent seven
companies and those involved in our artificial intelligence. The Royals
performance underscores the resilience and strength of the broader market
in twenty twenty five. Some other takeaways, growth outperform value

(07:19):
in the third quarter, particularly any any growth stocks tied
to AI continue to outperform their value. Piers Russell one thousand,
Growth ten point five, Russell one thousand, value not a
bad quarter five point three. I don't think if you
have value in your portfolio and you make five point
three percent in a quarter, you're too upset by that.
So it was pretty broad based in terms of the rally.

(07:41):
Strong performers in stocks were you mentioned since the election,
but in the third quarter, tech, communication, services and consumer
discretionary small caps first time in a while narrowly outpaced
large caps. Russell two thousand up twelve point four percent
in the third quarter, and that can pairs to eleven

(08:01):
percent of the NASZAK and only eight percent for the
S and P small caps end of the trailing year
to date period up double digits. At the end of
Q two, small caps were down two percent on the year,
So big quarter for small caps. Corporate earnings were better
than expected. S and P five hundred earnings came in
higher than expected eleven point seven percent. Third consecutive quarter

(08:22):
of double digit earnings. That's this is the bottom line, folks,
I mean, this is companies. There's a reason the stock
market's moving. It's not moving on a bubble without earnings.
And that's the difference between now in nineteen ninety nine
so much nineteen ninety nine talk over the weekend and
on Monday, and nineteen ninety nine had half of the
market and the parts of the market that were in

(08:45):
a bubble and moving too much with no earnings at all,
so negative earnings, and why you have that sometimes in
the non publicly traded in the private equity world, where
these companies aren't making money yet in this environment, most
people can't invest there anyway, and you probably shouldn't because
that's the real speculative part of the market. More than
four hundred s and P five hundred stocks beat their

(09:09):
earnings eighty one percent beat earnings for the third quarter.
Foreign international investments outpaced US equities in the third quarter,
So great quarter for small caps, great quarter for international.
They're well ahead of their domestic counterparts year to date as.

Speaker 2 (09:24):
Well, almost doubling the performance this year if you depending
on what markets you look at. But international is never national.
Let's see here, this is international. I've got international up
twenty five point one.

Speaker 1 (09:35):
Excuse me, emerging up twenty five point one, International twenty
seven point five as of the end of the quarter.

Speaker 2 (09:40):
Yeah, so never negative this year. With all the trade
and tariff talk that we had in April, international was
positive the whole time. And it is just one year,
not even a year at this point, so it remains
to be seen if it could be held on. But
a lot of gross stories happening in the international markets too.

Speaker 1 (09:56):
I think if you string two years in a row,
because that's the big one in my if you look
back at the last decade, international has had one off
years where it's outperformed. If it goes to a second
year in a row, you may be in for five, six,
seven years of outperformance.

Speaker 2 (10:10):
Yeah, and you can really look at the five and
ten year performance and realize how much more the US
has outperformed. When you look at a ten year it's
about twelve versus eight, Or if you look at emerging markets,
it's twelve in our markets versus five on an average
anga for ten years. So there's a lot of room
to go. And a lot of these governments in the

(10:31):
foreign markets are even quicker to see what growth stories
are happening and partner with companies and use a lot
of government stimulus to join the party of the kind
of the new tech growth world. And I think that's
what's going to happen in Japan and why their new
party came into office.

Speaker 3 (10:50):
What doesn't hurt that their stock market went nowhere for
thirty years too.

Speaker 2 (10:53):
Yeah, you're at a pretty low valuation, easy to go
up a lot if you haven't moved for that long.

Speaker 1 (10:59):
Certainly, the fall all the US dollar a year to
date has helped a lot of those international investments, including
Japan as well. The FED cut rates. They cut rates
zero point twenty five percent in late September as cracks
in the labor market and a potential slowdown in economic
growth outweighed inflation risk. The quarter point was largely expected
and priced into markets. Investors were encouraged by the voting results.

(11:19):
Eleven out of twelve FMC members voted in favor. Low
member of voted for a rate cut. One loan member dissented,
but he wanted a rate cut that was even higher healthcare.

Speaker 2 (11:29):
I just talk on the rate cut just a little bit,
because how it matters to individual investors or any consumer
is how it's affecting the thirty year mortgage. A year ago,
the low point was six seven to five on the
thirty year mortgage. It ended the year at seven and
a quarter, So the low point was right before the
rate cut, and then it moved up even though we
got more rate cuts into the end of the year.
Moved up about a half a percent. This year, the

(11:52):
low point again was right before, but the thirty year
was significantly lower than the lowest point last year. Six
and a quarter. Moved up a little bit in the
last two weeks, up to about six point four, So
remains to be seen. Are we gonna keep moving up
into the end of the year, or because there's more
rate cuts to come, are we gonna get a little
bit more of a drop and see that thirty year

(12:14):
into the fives. I think that would be a pretty
healthy move if we get it into the fives. And
right now we are pricing in more rate cuts. The
one thing that the market is looking at are the
jobs numbers.

Speaker 3 (12:26):
Week.

Speaker 2 (12:27):
Job numbers are bad news. That's good for the FED
rate cut and therefore good news initially here for the market.
And I think the one healthy sign for the job
market are these job openings numbers. The Jolts numbers that
show the job openings increasing a little bit over the
last couple of weeks is a healthy sign. We're staying
above seven million, but the ADP numbers that the Fed

(12:49):
is looking at have been weak, and so it's more
likely to get at least one more cut this year.

Speaker 3 (12:53):
If not too.

Speaker 1 (12:53):
I mean, it's still priced in for two. We'll see
what happens. Healthcare was a laggard in the third quarter
on a three point eight percent gain. Healthcare remains the
only S and P five hundred sector that is negative
on the year. Ongoing challenges include drug pricing reforms, tariff
related uncertainty. We just had an announcement recently about tariffs
on drugs, but although Trump's bringing in the Pfizer CEO,

(13:17):
there's a lot of carve outs on a lot of
these tariffs as well. So Trump likes to make these
deals and then he wants the companies to come to
him and they carve out specific you know, specific areas
that they're not going to tear offf That certainly has
weighed on earnings expectations for healthcare. Additionally, investor capital has
shifted toward high growth thematic areas of the market, such

(13:38):
as AI. So although don't count out healthcare in terms
of an AI play.

Speaker 2 (13:44):
Yeah, Well, since you're you're talking about the quarter, since then,
a lot of these the even just news that Trump
schedules a meeting with the CEO is as a market mover.
In the first week of this this fourth quarter, healthcare
was the number one sector. But again, it's just like
when we're talking about with these international markets, you move
nowhere for a while, it's easy to have a big

(14:05):
week or a big month, and that's what's happening with
health care this week, right.

Speaker 1 (14:08):
And healthcare I still believe will be one of the
fastest sectors to benefit from alternative intelligence.

Speaker 2 (14:17):
Yeah, yeah, and individual consumers of that healthcare will benefit
because of not just new innovations, but lower cost because
it'll be quicker to come through R and D.

Speaker 1 (14:29):
What's the market trying to figure out because people are
losing weight GLP ones, people are losing weight. When people
lose weight, they get off other medications, their blood pressure
goes down. Maybe they're not diabetic anymore, and maybe long term,
maybe that's what's pressuring healthcare is if people healthier are

(14:50):
not on this drugs for the rest of my life, right, yeah, right,
so that could be. I mean, we've seen the pressure
that GLP ones have put on restaurant stocks and liquor spirits, beer, wine.
Those stocks are all doing very, very poorly as a
result partially of people getting healthier and GLP ones.

Speaker 3 (15:11):
Yeah.

Speaker 2 (15:11):
Yeah, it's not just a few people eating and drinking less.
It's millions and probably a growing number when the cost
for those comes down and they figure out a daily
dose for people at you know.

Speaker 1 (15:21):
I saw a stat too about what's the generation that's
twenty to thirty years.

Speaker 3 (15:26):
Older These gen z's.

Speaker 1 (15:27):
Yeah gen Z's are not drinking. Yeah, no, they are
not drinking. It's unbelievable to see the statistics. Unfortunately, brad
gen X is just off the chart, plowing right. Yeah,
but those generations, I saw some statistics about how little
they are drinking. Now, there might be a push for

(15:48):
cannabis stuff, but in terms of alcohol, it's really hurting
those companies. But I also don't don't forget that GLP
one part of it, because just like people don't have
an appetite when they're on GLP one as much and
they're not going out to eat, they're also not drinking
as much either. So that's it's kind of an interesting thing.
Bond yields. Let's staying on the third quarter here. Specifically,

(16:10):
core bonds represented by the Aggregate Bond Index rose two
percent in the third quarter. That's pretty good for the
bond index. You touched on the ten year Treasury and
mortgage rates a little bit. Inflation is above target, but
recent data has shown a trend that is getting closer
and closer to the Fed's two percent goal. This quarter's
rate cut and dubbish commentary has helped calm investor fears.

Speaker 3 (16:29):
And keep those interest rates down.

Speaker 1 (16:31):
I was actually surprised when the ten year treasury spiked
right after the FED meeting.

Speaker 3 (16:37):
It kind of seemed like.

Speaker 1 (16:37):
If you look at the chart that it was really
going to head towards four point three to four point five,
it didn't. It came down. It was really only a
one day move and then a steady decline since about
one tenth of a percent or I'm sorry, one a day,
and we're right back down into the low fours. I
think the other interesting thing is kind of this back

(16:59):
and forth you've seen with CD rates that people could
invest in. If you look at the six month CD
rate from two years ago, when you actually this is
just one year ago, we'll look at two point three
percent on the six month CD rate today it's one
point nine. A year ago, you had the ten year
treasury at three point eight five and today it's at

(17:19):
four point one to three. So you've had the ten
year treasury up and the short term CD rates down
probably more of a function of the two year but
the two years flat over that period of time and
CD rates and the banks I guess maybe realizing they
don't need to pay once they get people hooked on
this renewal of six month and twelve month CDs, they
don't have to keep paying too much, and they're slowly

(17:40):
bringing it down and so if you have some CDs
that are six month and one year, I think you'd
be surprised at what some of these renewals are. We're
going to see under two I think for a while.
Number nine on our ten takeaways from the third quarter,
gold had an impressive quarter. Brad reach to new all
time highs. And I'll maybe temper this excite because I
know a lot of people get excited about gold, and

(18:01):
we're not big gold people.

Speaker 3 (18:03):
Sixteen point eight percent on the quarter.

Speaker 1 (18:05):
Geopolitical tensions, weak US dollar, retail and central blank inflows
propelled gold were a record high, crossing thirty eight hundred
dollars an ounce, best year since nineteen seventy nine. I
saw recently they said gold just recently made a new
inflation adjusted all TIMEI well, that's great, new inflation adjusted
all time I The problem is that inflation adjusted all
time high was I believe nineteen eighty three.

Speaker 2 (18:27):
Yeah, so you only had to go forty years plus.
Yeah forty you made no money forty years to make
no money on inflation. You made a little bit of money.
But what's inflation over that period of time two point five?
So you basically made two point five a year. So
when you hear back to all time high, if that
all time high was a long long time ago, it
means you made no money if you invested at that peak.

Speaker 1 (18:48):
Number ten on our ten takeaways from the third quarter.
And I know folks might be listening to us to
be like, gosh, you guys, you sound positive, but you
also have some negative So that's the market we're in.
We're in a market where, yes, we're positive, there's a
lot of excitement, there's a lot of underlying things to
be excited about in our economy. Market's a little pricey,

(19:08):
not as pricey as ninety nine.

Speaker 3 (19:10):
Zee.

Speaker 1 (19:10):
This is us tempering a little bit, but it's a
market that warrants that tempering. Are we overdue for a
five or ten percent correction?

Speaker 3 (19:17):
Yes? Could we still be overdue in March? Yeah?

Speaker 1 (19:21):
Yeah, So it's it is that type of market. I
would say it certainly. As I said at the beginning
of the segment, it just doesn't warrant you being way
out over your skis or all out while you wait
for something. Absolutely, you don't want to be either one
of those. You want to come up with your baseline
allocation to risk with equities, No risk with fixed income

(19:43):
and other alternatives and be right in that range. You
don't want to be necessarily overweight or underweight, but number
ten investor sentiment, this kind of leads you to maybe
a little bit more caution. Equities continue their rebound from
the April lows. The S and P climb thirty percent
after the terror proposals in April. Investor optimism has been
fueled by several supporting factors. Tariffs are have been less

(20:06):
than initially feared and less disruptive, Expectations of further rate
cuts are coming, Enthusiasm around AI, and solid corporate earnings.
These tailwinds have far outweigh concerns over the potential economic slowdown.

Speaker 3 (20:19):
With some maybe some.

Speaker 1 (20:20):
Rough jobs numbers, but overall, investors and their investor sentiment
numbers that we measure are pretty high. We have to
talk about it bit, Brad. Oftentimes we will talk about
the investor sentiment at the low point, and we say, listen,
this is we had at the low point there in April.
We had some investor sentiment numbers where the bulls and

(20:40):
the bears. The bears outnumber the bulls by more than
two to one. They were over fifty percent for a
record amount of time. Well, of course, if you're going
to use that on one side, we got to look
at it the other way. Too optimistic, and that's where
we are.

Speaker 3 (20:57):
We're a little we're on the higher end of that investor.

Speaker 2 (21:00):
So let me take the other side of that. Coming up,
you're going to see with this government shutdown, the one
effect will be true. There is this illusion that it matters,
and that will change investor sentiment. It'll change the consumer
sentiment surveys, and so there'll be this one off. But
don't read too much into it because the market is
shrugging it off. It doesn't matter, but people think it matters,

(21:20):
and therefore we're going to get these one month or
one quarter weird numbers coming up. If you were relying
on that for an indicator to be in or out,
I think you got to shrug it off until that
gets out of those numbers. Well, let's say our first pause,
we come back. We're going to continue on this discussion
with the advisors A christ And Wealth Management Group.

Speaker 3 (21:39):
We'll be right back and welcome back. You're listening.

Speaker 2 (21:42):
The advisors A Kerst and Wealth Management Group, Rad and
Kevin here with you today. Kevin I mentioned in the
first break that the in today's stock market, the speculation
in some cases is really not there like it was
in nineteen the nineteen nineties, where you had all these
this ipo craze. I mean, there were there were IPOs
that would go up one hundred percent if they had

(22:04):
anything to do with technology or the internet, almost on
a daily basis, especially at the end, and so you
had all these new companies seeking capital to try to
grow that we're all dangling carrots for every investor in
the stock market. You just don't have that today. If
it's a company going public, it's likely already an established
company with earnings, or the venture capital company wouldn't even

(22:27):
take it public. And that's a good and a bad, right.
The hyper growth that's happening that used to happen in
the small caps is happening in private equity, or maybe
it's not happening in private equity at all. It's just
a venture capital company that is not going to make
anything available to any investor. Now that's good and it's bad.
It means that the earnings power of the stock market

(22:49):
is much better because you don't have all this crap.
That's in the publicly traded markets. It's bad because now
we have even four to one k's trying to get
access to people to private equity markets like never before,
because the private actory markets are where all these new
IPOs are potentially going to happen.

Speaker 3 (23:09):
And so.

Speaker 2 (23:11):
People have the ability to invest in indexes and exchanged
rate of funds that are doing it. And now people
have the ability to do it, and they're four to
one K. And the question is should they Is this
an aggressive piece of the portfolio that is not necessary,
or is it a part of the new growth paradigm
that they should invest in well, And.

Speaker 1 (23:29):
I certainly don't like in some way the way it's sold.
And the reason we're bringing this up is there's a
Wall Street Journal article talking about how it's coming. It's
coming to four oh one K plans and you don't
have to buy everything that's in your four one K plan, right, okay?
And I think sometimes the way it's presented is it
is a less risky part of your portfolio. I mean,

(23:53):
number one, it has really high cost number two, which
sometimes it's warranted, but the money's not as liquid like well,
it'll be a fund and my four oh one k
it'll be liquid. Well, we'll see, I think when when
we go through a downturn, we'll see if all of
these funds can remain one hundred percent liquid, I'm not
buying it. Well, how the market drops enough, they will.

Speaker 3 (24:14):
Not be liquid by their nature. They can't be.

Speaker 2 (24:17):
They're not publicly traded stocks inside the portfolio therefore, or
publicly traded bonds inside the portfolio. Therefore, it can't be
one hundred percent liquid. They have to have limited liquidity
because you can't either you can't invest all the dollars
or you can't be fully liquid. There's no way to
sell this stuff because it doesn't trade.

Speaker 1 (24:35):
So if you're investing in a startup company, you can't
just sell the startup company. Yeah to if people have
withdrawal requests. But let's let's talk about what it is first.
You know, private equity certainly is it's going and maybe
private debt as well is going to make its way
into four oh one K plans. Private equity firms, though,
let's talk about that specifically buy companies using borrowed money

(24:56):
with the goal of fixing them up and selling them
for a profit. Or sometimes they're investing in startups this
model has generated outside gains for some investors. That's the
key in the year since the financial crisis, especially institutions
like pension funds and high networth individuals, But they have
high fees and illiquidity, so be careful. They traditionally have
not been offered in four oh one K plans up

(25:18):
to this point. Trump administration is working on rules that
would let four to one K plans offer private equity
funds and other alternative investments to ordinary investors. Wall Street
firms are eyeing trillions of dollars of potential new business. Well,
it's likely to be a few years before the choices
show up on the menus, and individual investors will be
looking at the arguments for and against higher returns potentially,

(25:39):
But industry boosters say everyday workers deserve access to private equity.
Through the first quarter of twenty five, private equity beat
the SMP by two and a half percent per year
for the last twenty years, according to State Street. Advocates
also say private equity offers diversification via access to returns

(25:59):
from thousands of companies with more than one hundred million
in revenue before they go before they go public. As
you mentioned, something only investors in only traditional assets can
miss out on. The contrast is the public company population
in the US has dropped in the nineteen nineties to
around four thousand. We used to have the will Shire
five thousand, and.

Speaker 2 (26:18):
Now there's not even five thousand, seven five thousand stocks critics.

Speaker 1 (26:22):
Critics say there's several counter arguments. For one thing, they
say the stellar returns have faded in recent years, which
is true. State Streets data showed the two and a
half percent percentage point advantage over twenty years is only
point four over the last ten, So is it worth it?
And it becomes negative in the last five. It's actually
negative two point five percent per year in the last.

Speaker 3 (26:44):
Five negative to versus the market, versus the S and
P five hundred.

Speaker 1 (26:49):
State Streets said private equity returns have beaten weaker global
stock indexes that some firms highlight by a wider margin,
but this gap too has narrowed in the last five years.

Speaker 3 (26:57):
The trend is clear.

Speaker 1 (26:58):
In recent years the excess return has been diminishing, and
that's certainly maybe. I think even a function of the
size of the market. The law law of large numbers
does kick in the decade from twenty ten to twenty
twenty was a great period for private equity, and so
certainly lower interest rates play a role because if they're
borrowing money to invest in private.

Speaker 2 (27:19):
Equity for cheap for now, they're having to do it
at you know, five percent higher exactly, exactly.

Speaker 1 (27:25):
Lack of transparency is one of our biggest concerns. Yeah,
if you don't.

Speaker 2 (27:29):
If you don't value something every day, it's easy to
say it's not volatile because you haven't valued it, and
it's it's it's an illusion of lack of volatility. So
volatility is there, you just don't price, price it in
and show it.

Speaker 1 (27:41):
Unlike public stock funds and ETFs, whose returns are reported
on a daily basis on market moves, private equity generally
report their returns on a quarterly basis by metrics that
differ from mutual funds and ETFs, even then mainly just
to their own investors. One metrics, called internal rate of return,
reflects chunks of invest money as they go in and out.

(28:01):
There's also the public market equivalent, a Shorthand score that
compares the fund's returns to the public market. The critics
say the internal rate of return can be inflated by
the use of something called subscription credit lines, which allow
funds to borrow money against investors capital to smooth out
the capital call timing. So when they're getting requests for withdrawals,

(28:23):
they can't really sell, so they have to borrow money
to fund those withdrawals. And that's the danger, in our opinion,
is Okay, this is great when everything goes up, but
if they're borrowing money to fund withdrawals because these are
ill liquid investments.

Speaker 3 (28:40):
Now you're basically leveraging.

Speaker 1 (28:42):
And what happens in a crisis when the bank says no,
you need crisis, You're gonna need more withdrawals.

Speaker 2 (28:50):
You're gonna need more, So you either have to just
cut off withdraws and say no withdraws, it's not liquid anymore,
or or go.

Speaker 1 (28:57):
To zero I mean, and that's the port they're gonna
have to start liquidating assets at firesale price fire prices. Yeah,
and that's the problem if you if you have to
borrow money because it's an ill liquid investment to fund
to withdrawal. Well, there's not a lot of withdrawal requests
right now because the market's been good, So you really
have to plan for the period of time when you
have a lot of withdrawal requests. Well, what's your relationship

(29:18):
with your bank? Yeah, who's who's funding those withdrawal requests?
And will they shut you down in a crisis?

Speaker 3 (29:25):
Yeah.

Speaker 2 (29:25):
Like many exotic investments like this, the sales pitch is
it does great when the stock market goes up. Yeah,
so does the stock market. You don't need it and
tell me how it does once we get to the
first ill liquidity crisis, and then we'll really know how.

Speaker 3 (29:43):
It's going to do.

Speaker 1 (29:44):
Warren Buffett's famous quote is when the tide goes out,
you see who's swimming naked.

Speaker 3 (29:49):
That is the.

Speaker 1 (29:50):
Perfect example of what happens with these private equity firms
because you don't necessarily know what's under the hood. You
buy an ETF, you know exactly what you own, and
the liquid is there every single minute of every day.

Speaker 2 (30:02):
Well, it's funny you mentioned that, because there are ets
for this as well. And I looked up about a
year ago which one of these ets were doing private
equity and held the most in SpaceX. Just this is
before open AI probably was the one that everyone wanted
to invest in just to see what it is. And
so if any I'm not going to say the name
of it, but anyone can look it up, or you
can email me and I'll tell you which one this is.

(30:24):
This is one that owns twenty two different private equity
It's an ETF. It trates every minute the stock market's
open SpaceX is the largest holding, Open AI is the
number three holding, and all the holdings are once I
recognize most people would know probably half of these twenty
two holdings. It charges a two and a half percent fee.
It's got three hundred and twenty million under under management
or in the ETF. Okay, all these stocks have had

(30:46):
positive valuations in their round B, round C, all these rounds,
open AI, every one of them. The value hider space
X two. And yet the performance of this ETF year
to date I just looked this morning is negative fifty
one percent.

Speaker 3 (31:00):
So what's happening. It's leverage, it's withdrawals coming in and out.

Speaker 2 (31:04):
It's you can look at you can look at this
this ETF. You can see the chart, and it is
negative fifty one percent. So they're raising money to buy
more shares of things. They're clearly borrowing money to do something.
It is a downward spiral of the stock price. So
I think it's it's buyer beware of. You can look
at the holdings of some of these things, but you're

(31:26):
not gonna get the performance that you think And the
ones that are in the four one K are obviously
going to be highly regulated either gonna be highly regulated.
They're gonna be one of the largest two or three companies. However,
you're not getting what you think you're getting. There's there's
These companies are not going to just give up shares
of the best three private equity companies and have it

(31:47):
be a top holding.

Speaker 3 (31:47):
They're gonna give you a little bit. There's gonna be
one percent, so they can say that that open aye
is in there.

Speaker 1 (31:52):
But I'm not as concerned about the fee argument because
you know what you're getting with that. I mean, that
has to be high fees. There's a lot more than
that goes into it. There's no way it wouldn't have
high fees. But really the illiquidity is the biggest fear
for me. And when this gets added to your four
oh one K, you can give us a call if
you want to talk about it, but don't rush out.
You don't have to be the first one in if

(32:13):
you want to add exposure. But we can talk about
the best way if you really feel like you need
to add exposure. Because what's going to happen, Brad is
if when these are eventually added to four oh one k's,
if they have great five and ten year returns, no
one's going to do any research or due diligence. They're
just going to say, Wow, look at that ten year return.
That's great. I want to add it. So you need

(32:33):
to know these pros and cons that we're talking about.
Let's take our next pause. You're listening to Money Cents.
Kevin and Brad Kirsten will be right back. Welcome back
to the show. You're listening to the advisors of Kirsten
Wealth Management Group. Kevin Kirsten and Brad Kirstin happy to
be with you today. As a reminder, we are professional
financial advisors and our offices are in Perrysburg. If you
have any questions about any of the information we're talking

(32:53):
about today, give us a call at our office four
one nine eight seven two zero zero six seven, or
if you'd like a set up a console review your
own financial plan once again four one nine eight seven
two zero zero sixty seven, or check us out online
at Kirstenwealth dot com. While we're on the subject, brad
of things that might get added to your four oh
one K or things that are available that are new.

(33:14):
There are a lot of cryptocurrency ETFs now and we
don't recommend them to our clients. We have purchased some
of them for our clients who would like that separately.
If it's an unsolicited thing and they want us to
do it, we'll certainly do it for people. But we
haven't incorporated into models and things like that yet, and
there are some concerns. I mean, I'm definitely concerned with volatility.

(33:36):
I'm definitely concerned with where does this fit in the
overall mix of risk. But Wall Street Journal article talked
about cryptocurrency ETFs and some things to look out for
and some things that you have to be careful of.
And the gist of the story is one of the
things that's the most important thing, especially in a new
asset class, is are you tracking the thing you're supposed

(34:00):
to be tracking. Because many people have been nervous over
the years buying crypto, getting a wallet and all this
is password. You can get hacked, it can get stolen
if I lose the password, I'm gonna lose all my
money all these other things. And so when the ETFs
came around, folks were like, okay, great, I understand that.

Speaker 2 (34:21):
Even I was for a client who said I want it.
My concern is, do you have the ability to not
have it get stolen? Do we know that your computer
doesn't have malware on it just waiting for you to
do this? And if it's an ETF and all it
is is part of your you know, your online trading portfolio,
if you're gonna do it, okay, that's fine. You're now

(34:41):
now all you're doing is basically trading an index, just
like you'd be trading the S and P five hundred.
I mean, it's the holdings are different. But at the
very least, we don't have to worry about, uh security,
any anything different than the security you'd have to worry
about with your username and password for any website. It's
doing it with an action well cold storage of a

(35:02):
wallet and having to make sure that if there's so
many issues the way it used to be, But the
ETF is probably the safest way somebody could do it.
It's not nothing's fool proof, but it's a lot better
than it used to be with if you want access
and you want the potential for positive performance that's tracking it,

(35:25):
then then by all means this is the way to
do it. Now the problem is is it actually tracking?
Is there a lot of tracking error with what they're doing.
Are you doing a stable coin and not the actual currency.
There's a lot of a lot of education. Somebody has
to have to know what they're going to own and
know that it's going to do what they're going to
actually get the performance that they think they're going to get.

Speaker 1 (35:46):
And you it's hard to know what are the differences too,
because you have these bitcoin strategy ETFs. It's not a
recommendation as a buyer sell this, we're just trying to
provide information what's called the strategy ETFH. Then you have
the spot bitcoin ets which were offered by the major
investment firms that are tracking it, and then of course

(36:07):
you have the crypto trusts as well, which it's like
there's all these different things, but the clear winner has
been just the traditional spot ets, which is the most
straight down the middle, boring ETS that you would see
at some of the major firms, but even that has
tracking air. The bitcoin strategy ets the tracking air is

(36:28):
more than one percent each month, whereas the spot ETFs
are about point point point seven to point eight per month.
But still, you think you're buying one of these cryptocurrencies,
and in any given month it's plus or minus one
percent for the most part, So just be careful. I mean,
if you look at the underlying thing you're trying to buy,

(36:50):
it might be up ten, and you might be up nine.
You can also be up eleven. But that's the average
tracking air that has happened. But something so new, I'm
actually surprised it's not higher.

Speaker 2 (37:01):
Yeah, yeah, I mean there's so much volatility you would
think it would be higher. My I think we're well
past this. You and I a couple of years ago,
we're talking about the the the spillover risk if something
were to happen, or if there was a major hack again,
and the systemic risks to other cryptocurrencies.

Speaker 3 (37:20):
I think we're just well past it.

Speaker 2 (37:22):
If there's a if there's if there's any kind of
major hack kind of like we or downfallow we saw
with FTX, we're gonna have a downturn in the actual
stock market because of how intertwined everything and when there's
just no way to avoid it.

Speaker 3 (37:35):
And when you look.

Speaker 1 (37:36):
At Bitcoin in particular, or any of any of these
cryptos and you lay the Nasdaq over top of it,
it's kind of hard to look at it and say, Okay,
if the Nasdaq has a big correction because AI gets overinflated.
People really think that these things aren't going to drop, right, No,
they're not non correlated. In fact, they're very correlated, especially

(37:58):
to the Nasdaq. Yeah, you know what, they're not correlated
to consumer staples, healthcare, util energy, right, yes, they're not
correlated to that, but they are. So if you think that, oh,
we've now matured and this is never going to drop,
that is ridiculous. This is one of the most aggressive
things that you can buy. We're talking about any crypto anything.

(38:19):
I mean, ETF great, at least it's liquid. But then
you start looking under the hood and you look what
they're actually buying. They're buying a lot of derivatives of
things we'll see. I mean, you really don't know what
you have with a lot of these new investments until
you go through a crisis.

Speaker 3 (38:35):
Yeah.

Speaker 2 (38:35):
Yeah, And the same thing with each individual stock. I
have people all the time that may be able to
inherit an individual stock, and I don't care if it's
some blue chip out there, and they'll say something to
me like, well, it's pretty sensible just to hold you know,
hold that that's not risky, right, Well, if it's one stock,
it's very risky. It's off the charts risky. It's not

(38:55):
if you were to look at a whole portfolio of
how many stocks and how many bonds, you're probably talking
about thousands of stocks and maybe four thousand bonds compared
to any one stock. Any one stock, I don't care
what it is, could go out of business tomorrow. There
is nothing stopping it from getting cut in half in

(39:16):
any one year, even if.

Speaker 3 (39:18):
It's a good year.

Speaker 2 (39:19):
Look at the top holdings of the Nasdaq from December
to April of this year, a lot of them got
cut in half. Okay, if you said, oh shoot, I
don't want it to go down any further, and you
got out at the bottom, then you got cut in half,
and then you drew a line in the sand, and
that's how much you were down. If you're buying, like
you're mentioning the crypto or the crypto ETFs, you got

(39:41):
to be prepared to get cut in half in a year.
And if you're buying individual stocks instead of a whole portfolio,
you have to be prepared to get cut in half
at any point in the year.

Speaker 1 (39:48):
The people I'm concerned about other people who use it
and talk about it as a justification where they say, Okay,
I'm gonna own this because it's a hedge against money
print for example. Let's use that as an example. It's
a hedge against money printing. Okay, it might be, but
that doesn't mean it can't drop, right. Okay, that does

(40:08):
not mean if you could buy something that's a hedge
against money printing, that does not mean it can't drop
fifty percent. And I bring it up with the individual
stocks because I think you have people saying, well, it
pays a dividend, so it's safe. It doesn't mean it
can't get cut in half, right, And so with any
investment period, whether it's an individual stock or private equity

(40:29):
as we were talking about, Yes, if you put three
percent or five percent of your portfolio in there, you
don't have to worry about it. But it's I've seen
a lot of folks who have gone a lot higher,
and that's where you're at a very very big lease.

Speaker 2 (40:41):
Are all things we talk about after our market has
gone up. You never hear any of this talk individual stocks.
I'm going to buy this exotic thing. We didn't hear
about it. In twenty twenty two. You get a ten
month downturn, Were they talking about it? Add in private
equity to four to one ks? Then no, are people
calling me up and saying, what do you think of
this individual stock that I heard Nancy Pelosi's buying? No,

(41:03):
this is the type of thing you do talk about
after a big run in the market, and so one
of the reasons that we're hedging back and forth between
it's a good time. However things some things seem frothy.
This talk from individual investors is a frothy kind of talk, right,
And really.

Speaker 1 (41:19):
You look at some of the targets that we've put
in place in our firm for the year or there.
You look pretty close S and P five hundred starts
getting to seven thousand. It's really hard to not lower
risk at that point, and we're just not that far
away from that. Let's take our last pause. You're listening
in money sense, Kevin and Brad Kurston will be right back.

Speaker 3 (41:39):
Welcome back. To the show.

Speaker 1 (41:40):
You're listening to the advisors of Kirsten Wealth Management Group,
Kevin Kirsten and Brad Kirsten wrapping up here today just
one sort of planning conversation. We talked about getting your
portfolio and balance Brad rebalancing back to your original risk profile.
And sometimes, especially if you have a large non retirement count,

(42:00):
that can be a difficult proposition because you could start
looking at your owner lying portfolio and say, I'd like
to I went to eighty twenty. I'd like to go
back to sixty forty stock to bond, maybe even a
little bit less. But I don't want to pay all
these capital gains, whether it's ETFs or maybe you have
some individual stocks as well. And one of the things

(42:20):
you can do is, certainly you can start with specific shares,
specific shares and when you bought them, when you look
at when we're in there and we're making adjustments, we
go in and we pick the specific lots. So you
might have an ETF where you added some money at
the bottom in October of twenty two. Okay, you're not

(42:41):
gonna want to sell those they're up thirty forty percent
or more. But you might have some either dividends and
capital gains that were reinvested in January of twenty two. Right,
it's gonna have a much lower tax excuse me, a
much higher tax basis and a much lower capital gain.
So looking at what those lots are, whether it's an

(43:02):
individual stock and ETF or even a mutual fund, is
very very important when you're reducing risk because you can
reduce your tax bill tremendously. So if you think about it,
you know, you buy something for one hundred, you sell
for one hundred and fifty, the cost basis is one hundred,
the gain is fifty, and that's that's sort of an
easy example. But most people, when they have ETFs or
even individual stocks, have reinvested shares from all over the place,

(43:28):
different years, different periods of time when the market was
at a high point, when the market has a low point.

Speaker 3 (43:32):
So you gotta pay attention.

Speaker 2 (43:33):
So maybe you can't find lots that are at a loss,
but you might be able to find lots or enough
of them that are just not at huge gains, and
then you're hanging on to only your your highly appreciated
lots in the portfolio. It's also the reason that when
the market gives you an opportunity. You need to do
your tax loss harvesting then so that when we get
to this point now, maybe you've banked some tax losses

(43:56):
from April and that will offset any of the gains
from reducing risk now right, And so some firms don't
allow it.

Speaker 3 (44:05):
We go in there.

Speaker 1 (44:06):
We could pick any lot we want. Some firms are
like no, first in, first out or last in first out,
or average cost basis, whatever it be. But we could
go in at our firm, we can pick whatever we
want in terms of which lots we want to go.
So let's you know, you look at what your options are.
I mean, many people don't have a lot of tax
losses to harvest at the moment, especially if you did

(44:27):
some smart tax lost harvesting harvesting, which we did in
March and April. But you look at the way that works.
If you did some smart tax losce harvesting in April
and now you have huge gains, well you could sell
because you might have some losses to offset that. And
even if the losses are still more than your gains
that you realize you get up to three thousand dollars
per year as a write off.

Speaker 3 (44:47):
But even if you could reduce some risk.

Speaker 1 (44:51):
And you have some losses to offset because you did
smart tax lost harvesting, that might give you the wiggle
room that you need if you're you know, with.

Speaker 3 (44:59):
An advice or was already doing that.

Speaker 2 (45:00):
If it's in a non retirement portfolio, might be able
to make some sideways moves on things too while reducing
risk and other things that are highly appreciated. So you
might make a sideways move on a tax free bond,
capture a little bit of tax lost harvesting now, and
still take that position over to a very similar fund
or taxmuni position, and that's not really changing for you,

(45:23):
but then it allows you to do a little bit
of reduction of risk of say your large cap part
of your portfolio.

Speaker 3 (45:28):
Right, So you have.

Speaker 1 (45:29):
To check with your specific firm to see if they
allow for this specific thing, and they mentioned some names
that do allow for specific lot id selection. So there
are some big firms that do, but there's a lot
that don't. So keep in mind this when you're looking
at your cost basis, your reinvested dividends and your capital
gains count each reinvested dividend on a holding in a
taxable count has its own basis, so sometimes you're not

(45:51):
even selling your original shares. You might have oh I
originally bought that in two thousand and five, Well that
doesn't matter. You might have enough that you could sell
if you want to lighten up your position from the
last couple of years and not have nearly as much
capital gain. So the other thing to look at is
look at Trump's megabill that added several provisions that expanded

(46:12):
tax rates this year, such as tax breaks for seniors,
additional standard deduction, and additional state and local tax righte
offs as well. This can raise the amount of income
that affective filers can have before owing any capital gains tax.

Speaker 2 (46:26):
Yes, you want to top out that bracket because you
might have some capital gains that'll be at zero, But
even if you do have long term capital gains, it's
at a much lower rate. And as long as you're
not pushing yourself, I would say above the twelve bracket,
you might as well just capture those while you can,
because yeah, the next four years we're gonna have some
pretty low taxes first.

Speaker 1 (46:46):
So some people might be sitting there saying, well, I
don't want to do that because I'll owe capital gains. Well,
it's ninety seven thousand of taxable income for the zero
capital gains rate on a for joint filers, forty eight
thousand for singles. You're well under that. You may be
able to reduce that risk like we're talking about, or
just you know, realize some capital games, or take a

(47:06):
withdrawal whatever you might need and pay nothing and pay nothing.

Speaker 3 (47:10):
Especially that's over sixty five.

Speaker 1 (47:12):
That is not over sixty five, it's even higher. So
pay attention to the wash sale rule. If you purchase
it an identical holding within thirty days. You So if
you did that back in April, and you say, oh,
I tax lost harvested. I sold my individual stock and
then a day later I bought it back.

Speaker 2 (47:31):
Get you didn't do tax loss harvesting. Yeah, it's not
going to be off. It's not gonna be on your
on your ten ninety nine. They'll take that off, that's right.

Speaker 1 (47:37):
So and then obviously big life events change cost basis
rules as well, so pay attention to that. Certainly, death,
even a divorce, you have to pay attention to how
that basis is transferred. Over All these other big life
changes can be a nightmare for tracking basis. But even
on death. I see people say, well I'm going to
sell this. It's like, well, who are we selling it for?
Who are we selling it for it? Well, it's my night,

(48:00):
your old mother. If you have a rollo cost basis
in that scenario, it's probably not worth realizing any capital
gains unless you're realizing it at the zero rate.

Speaker 2 (48:10):
Yeah, and when that happens and you inherit it, it's
not automatic for most people that that cost basis gets updated.
You do have to manually do it with most custodians.

Speaker 3 (48:17):
That's right.

Speaker 1 (48:18):
Thanks for listening everyone. We'll talk to you next week.

Speaker 2 (48:25):
You've been listening to Money since brought to you each
week by Kristen Wealth Management Group.

Speaker 3 (48:29):
To contact Dennis Brad or Kevin professionally, call four one
nine eight seven to two zero zero six seven or
eight hundred eight seven five seventeen eighty six.

Speaker 2 (48:38):
Their email address is Kirstenwealth at LPO dot com and
their website is Kirstenwealth dot com.

Speaker 3 (48:45):
Opinions voiced in this show are for general information only
and are not intended to provide specific advice or recommendations
for any individual. To determine which investments may be appropriate
for you, consult with your financial advisor prior to investing.

Speaker 2 (48:58):
Securities are offered through LPL Financial member FENRAP s I,
p C, m HM,