Is Staying the Course Still The Best Investing Strategy? (Episode 29)

Sure. Well, thanks Kate, for having me on the show. I agree with you. It's really confusing as to what to do right now. We're facing just this incredibly unusual set of circumstances. We've got higher inflation higher than we've seen in since the seventies. And then, you know, and more recently some growth fears popping up. And then the fed is on a course that we've never seen before of hiking rates and reducing their balance sheet. So liquidity is coming out of the system like we've never seen before. So what do you do amid this volatility? You know, I don't think staying the course is the right advice in the past. It has been because there was a mentality that buying on the dip is always the right thing to do. The problem now is that most investors' allocations are so concentrated in growth stocks, which is really the tech area. And that's the part of the market that's getting beaten up most because it's so sensitive to higher interest rates. And that's the problem.

Yeah. And it was, you know, it, the mantra was growth at any price,

So, you know, buy your tech stocks, they will always go up. That's the, you know, innovation digitization, that's the future. I'm not saying that that has completely broken down, but I think we've gotta be open minded about a regime change. And so yes, stay the course makes sense. You don't wanna sell all your equities and certainly not when they're off 15 to 20%, but it does deserve looking at your portfolio and saying, do I have inflation protection? Do I have a balanced portfolio between growth and value, which would include, you know, more energy related stocks or even commodities? Uh, so that's the advice that I'm saying that you've gotta look at your equity portfolio and make sure that it's got exposure to the right economic environment and we're in a very unusual economic environment right

Yeah. So I think let, if we can take a step back for a second, the most important thing for every investor is to think about their investment horizon and what are their liabilities, are those liabilities coming up in the next year, the next three months or the next five to 10 years? And that is gonna guide your decision as to how much you want to be betting on the markets. I personally think that trading the market is really dangerous. You know, nobody can get that exactly right. And we're seeing tremendous volatility right now. And you know, that's gonna cost you in transaction costs, going in and out, you know, today were the market's up two days ago, the market was down. I really don't think even the smartest among us, present company excluded can get that right every day so that I wouldn't do. But I do think that what you wanna do is have a philosophy and a framework. And the philosophy is that over the long term stocks should win, right. That the normal pattern of the economy is to grow. So that's your strategic allocation, but within that, you should be thinking about making tilts within your portfolio based on the current economic environment.

Yeah, that's a great question. Uh, because the implementation is so important in getting that right. So, you know, this is really about being a bit more defensive in your allocations. So I am suggesting to clients that they do reduce some of their equity allocation and to focus on the more defensive parts of the market. So when I look at us versus international, for example, I'm recommending staying overweight, us stocks, particularly versus Europe, because Europe is really in the crosshairs of the geopolitical conflict, inflation, et cetera. And I am also suggesting reducing risk by not being overweight, emerging markets. So that's a biggie. Everyone has plowed money into China and the rest of emerging Asia, Latin America, and just what's going on with food prices and geopolitical risks because of Russia, I could go on and on, but I just think emerging markets right now are vulnerable. So stick to more, you know, defensive us equities and defensive sectors.

I think it's fair to say that investor psychology would be depressed because yeah, you know, fixed income is supposed to be your hedge. That's, what's supposed to protect you in volatile markets and equity sell offs, and it hasn't done its job. But I think again, understanding the context of that is important. So the reason fixed income is done so poorly is because it is adjusting to a central bank that has signaled to the markets that they're about to raise rates. And they're about to raise rates a lot. So the market, you know, in fact has been leading the fed, I would say the fed has been behind and they so much has admitted that. I mean, chairman Powell basically said, yeah, we were late to controlling inflation. So now they gotta play catch up. And that means signaling to the markets that we've got, you know, at least 200 basis points of tightening ahead of us.

So, you know, what I've been saying to clients is that a lot the market has priced in a lot already rates are up 150 basis points. Mortgage rates are over 200 basis points. And now we're actually seeing signs that the economy is slowing down. So it is possible. And this is, you know, a bit of hope thrown in here. It is possible that let's say 3% on tenure yields might be a plateau in rates and that it's at least better value than we've seen in a long time. And if you're in corporate bonds, you're looking at, you know, four and half percent yields now. Well, that's a pretty competitive yield compared to equities. You know, if you look at dividend yields, et cetera. So I'm thinking that actually fixed income has some better value and that it will go back to providing some protection because we're at higher levels and growth is starting to show the effects of fed tightening.

I think that's an exaggeration. I empathize with our listeners that 60 40 has been terrible performer recently, but there is no other asset class besides fixed income that plays the same role in a weaker growth environment. So the whole concept of 60 40 is to give you balance when the cycle turns over. And what I think is gonna happen is the Fed's gonna tighten or the market will do it for them. And we are going to see slower growth and that should help fixed income. So maybe it means reducing your allocation to fixed income or decreasing the interest rate risk, but don't abandon it entirely. I think it still plays a role and it's gonna play more of a role when yields are higher. So I think that's hyperbole and makes for a good headline, but I am not of the opinion that you should completely get rid of your fixed income cuz face it. If you're in, you know what other asset class you can be in cash. I mean that is, you know, a more competitive asset class also with yields going up, but it won't give you any capital appreciation the way bonds would or an intermediate portfolio when stocks sell off. So, you know, maybe hold some more cash, reduce some of your very interest rate, sensitive, fixed income, and then also look for protection again, it's that inflation piece that portfolios don't have any exposure. And in my framework, I think having some commodities oriented assets makes sense.

Yeah. So commodities, you know, from the outset, they're very volatile asset class, as you've said, they've been performed incredibly well over the last well year to date energies of 50%. So we're talking about wild rallies there, but the, what we're saying on the research end is that you've got the geopolitical issues going on. As you said, Ukraine, can't get their wheat out of their ports. Energy is threatened because of sanctions both, you know, the Russia not shipping and the us sanctioning, but we see more structural issues in the commodities market and shortages almost across the board and particularly in energy and metals. So the idea is that companies are really responding to shareholder pressure, not to produce when prices go up. That used to be the self-correcting mechanism. So prices would get really high CEOs would say, okay, we're gonna produce a ton and prices would come down now because shareholders are demanding capital back CEOs. And frankly CEOs are getting paid to improve shareholder returns. They're not investing. And so production is down and inventories are really, really low. We're looking at shortages of energy and shortages of a lot of metals. And so that means that we could be in a long term cycle where commodities continue to perform well. And you could express that in the actual commodities, but there are strategies that use, you know, energy equities and things like that, which are substitutes for commodities.

I mean, I'd be very careful about using energy ETFs. I would use a, you know, I prefer well diversified baskets of commodities that would include metals and agriculture. And when I've looked at those ETFs, they're very concentrated in one or two names. So I think you gotta be really careful about that. And so I would prefer a more diversified basket and you know, let's not forget inflation protected bonds. There are tips that could do well in that environment. And frankly, if we have stagflation gold, I'm not a gold bug. I'll use air quotes too.

Invisible air quotes. But you know, gold is one of the few asset classes that can protect you in a stagflationary environment. Mm-hmm

Exactly. Because remember we've got two different kinds of, well, there are four different economic environments that I consider there's Nirvana, which is that growth is great and inflation is low. I think we can say that we are probably not in that environment today. And then there are two inflationary environments there's inflation with growth and inflation with weak growth and higher inflation, weaker growth is stag,

So, you know, we've got that dynamic right now. And the question is, are we now moving from that dynamic and transitioning to a more recessionary dynamic because the fed is really putting the pedal to the metal on rate hikes and quantitative tightening. So I think you've gotta be straddling some of these environments and making sure that you've got the asset classes that respond positively in those two different environments.

Avoid that? Yeah, no, that's a, a great point. And when I've done the research on rebounds, the reality is that if you make wholesale changes and, you know, sell your equities, you become a forced seller, uh, which is like a terrible position to be in. And sadly that's what happened in the financial crisis in 2008 to a lot of people. And what happened after the financial crisis is that literally like within the first few weeks of the rebound, most of the gains were made. So the lesson we learned is you may be smart enough to avoid losses, but you won't be smart enough to get back in, in time for the rally and the rally can happen so quickly and so dramatically that you really don't want to miss that. So that's why, you know, as I said, at the beginning, at this point, you don't wanna sell all your equities or, you know, go from 60 40 to, you know, to reduce, you know, by 10, 20%, but you can on the margins, change your sector allocation. So switch some of that tech exposure to, you know, dividend paying stocks,

Take your international exposure and move it back to us. Equities, take your, you know, if you have a lot of credit risk in bank loans or high yield, reduce that risk and go into mortgages and high grade corporate bonds, add some cash

Yes, there will be. And that's the good news.

Sure. So I'm the global investment strategist at Hartford funds and I work at Wellington management company and you can find my materials on the Hartford funds website. I publish insights every month and a quarterly publication every quarter. And we're actually doing a webinar at the end of June if folks would like to join. And in that case, they should take a look at the Hartford funds website and see if they can contact a representative from there.

Thanks for inviting me Kate. It was my pleasure.