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Portfolio Management in Market Downturns (Episode 39)

Portfolio Management in Market Downturns (Episode 39)

Details Transcript Guests

Today Kate chats with Clark Kendall, CEO of Kendall Capital. Clark offers some practical steps to allocate your money, as well as invest for tax advantages.

Kate Stalter
Host

00:04

Welcome to The MarketBeat Podcast. I'm your host, Kate Stalter. And in this show, we cut through the noise and give you real market insights from professional investors, traders, asset managers, and analysts, our guests put the market developments in context and give you actionable information to make you a more successful trader or investor let's get started

Kate Stalter
Host

00:33

In today's episode, doing something little different, taking a 30,000 foot view of your portfolio, no buy or sell recommendations today. No trades. Instead, we're looking at how to manage your retirement portfolio through the bear market, with thoughts on using dividend paying stocks, mutual funds and how to manage for taxes. And that's a really important element for investors. It can make a whole lot of difference in your overall financial position, but I know that it gets overlooked as stock trades get the big headlines. Ultimately I'd argue. And this is from my experience that your tax management in your portfolio is equally as important as your security selection. And you know what I'd even say in a lot of cases, it's more important today in this conversation with financial planner and asset manager, Clark Kendall, you will get some very concrete tips on saving for retirement in your IRAs, including whether you should consider a Roth conversion, which can save you a lot of money over time.

Kate Stalter
Host

01:42

If done properly. Clark also shares his thoughts on the pros and cons of mutual funds and how you can effectively use single stocks in your portfolio, along with a strategy for using those stocks, not only for price appreciation, but you got it to capture tax benefits. You'll also hear Clark's approach to diversification, which includes income generating securities that can add to your total return even in a bear market. So as you can tell lots of really practical money management tips today, which every investor needs. Here's my interview with Clark Kendall, CEO of Kendall capital and the author of middle class millionaire. All right, so Clark, as we are speaking today, we're looking at a host of things that are legitimately scaring investors and retirement savers. We've got the S and P and bear market territory. The NASDAQ has actually been there for quite some time already.

Kate Stalter
Host

02:46

You know, meanwhile, we've got inflation at a 40 year high prices rising in average of 8.6% since may of last year. And you know, Clark, I was at a birthday party last night, and the chatter did turn to people being nervous about their portfolios and about inflation. So glad to talk to you today because you have some very specific advice about navigating these challenges and for the audience, this is not about stock picking. You cannot stock pick your way out of this highly unlikely anyway, although you can and should manage your investment mix very carefully. So Clark let's do a quick summary of where we are, and then we'll get into some ways to get through this with the best outcome. Well

Clark Kendall
Guest

03:31

Quickly the macro point of view, first of all, take a deep breath. The stock market coming down 20% is pretty much a common occurrence over the last hundred years. The stock market being down 20% happens about once every six years, there seems to always be a different excuse of why the market's down. So take a deep breath and let's manage through this crisis. Looking in the rear view mirror, you know, my opinion is, you know, 24 months ago we had COVID and the federal government basically sent out a lot of money to keep people home, keep 'em safe. We paid people for that safety. Then the federal reserve came through and they dropped interest rates to stimulate the economy. Both of those things worked quite well. We did not have mass food lines. People standing in line for food. The economy has done strong and basically the federal reserve led by Dr. Powell basically said, last fall said, you know what? We're gonna try to steer the economy back to normal, a normal equilibrium we've taken away the unemployment benefit. We're raising interest rates to give us back to a healthy, balanced economy. And I think sometimes it's a little bit of a Rocky road and I think that's what we're going through right now.

Kate Stalter
Host

04:50

And that's a really good summary you made right there of what's happened. What's gotten us here. Obviously there's a lot more to it, supply chain, so on and so forth, but that's a great way for people to frame what's been happening. So let's cut to the chase. You work with clients who are investing for retirement. And right now, as I mentioned, a lot of people are very frightened that their retirement plans may be evaporating right before their eyes. And I'm sure you're hearing some questions from clients. So what are you telling people now about this?

Clark Kendall
Guest

05:21

Well, as I said, during bear markets, which happen more common than we think there are basically many different things we can do. Stock market goes down. If the beginning of the year you bought Coke and it's down 20%, you know, sell it, realize the loss, buy Pepsi. If you really like Coke, better than Pepsi, wait 31 days. And basically, you know, go back into Coke. But basically if you look at it realizing losses, you can either offset other gains in a taxable account, or you can offset ordinary income up to $3,000 a year. I mean, that's a great opportunity. If you're in a retirement account, we manage about a half billion dollars for about 200 families. And about half the money we manage are in retirement accounts. And for many people, at some point in time, those retirement dollars have to go through the income tax loop either when you retire or eventually, you know, your spouse or children will have to pay taxes on it.

Clark Kendall
Guest

06:19

When the market drops, you know, let's say pick a round number 25%. If the market drops your retirement account drops 25%, you could actually convert that pre-tax dollar money to a Roth account. And if you had a hundred thousand in a retirement account and it's down to 75,000, go ahead, pay taxes on the 75,000. Now you have it in a Roth account that Roth account can continue to go tax free. And basically distributions can be tax free in the future. And in some respects, you're getting a 25% discount on paying that taxes. Now, when it goes back to a hundred thousand dollars, you know, it can continue to keep on growing, compared to the person who did it at the beginning of the year. That's not for everyone, but in unique cases, that does work very well. And then the third strategy during a bear market is, you know, dollar cost average. If you're a young accumulator, quite frankly, remember it's better to use when you go to the grocery store, use a 25% coupon to buy your groceries. And here we're giving across the board 25% discounts on funding, your retirement accounts for those accumulators,

Kate Stalter
Host

07:35

You know, Clark, it's interesting because before I became an advisor, many years ago, I actually came from the stock trading world. And one piece of advice that I think stock traders do not help people with is by saying you don't wanna catch a falling knife. And what they mean by that is don't buy because things may go down even more. But the principle of dollar cost averaging is even more compelling in my view now because you're not trying to time the market and catch the exact bottom. That's just a, fool's errand, very unlikely that anybody can do that. Isn't it? It

Clark Kendall
Guest

08:15

Is very unlikely. You know, I've been in the investment business for more than 30 years. I started when the Dow was at a thousand, so I've seen many bull and bear markets over time. The two biggest mistakes individual investors make in the market. One is having a concentrated position. Tesla's gonna save the world. Amazon's gonna save the world. Bitcoin is it's gonna be the cryptocurrency. That'll take us the next one years. And they'll put all their money in just one security. Quite frankly, 30 years ago, we saw that with Blackberry. We saw that with AOL, we saw it with GE at the turn of the sanitary. So basic their success. The other big mistake is timing the market. It twofold, you know, you gotta time when the market's gonna go down, but you also have to time when the market's gonna come in. And I always use the reference as like someone carrying a pistol in their hand, trying to time the market is very difficult. And usually what happens. People either shoot themselves in the foot or shoot themselves in the head trying to time this market. I think what's a better strategy for that individual investor that we employ is we're not trying to time the market, we're trying to manage through it. And I think there's as always, there's great opportunities to manage through the market.

Kate Stalter
Host

09:31

Very different mindset. You're exactly right. You know, you said something else too about tax loss, harvesting. And it's interesting because what occurred to me Clark, is that people have kind of gotten out of the habit of looking for that in the past couple of years, haven't they? And here's an opportunity

Clark Kendall
Guest

09:47

Or quite frankly, everyone thinks that's only an exercise you go through in November and December. It really makes sense to do it when the market's down and then because the market might not be down in November or December to be quite Frank with you. And you say, ah, what a great opportunity I had in June and July.

Kate Stalter
Host

10:07

That's a very good point. Don't base all of these decisions purely on the calendar year and where we are. Now, you have a couple views on the bond market. Tell us how investors should be approaching that right now.

Clark Kendall
Guest

10:20

Well, bond investments are good. I always say utilize short term investment products for short term needs. If you're a parent and you've gotta pay, you know, fall tuition for your kids, it's due in August, that money should not be in the stock market. Even, you know, next spring's tuition. Uh, you should have CDs tips, you know, inflation protection securities. If you're paying a nursing home bill, you know, make sure you have enough cash on hand and to use those things, we normally will keep two to three years worth of kind of safety money on hand for the client. Because I remind clients when interest rates go up, if we, we have a three and a quarter percent, 10 year treasury right now, if interest rates go up to 4%, all things being equal that bond will drop, you know, roughly seven, seven and a half percent, and you're locked to three and a quarter percent for the next 10 years.

Clark Kendall
Guest

11:18

So I'd be very cautious about going into the marketplace to buy those fixed income securities. And as we know right now, 10 year treasury at three and a quarter percent is a 5% lower than the inflation rate. So your actual purchasing power is being taken away roughly 5% per year. So I don't think the fixed income market is very attractive. And historically the 10 year treasury has been historically about one, 1.5% above the inflation rate. So there's still a great divergence between the two that really needs to come together. I E I'd stay away from the bond market.

Kate Stalter
Host

11:56

Okay. Because historically many investors and advisors have used fixed income as ballast as a way of dampening, the volatility of stocks that has not been working so well lately, if investors do hold bonds, particularly maybe some of these longer term ones that are more sensitive to interest rates, what should they be doing right now?

Clark Kendall
Guest

12:20

Well, I tell you one of the, one of the most attractive segments of the market, I think right now is, you know, dividend paying stocks. And for example, we call no one talks about the old dogs of the Dow, the 10 highest yielding stocks of the Dow Jones. There are 30 stocks in the Dow Jones, industrial average, the 10 highest yielding includes. IBM includes Coca-Cola. As I mentioned before, John, uh, JP Morgan, even Cisco and Intel is in that mix, Verizon Walgreens. I mean, you could collectively buy these stocks with about a 4% dividend yield right now. So you're actually getting higher than a 10 year treasury. And as we have inflation, you know, as I always like to say, my wife keeps swiping the credit card and you know, the fees go up, you know, we're still buying computer chips and routers and, you know, IBM is actually one of the biggest, you know, infrastructure, um, developers in the blockchain management. People forget that, but you, you know, that's a great way to play. The cryptocurrency is having the blockchain manager a part of that. So I think there's great opportunities, kind, those large cap values, where the PE ratios are much more reasonable than some of the NASDAQ stocks right now. I think that's a very attractive segment to sort of move that fixed income investor, you know, away. And I think there's great opportunity in that segment of the market.

Kate Stalter
Host

13:50

That's a great observation right there. And I do hope the listeners were taking some notes of that, cuz very good action plan in this particular environment. Not sure what stocks to buy and which to sell well, no worries. Market beat. Has you covered get the latest buy and sell ratings from wall Street's top performing most accurate and most respected research analysts. That's just one part of what you will receive as a MarketBeat all access subscriber. You'll also get MarketBeats, new trending stockless, which monitor social media chatter in real time to help you identify the next game stop or AMC before you hear about it on the news, MarketBeat all access also features real time news market events and performance data for your stocks with the MarketBeat portfolio monitoring tool. And you can take a completely risk free trial for just $1. If you head over to the link we will put in the show notes, you'll get best in class stock research tools, performance ratings for wall street analysts, real time newsfeed, executive support team access, all of this add free for just $1 for the first month. Sign up today. The link is in the show notes. Now coming back to the idea of the dividend payers, Clark, are you suggesting, or would you prefer that investors go into single stocks, maybe create their own little portfolio of dividend payers or should they get some kind of fund? Like obviously there's the Vanguard fund of the dividend aristocrats. There's a few of those. How would you suggest people approach that question?

Clark Kendall
Guest

15:37

We are the only fiduciary advisors and there's pros and cons of owning individual stocks and there's pros and cons of owning ETFs and mutual funds, ETFs and mutual funds give you instant diversification. Great to use with small investors, great to use in retirement accounts cuz you don't have to worry about, um, capital gains distributions. The biggest negative of mutual funds is, you know, at the end of the year they distribute capital gains, whether you'll want 'em or not. And that becomes kind of very difficult to manage and you know, mutual funds can have a large cast withdrawal. For some reason, the strategy might be out of favor and the portfolio manager of the mutual fund needs to sell securities and he, or she will generate capital gains and then distribute it to the people who still own it, which is very frustrating on the opposite side of the coin individual securities, give you the opportunity.

Clark Kendall
Guest

16:31

I always say, there's great. Peace of mind owning a Verizon or owning an apple cuz when you go through a crisis like this, I notice my kids keep on texting me and you know, they keep on calling me on the cellphone and I keep on using myself. And so I understand the product and service involved. I also like, you know, just to get off on a little bit of a, I like individual securities, cuz for example, let's say a security is being bought out. Um, you can use that for donor advised funds as the opportunity to donate to a charity, something that's appreciated dramatically in value. And going back previously to my Koch example, you can also much more easier sell that one security that's gone down. Cuz if you own a portfolio of stocks, more than likely a few will do better than you expected a few will do not what you expected, but it, it also creates opportunities for that prudent portfolio manager and a taxable account.

Kate Stalter
Host

17:27

Then let's talk a little bit about account management about rebalancing. How do you do that? An account that holds single stocks because it's sometimes a little bit easier if you just have a group of funds that you can rebalance.

Clark Kendall
Guest

17:43

Well, as I said, there's pros and cons and what we just gave you the difference of the pros or cons and how do we go about prudently, managing them? We monitor the sectors. We have research services that give us what we think are the intrinsic value of the underlying security, where we might buy more. We might use it as a source of funds if clients need money. So no two clients are exactly the same. You have some people adding money to the accounts. You have other people who have retired and taking money out. So we'll, we'll work that as far as managing the portfolios and managing the individual securities

Kate Stalter
Host

18:20

When it comes to overall portfolio diversification, you've got some other thoughts too about maybe some investments that can be in the mix as well, such as CDs, high yield savings account, maybe something other than a stock or a fund. Tell us a little bit about that, Clark.

Clark Kendall
Guest

18:40

Well, as I said that I do think for short term cash needs, we should not, you know, as a portfolio manager should not be afraid to use us treasuries us tips, even CDs and savings accounts during bull and bear markets. I always say, I never know if the market's gonna be 10% higher, 10% lower six months from now. And there's no reason why if we put together a financial plan and someone wants to spend $10,000 a month, that we shouldn't have that cash on hand, you don't want their vacation plans to be dictated by whether the Dow is up or down, you know, especially when they retire.

Kate Stalter
Host

19:20

Right? So it really is more of a long-term perspective. And I understand this having been in the financial planning business myself, but maybe Clark in your words, explain how investors should be approaching this. If somebody is thinking about retiring in the next year or so. And obviously this is a very treacherous time with the market down right now to be thinking about retiring. And you might have to be a little more cautious than perhaps you were in a roaring bull a couple years ago, but how should investors look at their financial plans as of this moment?

Clark Kendall
Guest

19:53

Well, as you know, an extreme case is, you know, someone wants to retire at 60, they need a lot more and wanna live off 10 or $15,000 a month. They need a lot more money to retire at 60 than they do at 70 for a host of recent social security benefits. Um, you've got 10 more years to accumulate funds. If you're doing a retirement plan for someone at 60, you really need to plan for 30 years. If you're doing a retirement plan for someone at 70, you're really only planning for 20 years, but in both cases and just go back to the 60 year old, the 60 year old needs to be thinking about what things are gonna cost in 2027, 2032. You know, we really need to be doing a financial plan and thinking about cost in 2050 hard to, you know, 30 years from now. And historically it has been proven that if you roll in 90 day treasury bills for 30 years, historically, you don't keep up with inflation. And even now the biggest risk for that 60 year old and 70 year old is what will groceries cost? What will gas and cars? What will home healthcare cost, you know, 5, 10, 15 years from now. So we are very kind of strategic utilizing investment products that will maintain purchasing power for those clients. Not so much to be an index, but to maintain that purchasing power for the client.

Kate Stalter
Host

21:25

Yeah, very good distinction about not trying to beat the index, but maintain purchasing power. And you know, as you were speaking, one thing that occurred to me is I know for a long time investors were using kind of a 3% inflation rate as a default. I used to hear that a lot. What do you say about changing their assumptions at this point for the long term,

Clark Kendall
Guest

21:45

When we do financial plans, we do assume a 3% inflation rate cuz that's historically what we've done. That's what Jerome Powell has basically said. He's targeting is to get put back below 3%. I think the key issue is what's your real rate of return. We do financial plans and we assume a 7% absolute rate of return, but the real rate of return, the difference between return and inflation is four and half percent. So quite frankly, if you do a financial plan and you have 10% inflation, as long as you make a 14.5% rate of return, the clients can still spend that $10,000, $15,000 a month in today's dollars. Cuz the financial plans adjust for that on the opposite side of the coin. If we have 1% inflation, you really only need a five and a half percent rate of return. A lot of it, when we do financial plans, you social security is index for inflation. Do they have pensions it's index for inflation or not? And uh, you know, do you have a fixed annuity? That's just a certain dollar amount for the next 30 years. And you know, how do we manage around that for a client if that's what they have

Kate Stalter
Host

22:57

Right? Taking all their financial assets into account. And when you're talking about a 14.5% return, you're talking annualized because I think that's hard for a lot of people to wrap their brain around at this moment.

Clark Kendall
Guest

23:07

It is, it's also hard to, it was an extreme example. I was talking about 10% annualized inflation. We have had blips in the seventies of inflation rates, you know, higher than where we are now, but it was actually only a short period of time. The federal reserve has basically been charged for price, stability and full employment. And they're actively working, you know, to get us, you know, the inflation down, they're fortunate in the fact they can do it in a 3.6% unemployment rate environment. Unlike the seventies, the inflation rate was much higher.

Kate Stalter
Host

23:44

Yeah, that's true. Every one of these market cycles has its unique characteristics. I was just texting with somebody this morning saying, you know, in 2008 we had the housing and the stock market collapse. Now we have inflation and the stock market decline. So it it's that old thing about history doesn't necessarily repeat, but it does rhyme doesn't it?

Clark Kendall
Guest

24:03

It does very much so good point.

Kate Stalter
Host

24:05

Yeah. Interesting. It's interesting to continue watching how, what will happen here, but you've given us a lot of great guidelines and the listeners can certainly benefit from following some of these suggestions that you've put forth today. Clark, if folks are interested in learning more about you and what you do, how can they find you?

Clark Kendall
Guest

24:23

They can find us we're on the worldwide web Kendall capital.com. As I mentioned, I've written a couple books, middle class millionaire, essential strategies to grow and enjoy your wealth tells on Amazon also middle class millionaire woman. And that's just been my 30 years experience. You know, things that women should do a little bit differently that men do. And we just highlight the fact, you know, to be engaged. It's too many times. We see, you know, women default to let the men manage the portfolio, but, and honestly they need to have an input and understand what's going on. And so this just kind of working with women for the past 30 years, these are some of the experiences I have and how they can take advantage of it

Kate Stalter
Host

25:08

Could not agree more. Absolutely. And, and a lot of that is due to the fact that women do live longer. If they've let their husbands manage the money without any input, sometimes there is some nasty surprises when the husband passes away, I've seen all of this Clark and I totally agree. Well, thank you so much for joining the show today. Really appreciate your insights.

Clark Kendall
Guest

25:30

Thank you. It's been an honor to be on your show and enjoyed our time together.

Kate Stalter
Host

25:36

Thanks again for listening to The MarketBeat Podcast, do not forget to subscribe on Apple Podcasts, Spotify, Stitcher, Google, anywhere else, you get your Podcasts. And you'll also find us on marketbeat.com. If you enjoy the content here, please give us a five star review. So others can also find all the great interviews and market insights that we bring to you each week. Also, did you know that MarketBeat has a YouTube channel? We sure do. The Podcasts are there as well as tips for getting the most out of MarketBeat and becoming as always a better investor or trader.

Clark Kendall

Clark Kendall, Guest

CEO, Kendall Capital

Kate Stalter

Kate Stalter, Host

MarketBeat Contributor, MarketBeat

Kate Stalter is a Series 65-licensed asset manager, with more than two decades of experience in various areas of financial services. As an investment advisor and financial planner, Kate personally manages client portfolios, with a focus on successful retirement, including asset allocation, income generation and tax strategies. Kate also serves as a capital-markets contributor at Forbes.com, and is an expert columnist for the investment advisory channel at U.S. News & World Report.

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