Barron's Streetwise - Advice for a Nutty Market

Episode Date: March 26, 2021

Jack talks with the top investment strategist at Charles Schwab and the CEO of Edward Jones. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. Probably the most common question that's directly about what should I do as an investor is, should I get in now or get out now? And I always say, well, neither get in nor get out is an investing strategy.

Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard, that's Lizanne Saunders. She's the chief investment officer at Charles Schwab, here to talk about the outlook for stocks and bonds and what to make of some nutty investor behavior we've seen lately. We'll also hear from Penny Pennington, the CEO of Edward Jones, about who should hire a financial advisor and why. Listening in is our audio producer, Metta. Hi, Metta. Hey, Jack.

I cannot believe it, Metta. this podcast just turned one year old. I know. Happy birthday to us. You know, when babies turn about one, we begin referring to them as toddlers. And frankly, I can't think of a good reason not to begin referring to one-year-old podcasts as toddlers. I'm going to pause now for what I can only imagine is uproarious applause at that suggestion. Okay, the early reviews are mixed. On our first podcast episode, we heard from the CEO of Reg many big companies about how the pandemic was affecting their industries, including Disney, CVS, Ford, Chipotle, NVIDIA, and Visa. We recorded that first episode the week the stock market hit bottom.

Things look grim, but here's what we told investors. So the question I hear most often is, have we hit bottom in the stock market? Is it going to get worse from here? Or I have cash that I've been waiting to put to work. Should I do that now? If you're a long-term investor, you don't need to find the bottom. You just need to buy when prices aren't crazy. And prices aren't crazy now.

Prices are pretty reasonable now. The U.S. stock market has since shot up about 70% from its low point. Lest anyone think I'm congratulating myself for telling investors to buy last March, I should make clear that I have no special ability to predict the short-term performance of stocks, and I'm not aware of anyone who does. I just tend to guess up when asked about where stocks are headed because that's where they tend to head over the long term. And over the short term, they rise more often than they fall. But sometimes they fall, and for that reason, even though I pretty much always guess up, I always diversify too. I keep some money in things I'm pretty sure will offer meager long-term returns from here,

like bonds and cash, because those things can hold their value in the short term if stocks dive. like bonds and cash, because those things can hold their value in the short term if stocks dive. Now then, our one-year birthday is a good point to hear from a top market strategist about that timeless investment question, what in the holy heck do I do with my money now? And we'll also talk with someone about whether and how to seek professional advice. Meta, I understand we have a listener question to get us on track. We do, yeah. Here's Mike.

Hey, Jack. This is Mike. Long-time listener, first-time caller. My question's about risk and returns. Many investors that are closer to retirement typically would move their portfolios to holding more fixed income, you know, to lower the risk in the market.

But with interest rates so low, many of them have their portfolios more into equities than they typically would. I believe that investors should build their portfolios around diversification and their risk profile. But advisors are basing it on returns today. And with the markets being so frothy these days, I feel like if the bubble pops, this could create a problem not seen since the Great Depression. Let me know your thoughts. Thanks. Thank you for your question, Mike. To get you some answers and to get all of us a fresh perspective, I reached out to Lizanne Saunders.

Hi, Jack. How are you? Doing well, thanks. Good. Lizanne is the chief investment strategist at Charles Schwab And clearly she's someone who knows how to set up decent audio for a call I, on the other hand, forgot to plug in my microphone That's why I sound like I'm making a phone call with a soup can tied to a piece of string I am appropriately ashamed and working to gradually win Meta's forgiveness You're not there yet I started my questions for Lizanne where you might expect and working to gradually win Meta's forgiveness. You're not there yet.

I started my questions for Lizanne where you might expect. Let's ask you the main thing that people think of when they talk to you, and that's what are stocks going to do from here? I mean, I won't ask you about this year, although if you happen to know, I'd be delighted to hear it. Well, if I happen to know what stocks are going to do this year, then wouldn't I be a brilliant and wealthy person? But I think a lot of investors are wondering, OK, you know, I sock away this money in my index funds or my mutual funds, whatever they do.

Will stock returns over the next, let's say, 10 years be the type of returns that I'm used to seeing? Or are we starting at a point where it's expensive, so I should expect below average returns from here? Yeah, I think curbing enthusiasm for an above average next 10 years is probably appropriate just because of the start point. That doesn't mean there aren't going to be opportunities along the way.

I think the greatest mistake that investors make is they think the path to investing success requires knowledge about what is going to happen in the future. And the reality is that it's not what we know, meaning about the future, that makes us successful. It's what we do. Even down to the basic disciplines around diversification and rebalancing. Rebalancing is such a beautiful tool or discipline because it forces us to do what we know we're supposed to do, which is not so much buy low, sell high. That almost infers all in, all out decision-making, which that's not investing, that's gambling. But add low, trim high. By by rebalancing Lizanne means periodically adjusting your portfolio to keep your percentages where you want them let's say you start with 60 percent in stocks

and let's say stocks fall more than the other parts of your portfolio reducing your stock exposure to 55 percent to rebalance you can shift funds from other assets into stocks until you get back up to 60%. Some investors rebalance like that quarterly or yearly. By doing that, they tend to put more money into the parts of their portfolios where prices have come down and where valuations might be relatively attractive. I asked Lizanne, what about bonds? Yields stink, but investors want diversification. Should investors stick with bonds knowing returns from here might be low or even negative if interest

rates jump? Lizanne says bonds, more so than stocks, should be tailored to the individual. What are they trying to do with bonds? Preserve capital? Then they might want to look at safe bonds like treasuries, either short-term ones or a laddered portfolio with a range of maturities so that bonds are regularly maturing and freeing up cash to be invested at higher yields if yields broadly rise. An investor who wants income might add some risk by buying corporate bonds. And an investor trying to minimize taxes might prefer municipal bonds. But whatever the approach, Lizanne says, yes, investors should stick with bonds. A bear market in bonds is very different than a bear market in stocks. You don't tend to get completely clocked.

You know, it's very rare, actually, for investors to lose money on sort of an annual basis. I think the most significant negative year in bonds, I think, was 1994. And it was a fairly mild loss in total return terms. So I just think understanding the nature of what a bear market in bonds means, or maybe better put, what a rising yield environment means, is very different than if you're comparing it to the notion of a bear market in stocks. So we still think that as a diversifier, absolutely. I asked Lizanne about the top mistakes investors make. She touched on one earlier, try to time the market. Probably the most common question that's directly about what should I do as an investor is,

should I get in now or get out now? And I always say, well, neither get in nor get out is an investing strategy. Both of them individually and collectively are gambling on two moments in time. And investing should always be a disciplined process over time, never about individual moments in time. Another common mistake Lizanne mentioned is basing stock decisions on whether the economy looks good or bad. It's human nature to think of the economy in good versus bad or strong versus weak terms. So when we do that and try to connect it to what's going on in the stock market, important inflection points are missed because the stock market as a leading

indicator, as a discounting mechanism, does an incredible job of sort of sniffing out the inflection point when the data stops getting worse and starts getting better. And by definition, that's the worst level of the economic data, which is why I think it trips investors up. I can't tell you how many times I hear, in the kind of March, April, May, June, July 09 time period. Why would I want to be an investor in the market with a 10% unemployment rate and still going up? And I'd rather wait until we start to actually see it in the economic data. And I feel confident based on the traction I'm seeing in the economy. And more often than not, they might even cite indicators like the unemployment rate. Well, here you're comparing a leading indicator in the

stock market to a lagging indicator. And if you wait until the lagging indicator is sending a bullish message, you've missed the entire bull market. Rather than base stock decisions on whether the economy looks good or bad, Lizanne says, try to consider whether the economy is getting better or worse, no matter how good of a level it's starting from. What about all the crazy things we've seen over the past year? We've talked on this podcast about day traders sending shares of bankrupt companies soaring and piling into certain stocks because they got the name wrong, maybe by accident or maybe on purpose.

There's a company called Zoom Technologies. The ticker is Zoom. Not to be confused with Zoom Video Communications, ticker ZM. A lot of people apparently were making that mistake. Zoom Technologies. We've talked about a parody cryptocurrency called Dogecoin that multiplied in value. Dogecoin. Are you kidding me?

Are you kidding me? This thing pumps 800 percent. What is going on? A meme coin. Lately, I've been watching the hubbub over NFTs, non-fungible tokens. An asset that has been verified using blockchain technology. Whoa, stick with me. NFTs use cryptocurrency technology to prove ownership of digital assets like pictures and videos, often things that people can get copies of for free online. If that doesn't make a lot of sense to you, it probably means you understand it completely.

This past week, someone paid more than $500,000 to own a digital rendering of a make-believe house. The week before, I saw their Brooklyn man had sold an NFT representing ownership of an audio recording of, how shall I say this here, flatulence. I wasn't about to ask an esteemed stock strategist for crypto gastrointestinal allocation advice. That's clearly a question for an alternative asset strategist. I asked for someone known for measured advice about sticking to the plan, does any of this bother you? Is there any part of you that goes home at the end of the day and says, my God, are they running up GameStop again? Or Bitcoin did what? Oh, there's a lot of really nutty stuff going on in the market right now. And I think ultimately, my favorite thing ever said about the stock market was the Sir

John Templeton quote. All markets are born on pessimism. They grow on skepticism. They mature on optimism and they die on euphoria. Lizanne says you can define a market cycle without any mention of interest rates or price-to-earnings ratios just by describing investors' psyche, shifts in attitudes from one extreme to the other. Investors can use those extremes as contrarian signals by going against the herd. But there's a catch, Lizanne says. The contrarian signal works best at market bottoms because points of despair tend

to be short-lived. Periods of euphoria can stretch for longer. So the nuttiness we've seen, in Lizanne's view, might not signal a market top just yet. So in and of itself, excessive optimism, euphoria, complacency, speculative fervor, whatever terminology you want to use, absolutely represents a risk. But in and of itself, it doesn't tell you anything about when there's going to be that spark that kind of turns the market in the opposite direction. in the opposite direction. Meta, does this one-year-old poddler need to be put down for a nap now or can it stay up for a few minutes longer

so we can discuss seeking financial advice? Are you just trying to say poddler so it will catch on? Is it catching on? It's definitely not catching on. Then no, I was not doing that. But yes, we have a few minutes. That's good because I had an opportunity recently to speak with someone in charge of around

20,000 financial advisors. Hi, Petty. Jack, how are you? Nice to meet you. I'm a little starstruck. You're with me every Saturday morning after my run and it's very nice to meet you in I'm a little starstruck. You're with me every Saturday morning after my run, and it's very nice to meet you in person. Oh my goodness. Penny Pennington is the CEO of Edward Jones. Penny's only the sixth leader in the firm's

99-year history. You know, I remember 99. Barron's Magazine, where I work, it turns 100 this year. Penny says people sometimes ask her if Edward Jones has any relation to Dow Jones, which includes Barron's and the Wall Street Journal, and which was co-founded by a man named Edward Jones. But it's just a coincidence. Our Edward Jones was a Massachusetts statistician and journalist who met Charles Dow when the two worked as reporters in Rhode Island. And later, they and a third reporter founded their own financial news agency in a Wall Street basement. from Missouri and worked as a bond salesman in New York before returning home to found a brokerage firm that came to focus on mid-sized towns that were overlooked by the Wall Street

giants. Today, Edward Jones boasts more U.S. branches than any other brokerage firm. Sometimes people ask me where they should go to start investing or to get some help. In my opinion, step one is to learn to do it yourself, even if you have no interest in being a do-it-yourselfer, so that you can judge whether you're getting good results. Hopefully you find this podcast informative. If you'll forgive me for pitching some more of the company merchandise, this podcast informative. If you'll forgive me for pitching some more of the company merchandise, I recommend reading Barron's each week and the Wall Street Journal each day. I did that for many years before I worked here. There are many classic books that can serve as primers. For stock pickers, I like The Intelligent Investor and One Up on Wall Street. And for indexers, there's A Random

Walk Down Wall Street. For absolute beginners who aren't easily insulted by book titles, grab one of those guides from the Dummies or Complete Idiots series. I once read the Complete Idiots Guide to Weight Loss, and I felt like the book was calling me stupid and fat. Some brokerage firms are for do-it-yourselfers, some offer professional advice, and some do both. For do-it-yourselfers, a recent ranking of online brokers by Barron's made favorable mention of Interactive Brokers, Fidelity, TD Ameritrade, E-Trade, and Charles Schwab. If you want advice, there are plenty of options from limited, low-cost ones to comprehensive ones. On one extreme, Barron's also ranks what are called robo-advisors. Whenever I hear that term,

I think of the 1987 movie RoboCop, about a Detroit cop who gets killed by gangsters and brought back to life as a cyborg. You have the right to remain silent. You have the right to an attorney. There's a lot of bad guys getting thrown through windows, but nothing on asset allocation. And that's where robo-advisors come in. They automatically recommend a mix of stocks, bonds, and other assets and help investors stick to that mix. Many online brokers offer robo-advisors, and last year's Barron's ranking, SigFig, TD Ameritrade, Fidelity Go, Vanguard, and E-Trade Core did well. Robo-advisors are for young investors who've spent so long

staring at TikTok that they no longer require basic human interaction. Is that fair to say, Meta? I don't think so. Okay. RoboAdvisors can be a good choice for investors of any age who are just getting started, who don't necessarily need someone to talk to, and who want to keep fees to a minimum. At the extreme other end of the advice spectrum are what are called family offices. Those are like financial concierge services.

Some of them serve just one family. We should all be so lucky as to one day be wealthy enough to need a family office. Much of the financial advice business falls between these two extremes and consists of people who advise multiple clients on how to invest their money and how to plan for expensive things like college tuition, retirement, old age care, and estate taxes. Meta, I feel a 90s story coming on. All right, let me get the music. My first job decades ago was working at a big brokerage firm as an associate financial consultant, or what you might call a trainee stockbroker. The industry was in transition. Me and my fellow trainees would take our phones into the conference room and plug them in and make hundreds of dials a day while throwing a football around the room and chewing tobacco in between conversations. Maybe sometimes during

conversations. I didn't chew more than once or twice, for the record. I might have thrown the football a little, but only to be polite if someone threw it to me first. Anyhow, we were looking for folks who had money that just became available to invest and who might like to hear about something like a mutual fund. In the cabinet near the conference room's television was a VCR with one tape. Hello, Mrs. Greer. This is Louis De Palma. Have you decided what to do with your husband's life insurance settlement yet? It was a 1981 episode of the sitcom Taxi.

Where the shifty dispatcher, Louis De Palma, gets a job as a stockbroker. Now, the boss where I worked made clear that that was the old way of doing things, selling individual investments. The new way was to take more of a financial planning approach once you had gotten people in the door, often by selling individual investments. Today, the industry is much evolved. Many financial advisors have not just the required securities license, but also professional credentials that demonstrate their expertise. Many are paid set fees for advice rather than commissions that change according to what they sell. I asked Penny to tell me how financial advisors add value. The difference in confidence between folks who are advised by a financial advisor and those who

aren't is right now about 10 percentage points difference in confidence. And what does confidence do? Well, confidence enables one's anxiety to come down so that they can make better, more informed, intentional decisions, not emotional decisions. Jack, you and your listeners know this. Emotional decisions in the markets is what gets us in the biggest trouble and impacts our performance in a negative way. Okay. But what about for people who already know a thing or two about investing? The clients that we work with today say, you know, I think I'm smart enough to do it on my own,

but I don't want to spend the time. And I want access to resources and information when things are changing so rapidly. And when I'm hearing so many different things about what I could do with my money, I really value someone whose only focus, their professional focus, is staying up to date every day about what's going on. And then it can help slow me down as a client so that I can stick to my plan over time. I asked Penny what she makes

of all the day trading we're seeing and all the anecdotes about young investors with zero commission accounts watching their Reddit chat rooms for posts with hot tips. and one does not put the words play and money in the same sentence and expect long-term, really positive outcomes. Your advisors don't use rocket ship emojis at all, do they? No, they do not. It is tried and true investment philosophy. Figuring out how much risk you're willing to take. Think about the goals that you have and how long you have to achieve those goals and put together an intentionally built plan and portfolio to build those. I do worry that right now emerging investors, folks who've never been involved in the markets before, got involved in the markets, got invited into some of the things that you've just shared, and have been turned away, feeling that the market is not there to work for them. And that's not good for capitalism. It's not good for innovation or growth. It's not good

for our economy. I asked Penny, what are some mistakes she sees investors make? We mentioned one earlier, and that's FOMO, fear of missing out. My neighbor or my brother-in-law told me about this thing, or social media told me about this thing. Penny, I got to have some of this. I don't want to miss out. Another one is taking it from the other direction. I don't need to start now because I really can't put aside very much. And so it won't mean much. Recognizing the magic of compounding over time. It is a force of nature. It's like gravity. It's the most amazing miracle. Put away a little bit today rather than putting away a little bit more tomorrow. Strangely enough, you have more when you start with a little bit today and be disciplined and continuous about that, increasing it over one's lifetime as one's ability to do that increases.

But the magic of compounding and starting early is what's so important. There is just one last thing. You said you listened to us after your workouts during your cool down, but now we're talking, which means you're going to be on the podcast, which means at some point soon, you'll be listening to yourself after your workout during your cool down period. Do you have any words for future Penny about that workout and about, you know, words of exercise encouragement? Penny, keep getting better. Just stick with it.

Stick with the discipline of being in the park every Saturday and being with Barron's every Saturday morning. Stick with it. That's inspiring. Thank you so much, Penny. It was great meeting you. Thank you, Jack. Thank you, Lizanne and Penny. And thank you, Mike, for sending in your question. To send a question, just tape on your phone, use the voice memo app and send it to jack.how, that's H-O-U-G-H, at barons.com. Thank you for listening. Meta Lutsoft is our producer

and proud podler mom. Congratulations again, Meta. Why did you spit on your brother? Yes. Are you supposed to do that? Yes. Subscribe to the podcast on Apple Podcasts, Spotify,

or wherever you listen to podcasts. And if you listen on Apple, please write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.