The Dividend Cafe - Not All Portfolios Are Created Equal - TBG Investment Committee Speaks

Episode Date: September 11, 2019

Topics discussed: This week's Dividend Cafe podcast with the entire TBG Investment Committee almost makes it without talking about the trade war, the Fed, or Presidential tweets (not quite). But what we do accomplish this week is a digestible, succinct, informative talk on how portfolios are often constructed, and how they ought to be. You will not be surprised to learn that sometimes those two things are not the same ... Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this Dividend Cafe episode featuring our entire investment committee. This is David Bonson. I'm the Chief Investment Officer and I'm surrounded by my friends and colleagues, Brian Saitel. Brian, how are you doing? Doing great. Thank you. Julian, how are you doing? great. Thank you. Julian, how you doing?

Good. Thank you, David. Julian, of course, being our director of equity research, joined the Bonsai Group a few months ago, and we're all having a lot of fun doing these podcasts together. And I guess it's for a lot of you, maybe your first chance to get exposed to Julian. But then you have our long timers still to go with Daya Parnas. How are you doing, Daya? Great. These podcasts are a lot of fun.

Looking forward to this one. Robert Graham. Doing well. How are you, David? I'm wonderful. Guys, it's a weird week. No volatility anymore. It's so boring in the market.

The first time we've had this without a 400-point move one way or the other. Yeah. So what were we up yesterday? About 100 points. And then I think today we're flat. We've been going back and forth between up 20 and down 20 most of the morning. You know, I'm up real early. The futures market, we're kind of pointing to the same thing. We actually went down a little bit at one point. But anyways, we're not going to talk about the market,

what it's doing this week and what Trump's tweeting. Actually, right now, it focuses off trade war. He fired Ambassador John Bolton from National Security Advisor position this morning. So there's more foreign policy stuff kind of going on in the White House than there is right now, economic-type issues. So we'll give you a reprieve from politics. right now, economic type issues. So we'll give you a reprieve from politics. And we want to actually focus today on a more topical basis. And we're going to do more and more of these. Let the investment committee come in week by week, usually at the beginning of the week, and try to address a given topic that we think will be informative to our listeners,

and especially those listeners who are clients. We like all the listeners, but we really like the listeners who are clients of ours best for rather obvious reasons. But here's the thing. It's difficult to pick topics week by week because we don't necessarily know what's on your mind. And so if you have particular suggestions and one of them is not, hey, tell us what you think of cryptocurrency. Then we're really open to your suggestions, and we'll actually help drive a lot of the different things the investment committee would love to sit around this table and discuss for your listening pleasure. I joke about the cryptocurrency side. Maybe we will do one someday, but I doubt it.

But I make the joke because that is the type of question we have gotten so often. But no, I mean, more or less, outside of Bitcoin, everything's fair game. And then, of course, the regular Dividend Cafe podcast near the end of the week, where I'm trying to summarize that weekly commentary and what took place in the market that week and things of that nature. We want to keep that going as well. So if you're getting about two podcasts a week from us, one with the whole investment committee and one with just me, that's more or less the intention. But some weeks it's going to get a little funkier just as far as scheduling and markets and different things that happen.

So we'll do our best to make it work. Luckily, these four guys are very flexible. All right. Our topic this week, strategic allocation versus tactical allocation. the pros and cons of both, the differences of both, what does it mean for clients to have their portfolio asset allocated on a strategic basis versus having it allocated on a tactical basis? and Dale, why don't I just cheat right off the top and say what does it look like to have a blend of the two, which is what I really kind of think we do at the Bonson Group. Absolutely. But I'm going to sort of bury the lead a little,

or not bury the lead, reveal a little bit. What are you supposed to say there? Yeah. I gave it away? Yeah, front run? I don't know. No, front run. There you go. So there is sort of a hybrid explanation

we'll be unpacking for you as a group here. In the most simplest of senses, Robert, why don't you provide the vocabulary for the listeners as to what it means that one would be strategically allocated versus tactically allocated? And for now, we'll presuppose those two things as being distinct from one another. Sure. And for now, we'll presuppose those two things as being distinct from one another. Sure. So starting with strategic, what we do and what I think many practitioners in the space do is we take a look at long-term risk and reward characteristics of different asset classes. So bonds, equities, alternatives, those types of things. And we say, okay, for each client or strategically within our specific portfolios, what is the right mix or proportion of those asset classes to each other? Okay, and those are going to create maybe a center point,

and then we have bandwidth surrounded as well. Tactical is a little bit different, because a tactical asset allocation allows you to express a view or an opinion on a somewhat shorter time horizon. There's both, you know, asset class tactical decisions, there's also sector decisions as well on a tactical basis. We tend to do a lot more of the asset class tactical decisions. There's also sector decisions as well on a tactical basis. We tend to do a lot more of the asset class tactical rotations than we do the sector rotations by nature of us being bottom-up managers. And so in terms of the broad asset classes, we're talking about stocks, bonds, cash theoretically, and, theoretically. That's right. And then alternatives. That's right. And long-time, well, even short-time listeners know we use the word alternatives to describe

things that receive their risk and their reward from something alternate to the stock and bond traditional assets. So then you have sub-asset classes within those different things. Is strategic allocation the same as buy and hold, Brian? No, not buy and hold. I mean, strategic allocation, like Robert said, it's based around a certain level of risk for that particular client

and a certain goal for that client. And then a percentage of stocks to bonds to alternatives and cash is sort of selected. It's more buy and hold than tactical, but it's not buy and hold in the sense that you are going to have to rebalance that every period of time, whether it's quarterly or annual. Originally, when we got in the business, quarterly was sort of the

new thing. And I think that's a little too much. But yeah, so essentially, you've got, let's say, an average person, 40% in bonds, 40% in stocks, 20% in alternatives. Stocks were to outperform. You'd want to rebalance and take some of the gains out of the stocks and then position in the other asset classes to kind of keep those percentages in line. So it's not so much buy and hold. It's sort of buy and hold with the rebalance type of approach. So your summary there is helpful. It is buy and hold with the rebalance component. But what was the strategic allocation in the hypothetical you used? Like a 40-40-20? Okay, so someone has 40% stocks, 40% bonds, 20% alternatives.

They're going to stay in that allocation throughout their investing life in theory. Yeah. But they'll just simply rebalance back to it. And that doesn't mean inside of those asset classes there aren't things going on. You know, 40% stocks is pretty broad. You may have large, mid, small cap, different sectors and different things going on different things moving in the portfolio so there's there's activity there right but as far as the actual strategic allocation you sort of have set it around usually a financial plan

and usually sort of a broad goal and risk tolerance for the client and your front-run comment but what we do you know is a little different I mean we're not gonna be strategic allocation investors solely. We're going to be kind of a tactical overlay. So the way I would describe it is something like strategic asset allocators with a tactical overlay based on valuations. And so when you look at valuations of stocks versus bonds, we'll have a bandwidth to kind of maneuver and massage what we feel is appropriate, giving the risk to the client. Okay. So I want to hold off on a question

I'm excited to talk to Julian about with tactical, but it sounds like, Daya, that not all strategic allocation is created equal either. Okay. So would this count as strategic allocation? The answer is going to be yes. But what you're saying is this is what I'm about to say is not the only thing that could count as strategic allocation. And it would be you have 40-40-20, but within that, you set your strategic that of that 40 in stocks, 75% is U.S. large cap, 15% is international, and 10% is small cap. And if you don't alter those numbers at the sub-asset class level, that's also strategic allocation. And then you could have different breakdowns within your bond allocation of treasury bonds, government bonds, things like that, and alternatives.

But what you're saying is you could theoretically be alternating the sub-asset classes but staying strategic on the top down of a stock bond, more generally speaking. So, Daya, right now in the world of passive investing and the world of robo, which is essentially building a strategic allocation and then letting it sort of run its course algorithmically, letting it run its course algorithmically. If you're altering at the sub-level, isn't that a form of tactical allocation? An acknowledgment that some human intervention is theoretically a value added to the portfolio result. Right. I think it's important to realize that a majority of the returns in the portfolio will be from

the broad asset allocations. And if you look at the studies, I think it's over 85%, or something like that. Brinson Partners study in 1991, that UBS, Brinson was bought by UBS, was 91%. Right. Yeah. So, yeah, if you look at those Brinson studies, that'll show you an overwhelming portion of that return is as a result of the broad asset allocation. Sure, I think there's layers as far as you can be strategic at the top down, but then

you can say you're tactical at the sub-asset class level. But I'm not sure. That's not something that we would consider tactical. I think that's more marketing than anything else. I don't I don't know what I guess I'm trying to get to. Why would someone be in favor of strategic allocation? The argument for strategic allocation is that human intervention is going to do more harm than good.

You just want to set your broad asset classes that are in line with the risk reward Robert talked about of clients given risk profile. That's going to kind of dictate their overall in line with the risk-reward Robert talked about, a client's given risk profile, that's going to kind of dictate their overall portfolio composition, and your best to let that roll. And then to Brian's point, you can still rebalance, although even a strategic allocator would admit rebalancing is more about risk management than performance addition. But then say, I really believe in this, top down, but then I'll make an exception one level below it.

Like, in other words, if human intervention is negative, why is it okay to say I want my 75-25 U.S. international to go to 65-35, but it's not okay to say I want my 40-40 stock bond to go to 50-30? Yeah, yeah. So that's not something that say I want my 40-40 stock bond to go to 50-30. Yeah, yeah. So that's not something that makes sense to me. I assume that— Does anyone else want to defend it?

Keep going. Yeah, okay. So as far as saying that there's some sort of magical 40-40-20 or whatever it is that is going to be good for the lifetime of the client. And I assume that they're just looking at historical data and using the historical data as gospel and not making any sort of adjustments. But they have some sort of forward-looking opinions for the sub-asset classes.

It's very hard for me to reconcile those two things. Yeah, they do. But again, in fairness to those that set these kind of automated programs, they have forward-looking projections in the asset class that are entirely driven by the backward-looking performance. It's essentially historical averages. Right. Well, I mean, not just purely extrapolating from the historical trend line and making some sort of projection in the future. I mean, realizing that there's

certain things that might be different and might affect expectations going forward and adjusting your asset allocation that way, which I assume maybe they're not doing for the sub-asset classes. I'm not sure what those robo advisors are doing. And even apart from the robos and so forth, which I don't think a lot of really high net worth and sophisticated investors are embracing, but for smaller investors that they're really selling the concept of automation, I think that that plays. But even just the TAMP world in general.

So a turnkey asset management program is something we don't do at the Bonson Group, but something that's become very popular. You get to charge fees and not have to manage the money, and it's really attractive to a lot of financial practitioners. So even apart from Robo, which you and I might sometimes use that derogatory, but I think that it really applies to the TAMP world overall. And to me, I guess I'm trying to point to a potentially internal contradiction

for strategic allocation people that would say it's not a good idea to strategic allocate at level one, but it is at level two. But now I'm going to open up the same can of worms on the tactical side. So Julian comes from various handful of hedge funds he's worked at throughout his investment career. And some of them that you particularly worked at, even though you were a fundamental equity guy, but some of them were very known for being tactical.

Not just that they might one year say we really really like 55 stocks, and the next year, 50% stocks, but they might at 10 in the morning like a given name, and at 10.03 in the morning, not like the name. So just as much as strategic people can be really extreme out here, tactical, once, let's say, Brian's on my side here, and we go, hey, we believe human intervention can be value-added to your portfolio, why stop it quarterly or yearly? Why not go minute by minute, like our old friends at blank? I can't say the name. You guys can look up Julian's bio if you want to know where he used to learn. Yeah. Look, I think it's human nature that you might have your long-term investment goals, but we look at the market every day and we see opportunities every day. And so it's your turn to want to intervene and tactically position your portfolio for the opportunities you see in front of you.

So you have mean reversion, and that's one thing that we should mention. Maybe explain the concept of mean reversion. The concept of mean reversion, like asset classes, they tend to move together, but there will be some moments where, like now, you could say equities look relatively cheap compared to bonds, when you can make a yield that's higher in the S&P that you can make on a 10-year. So that would be like somebody who was tactical would say maybe now is a good time to go a bit more into equities and a bit less into bonds.

That's at the asset class level. If you go into more like detail level and then go into equities, you could say now maybe it's a good time to go into financials and a bit less into consumer staples that have done so well. And then if you go at the stock level, like we do,

you could say, well, this... ABC versus XYZ. Yeah, you could say this company just was going to do a huge deal and they were going to pay a lot of money to buy. And then someone came in and wanted to fight with them and instead of overpaying, they walk away and they're doing more buybacks, they're paying more dividends. And so that sounds like a nice time to own a bit more of that company.

So that would be another example of tactical. Okay, so those are all examples of good tactical. Yeah. But what's an example of bad tactical? Well, I guess the example of bad tactical is that you think you're doing the right move, and the market doesn't agree with you. And I guess that's probably one of the difficulties that there's so much money that's passive at the moment that the active managers have been, for some reason, underperforming

because they are, I guess, investing against the flows. Well, and also you have a market that has had a lot of tailwinds where you generally see active do much better during more challenged markets, flat markets. But when you have a straight line bull market, much like the post-crisis era, it changes things. So, Robert, here's what I'm hearing so far.

And tell me if this is a fair summary that a little, like so many things in life, there can be something that is okay at a certain magnitude, a certain measure, but then too much of it can become a negative. measure, but then too much of it can become a negative. So some tactical allocation around economic viewpoint of sector valuation, an economic viewpoint around opportunity, reacting to the trade war, things like that, there's a room for it, but then you can go too much tactical to where effectively day trading is an extreme example. You stack the odds against you. You open up for more opportunity for human error. Absolutely. So I think expanding the definition of tactical to being opportunistic around value is a good place to start there. And that's a lot of times what we do. As I mentioned

before, we're bottom up. So to some extent, we have to be agnostic as to top down sectors. That's where I see a lot of the danger in when retail investors hear tactical, you know, this or that, when they hear a talking head talk about, hey, overweight this, underweight that, and then they go into a biotech ETF and their 401k get blown out. So I think the environment in which you're discussing these things is extremely important. And just to reiterate, not playing on sectors from a tactical perspective, that's okay sometimes to look at how financials or healthcare utilities are doing on a broad level. But to some extent, we don't necessarily care about that because we're looking at individual companies.

And how efficient do we think the markets are? Do we think that there's mispricing here and there? Sometimes I do. And so can you be strategic in the percentage of equities you're going to have, but tactical or active, engaged in what equities you're going to own within it? Which is, of course, in a sense what we do. But then that other layer of tactical is not just that we may say we like ABC and now we want to trim XYZ. That's tactical intervention in a portfolio, but it's driven by bottom-up decision-making

because we're dividend growth evangelists. But sometimes we might say to that 40-40-20 client, Brian, we think going into this next year, 50-30-20 is a better allocation. You could even say 50-30-30, but then who's going to trust you with the money? A little leverage in there. Oh, yeah. Yeah. And that's the thing.

And what we do is manage money for people. And so we're not running a hedge fund. This isn't an institution. There isn't sort of a one account with a pool of money that we can play the market and so on. There's individual people. So everybody has their own goals, their own risk tolerance. It's very custom.

It's very bespoke. And as far as the difference between the two, yes, we're setting a strategic allocation based on the initial conversation and the goals. But as David just said, I mean, as markets change, you know, negative interest rates around the world, rates are moving lower, earnings are good or bad, so on and so forth, we may increase or decrease in equity allocation based on what we think of the world. And it's not that we're going all in and then all out of something. It's that something maybe instead of a 40-40-20,

a 60-40 or 60-30-10 or I can go on and on and on with the percentages there. All those numbers can change. There's so many possibilities. There's so many. But I think that it's helpful philosophically to start with what people mean by the terms and then show how even they usually don't fully mean it. Okay. So I would define when I said hybrid, that we are strategic dash tactical, that we start with a framework, but it's a bandwidth, not a hard number.

And yet there is a given client that once we've profiled them as a person, that with the specific human needs and timelines and liquidities and tax ramifications, that we may say the appropriate bandwidth for their equity allocation could be on the low side, 35, and on the high side, 50. So you have a strategic window, but then you have tactical setting based on market outlook, valuations, mean reversions, things of that nature. Then within that, you allow for bottom-up selection, things of that nature. So one of the reasons I'm defensive of the Bonson Group's approach to this is because I don't think we're guilty of any contradiction. I think that the strategic people are all full of it. They're all full of it.

They all end up allowing for some human decision at some point, some less so than others. But there was a guy, it was actually funny, he worked at the company that Brinson Partners became much later. I heard him speak once at a investment conference I was at. And he said, studies show that 50% of arranged marriages end in divorce. And 50% right now in our society of all marriages end in divorce. So one could look at that and determine, I have no better chance of making my marriage work by actually dating the person I choose to marry versus just having it arranged for me, so I may as well not try. And yet most people probably would say,

nah, like, yeah, I guess supposedly, and it's very sad, but if 50% of marriages end in divorce, I think most people would still say, I'm going to try to make sure that there's some common ground and compatibility. And so from a portfolio standpoint, it strikes me that to Julian's point earlier, someone could be looking at certain things and say, I refuse to act on this information. Can you imagine setting a 30-year strategic

expectation for bonds 30 years ago, and right now saying, no, it's the same. I have the same expectation for bonds in the next 30 years. When yields are below inflation? Yeah, well, so 30 years ago, the 30-year was trading 18%. It's right now trading at 2%. And you're expecting the same asset class return. Yet once you say, no, you know what?

Once I adjust for the inflation differences and yield differences, we're going to adjust our expectation and our weightings. Well, guess what? You just became tactical. So you see my point? There's differences. There's bandwidth that both sides will have. And the reason I brought you in, Julian, is I think that a lot of the active trading-oriented hedge funds, first of all, they're not doing it for people. They're doing it in a more abstract.

But secondly, it represents an extreme version, day-to-day trading, of the same thing. So I'm willing to say that once I go tactical, even I have a limit to it. I want to be tactical around bandwidths that were set strategically. I was going to say, yeah, I mean, I guess we are strategic. I mean, the way, I think the right way to do it is to be strategic with tactical on the margin, basically. That's right. Yeah. It's valuation-based.

And if tactical becomes your main strategy or the way you basically run the business, you can be completely upside down the other way around. business you can be completely upside down the other way around you know like there's a lot of dead hedge fund in the graveyard who called the you know say this is the time to be short the market this is over bull market is over and and you're out of business in in a year or two you know so is that is that a good segue to the what's the difference between tactical allocation and market timing? Is the bandwidth as a governor the key differential? So as far as tactical allocation and market timing goes, and I'm really glad we're having this discussion, and it strikes me that all these terms get thrown around in our industry, and it's so common, but there's actually so much to the definition and the different ways one one can see

one versus the other but not fully understand what it means to be strategic and what it means to be tactical so yeah just to zoom out a little bit i'm really glad we're having discussion as far as market timing look i mean i i assume there's somebody out there who could have some sort of algorithm around market timing and say they's super tactical and sure they're not they're not setting a percentage and they're not keeping it that way and I guess that falls under the definition but I wouldn't consider that a viable tactical allocation strategy I mean our tactical allocation strategies Brian mentioned is valuation driven. You know, it's not something where we look at a trend line and the 50 day crosses the 250 day and now it's time to go 40 percent the other way.

You know, so for us, tactical means valuation driven. We're doing the fundamental work on the asset class. We're reconciling the historical data with forward-looking expectations and making a decision. So I think this is really helpful. It's not only kind of hopefully useful for some of the people listening right now, but I think it's a fun conversation that we get to have. that we frame this and all of us philosophically have adopted this notion of behavioral decision making as a real key driver in the ultimate outcome that an investor will get. I am fervent in my belief that we owe it to our clients to try this sort of marginal tactical intervention around strategic parameters that the top-down asset allocation matters primarily.

The bottom-up selection is to feed a result. We can manage risk and drive returns. We're dividend growth people. And yet at the end of the day, there's nothing that will deliver a better return through time than the investor's behavior and nothing that will undermine through time the result more than the investor's behavior. Robert, do you think that behavioral thinking is compatible with this sort of strategic tactical hybrid? I do. And I think us being kind of the insulator between the client and what they're being told or shown elsewhere is really important and integral to that, certainly. The bandwidths that we put on it, I think, Dave, was maybe getting to this, and I just wanted to touch on it as well on something you said.

The bridge between the strategic and the tactical, the bandwidths we have around certain sectors or asset classes and the ability to float within that, it's a very risk-first type of constraint. And I think that's where we even control our own bad tendencies, as few as they may be. Yeah. And can I add to that real quick? As far as the approaching portfolio management from the risk side first, I think it's something that is hugely important. And also, if somebody's super tactical and they're making, I don't know, 10 decisions a day, how much actual thought is going into those decisions? How how much how how deliberative right how much conviction can they actually have I it's

difficult to make good decisions in our business there's a lot of information floating out there you all you always have to look behind the statistic to get the right interpretation so to build up that amount of conviction takes take some thought takes a good process and can take a little bit of time so i i'm very skeptical of people that are able to make decisions with that rapidity and those convictions are based around 10 12 different data points of the reasons why we are highly convicted in a certain position or or or allocation and have like you said i mean if you're changing that daily then it can't be based on 10 different factors.

You're basing it on something that must change at a whim, and how would you invest that way? Exactly, yeah. I guess the mandate is so different. I think that's really the, we have very different mandate from, you know, being, if you're a hedge fund manager, your mandate is to generate monthly returns.

So the way you look at it is first of the months, you start at zero, and you have to make money that month. If you have some P&L, you take more risk. If you're starting to lose money, you cut risk, regardless of what's happening out there. And you're really short-term because people pay you for low volatility, short-term performance. We're investing for long-term. But what if, Mr. and Mrs. Smith say, no, no, no, that's the same thing I want from you guys? In other words, is that difference as profound as Brian and I are suggesting that you're bringing up now,

that when one is managing money just in the abstract for the performance of a fund and not with a given individual goal attachment for Smith and Jones and Johnson, attachment for Smith and Jones and Johnson, wouldn't someone be able to say, look, that's what I want as well as just month by month good return? What would be the distinction? Well, I guess it, again, depends on the mandate and the objective of the client. But if the client has money with us that's invested for the long term, that would be our job to explain to them that they have to accept the volatility of the market, they have to accept our recommendation

in terms of asset allocation, because we know from history and we know from investing, market efficiency, that this is the way to generate returns over the long term, not being 100% in alternatives that are going to have lower returns with lower volatility. So you have to accept the volatility to get the returns. Yeah. Well, I think that's one of the advantages of our strategic tactical sort of hybrid

is that there's a lot of honesty embedded in it. Because I think that a real purist of tactical allocation that was anti-strategic, and I'm all in for tactical. And you'll see some of these kind of strategies that they'll brag about how we'll go to 0% equity and we'll come back in. And they're giving an impression that the value proposition is our ability to know when to be in the market, when to be out of the market. So then they'll be out of the market in a period where it runs up a lot. And then it's just like, okay, well, we missed that one. We move on to the next. And it's feeding this sort of narrative that someone can do that.

Where what we're saying is, you know why, if we were as bearish as we've ever been, go back to the way you and I felt, Brian, in the financial crisis. And there was just absolutely no thought in my head that, well, this thing should be done in a day or two. Like it was clear that we were going through a paradigmatic shift in the American economy. And yet, even then, we didn't want to go to 0% equity. Absolutely not.

Because of the humility that says, look, I don't know when there's going to be a 1,000 point up day. And we had those. We had these last December. Absolutely. And missing those days. Talk maybe a little bit about that. No, I mean, and that's the, you know, both of what we're talking about, whether it's strategic asset allocation, tactical asset allocation, and they're both sort of from this modern portfolio theory. And it's regarding that, you know, there's a certain amount of risk that you take with each asset class and there's a certain amount of reward that you would get from

each asset class. And I think it's, you know, financial malpractice to really try to pick which one of those is going to be that asset class for the next 30 days or six months or whatever it's going to be. And really, let alone with your own money, but with other people's money, try to guess that because that's rooted in some sort of crystal ball and nobody has that. And so, you know, our job with this is both on the strategic and the tactical is to set the allocation based around the clients goals to have bandwidth so that we can massage that portfolio as valuations change we take advantage of it but to never lose sight that to David's point in the o8 crisis that we don't have a crystal ball and so I'm not going to

ever be out of an asset class completely like a stock or a bond type of thing. We could go low to cash or low to alternative, something like that. But the point just being that it's rooted in fundamental belief that it's based on fundamentals of companies and investments based on valuations, not just trying to predict the future of the world. Well said. Like you said, humility. It's based on humility. the future of the world. Well said.

Like you said, humility. It's based on humility. No matter how smart you think you are, you are a human being and you can be wrong just like anybody else. And there's an irreducible level of uncertainty as far as the range of outcomes that are possible. And you want to make sure that you are preparing the client

for multiple scenarios, not just be a single scenario thinker. Equities are going to do this, and I know it's true because I read hundreds of pages of research. I mean you could argue, and I don't want to get overly weird about it, but you could argue there's a lot of parallels to the way people ought to live their lives in general. There's always this sort of needed hybrid of humility and confidence. You have conviction, but you temper it with some modesty. And I think you and Brian have done a lot of these hedge fund

visits over the years with me. We're in New York. We meet with people. And Julian, coming from the space, I bet you could tell us horror stories. But sometimes you meet with a hedge fund, and my immediate response is they don't respect markets. They're so smart, and they have so much conviction and confidence in what they have conviction in, but they're unaware that they could get, or they just don't care, that they could get their face ripped off if they have something sort of wrong. Where I think strategic allocation is a way to force your high conviction to stay within a paradigm of not blowing somebody up. Yeah, exactly. I didn't get much response from you guys on the dating analogy.

Did you think that worked? That's the first time I've heard it. I like that. I like that because it perfectly illustrates the, well, you should just be 60-40 equities. Yeah. Well, it's like, wait, but shouldn't we try to understand why? And times have changed. Yeah, times have changed.

Huge paradigm shifts can happen with bonds and different asset classes. If it was any more than 50-50, I would ask for a refund. Let's try again. No, there's always leverage. You could go somewhere with this analogy. Well, Robert, do you have anything you want to add to the subject? Why don't we all do a little closing thought, and then I'll take us home. I love Daya's talk a little bit about humility,

and being somewhat rules-based is a great way to start with that. Daya? Yeah, it's a discussion I'm really glad we had. Asset allocation, as much as somebody might label it passive or active there's a decision always being made and there needs to be uh the right kind of thinking behind those decisions so i think that was really interesting topic and it's funny because uh you know i was i was studying for the 65 and it was you know one of the things you you learn I mean, I knew about it, but you read again a lot. But I think at the end of the day,

it's not one or the other. We have to be strategic. And on the margin, why not be tactical as well? I would say that at the end of everything that we've discussed, which I've really enjoyed, it's just about the client. So everything that we do is not done in a vacuum. We're focused on individual people and what their

individual goals are and what they're trying to accomplish in life. And we're privileged to be a steward of capital to do that. And these decisions, strategic and tactical, are because we care and we love what we do, obviously. But it's about clients first. And I echo everything all you guys have said. It's nice that our partnership involves so much common ground. Of course, it's not coincidental. We don't find common ground out of our partnership. We found our partnership out of our common ground. And so we see these things the same way ideologically, economically. But I think also the priority about it being around the client, that there is a sense in which academically, around the client. There is a sense in which academically the notion of just sort of managing money disattached from a goal, a timeline, and a human is a fundamentally different thing than

managing money attached to investor psychology and dynamism. Life changes, unexpected inflows and unexpected outflows, right? I mean, you know, we talk about divorce. Like, I hear that could be a big outflow. I don't intend to find out. But, Julian, I hope you're listening. But here's the thing. Here's the thing. Strategic allocation, Dave made this point earlier, and I want to sum it up with this.

They have made this point earlier and I want to sum it up with this. A lot of the vocabulary you hear, they're media-driven simplicities that are unhelpful to framing how you think about your own portfolio. Your portfolio is not binary like, oh, I do active or I do passive or I do strategic or I do tactical. It's dynamic in the sense that it needs to be customized to your specific situation. But at the beginning of the process is the pursuit of a return that is a premium to what you could get by hiding money under the mattress. If everybody's financial goals could always be achieved by hiding money under the mattress, there would be no need to pursue risk premia. It is the pursuit of a return that, as Julian pointed out, if we ever tell you we can get you a premium return

and we will not add any additional risk to do it, we are lying to you. Now, we're never going to say it, but other people not only will, they do it. They say it all the time. And our job is to not only offer something different, it's to constantly bat down these charlatans that I think are doing significant damage at eroding the wealth of American investors. Risk-free returns at a premium to mattress money don't exist. So how we go about pursuing that for a given client is the subject we've been talking about today. Some of it, don't worry if you missed a bit of it. I know we go into our

jargon and vocabulary, but those of you that stuck with this whole podcast, we appreciate it. We hope you've got some out of it. We really do welcome your questions. We've been getting more people that have emailed in with different questions and comments. We appreciate it. And I'm going to reiterate the offer I made. Thank you to those of you that took us up on it last week and your books have been sent. But if you'd like a copy of our case for dividend growth and write a review at whatever your podcast player choice is, send that to us with your address and we will get you a copy of the book on us. Thank you for listening to this week's Dividend Cafe. Thank you to my investment committee colleagues here at the Bonson Group. And we look forward to another fun conversation for you next week at the Dividend

Cafe. Thank you for listening to the Dividend Cafe. Financial food for thought. The Bonson Group is registered with the Hightower Securities LLC, member FINRA and SIPC, listening to the Dividend Cafe, financial food for thought. free of risk and there's no guarantee that the investment process or the investment opportunities reference herein will be profitable. Past performance is not indicative of current or future performance is not a guarantee. The investment opportunities reference herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information containing this research is provided as general market commentary. It does not constitute investment advice. The team at Hightower should not be in any way liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other Thank you.