A listener asks:

“The current economic situation seems to be taking a turn with high inflation, interest rates on the rise, and the pandemic potentially slowing down, allowing the economy to reopen. Given that backdrop, I’m curious about how to choose investments for the future? Even for the long-term, 5-10 years, how do you perceive this macro environment and what investments will you shift?”

Matt and I discuss this question and how to adjust your portfolio. Our discussion includes:

  • Is 5-10 years really “long term”?
  • If you have a thesis on how to invest given the current conditions, how do you implement an investment strategy

-How confident are you?

-When do you re-evaluate your thesis or adjust your investments?

-How much work and stress will that cause you?

  • Why do I recommend low-cost index funds?

-80% of actively managed funds, trying to make active investments based on the current environment, fail to beat passive low-index funds. Are you confident you can do better?

-You get better returns: a win-win!

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Transcript
Matt:

Welcome to real financial planning, broadcast on WK, Excel, and

Matt:

available wherever you get podcasts.

Matt:

I'm Robinson and I'm joined as always by Mike Morton, the host of financial

Matt:

planning for entrepreneurs, which is an excellent podcast for people who care

Matt:

about their personal financial situation.

Matt:

If you don't care about your personal financial sector.

Matt:

Don't listen to Mike Morton's podcast.

Matt:

Also, this show is available in the capital closeup podcast feed.

Matt:

They're both excellent ways to get a hold of show.

Matt:

We hope you'll subscribe both, and we're super happy that you're

Matt:

listening to us on WK radio, which you can hear all over New Hampshire.

Matt:

Mike, welcome back.

Mike:

thanks, Matt.

Mike:

, I love being on the radio airwaves and I do want those out there listening

Mike:

in the radio to send in a question because we're getting more questions.

Mike:

So when you've safely pulled off the road to wherever you're going, or

Mike:

if you're listening to the office, jot down a question and send it in

Mike:

because would love to answer those here on the podcast and on the air

Matt:

All right.

Matt:

So there are two ways people can get their questions into us.

Matt:

Let's just them as always.

Matt:

One is by email.

Matt:

What's that email?

Mike:

financial planning .

Matt:

Also feel free to look up the beyond politics with Paul

Matt:

Hodes Matt Robinson, Facebook page.

Matt:

That's the name of our overall show We're on every day, four to six on WK XL radio.

Matt:

And so if you go to Facebook, you just enter a question there.

Matt:

We will see it.

Matt:

We will check it out or you can send in an email.

Matt:

Mike's right.

Matt:

Pull over to the of the road.

Matt:

If you're driving, or if you're in the office, pull over to side of your

Matt:

office, don't let your boss catch you doing your personal financial planning.

Matt:

Speaking of questions that we get listeners, we have a question

Matt:

from a listener, which awesome.

Matt:

I'm going to read it, Mike.

Matt:

The question is the current economic situation seems to be

Matt:

taking a turn high inflation.

Mike:

wait, hold on a second, Matt, You said economic.

Mike:

I pronounce it.

Mike:

Economic.

Mike:

You said economic and you just threw me for a loop on the whole question.

Matt:

Economic economic.

Matt:

That's an interesting question.

Matt:

I, I think it depends on what sentence you catch me in.

Matt:

I don't,

Matt:

I, now you've thrown me off.

Mike:

read the question.

Mike:

Here we go.

Mike:

Let's

Matt:

All right.

Matt:

The current economic situation seems to be taking a turn with high inflation interest

Matt:

rates on the rise and the pandemic potentially slowing down, allowing

Matt:

the economy to reopen, given that I'm curious about how to choose investments

Matt:

for the future, even for the long-term five to 10 years, how do you perceive

Matt:

this environment and what investments will you be shifting Mike Morton?

Matt:

So there's a lot in that question.

Mike:

It's a really great question because I do feel we're in a

Mike:

slightly different time, right?

Mike:

The last, five years call it, things have been just tugging along pandemic

Mike:

aside, but in terms of the economy and profits and companies and low interest

Mike:

rates, we've been in that environment a long time no inflation to of.

Mike:

And now, inflation's obviously kicked up interest rates are on the

Mike:

rise of fed stepping in this year.

Mike:

And the economy is still, heating up potentially reopening.

Mike:

And certain areas we've seen a shift with what stocks have been doing well,

Mike:

technology stocks coming down energy and financial stocks on the rise.

Mike:

So given that you can tend to think, okay, the next five or 10 years, maybe

Mike:

we're in this little bit of a shift.

Mike:

And so how do we position our portfolios for the next long

Mike:

while I'll use that from.

Mike:

From the question.

Mike:

here.

Mike:

And what should we do thinking about that future from a sort

Mike:

of macro economic perspective.

Matt:

Yeah that makes sense to me.

Matt:

As, as much as you've been very super clear on this show that what you

Matt:

want to do is invest for longterm.

Matt:

And if you do nothing else, just get a good index, go with the market over time.

Matt:

That'll do well for you.

Matt:

Obviously the listeners to this show are who do want to think a little bit more

Matt:

deeply about how they're themselves.

Matt:

Maybe they're investing in individual sectors, industries, types of investments

Matt:

or individual stocks, and right.

Matt:

Seen as we're recording this and obviously the show might have.

Matt:

Shelf life.

Matt:

But this week, we've just seen this big market tumble for Metta

Matt:

the holding company over Facebook.

Matt:

And some of it is because of apparently the.

Matt:

Expectation of rising interest rates, which means less free money

Matt:

available big companies that like to invest in lots speculative stuff.

Matt:

So it would make if you're in that realm of about more individualized investing,

Matt:

it would make you a little bit what that next five to 10 year picture looks

Mike:

Yeah.

Mike:

So let me break apart some of the components one, the first thing.

Mike:

Th the listener has long-term five to 10 years.

Mike:

And in investing frameworks, that is extremely short.

Mike:

So have to understand that the investing typically, when I look at

Mike:

how to invest and the research behind.

Mike:

Any five-year period, you could see a lot of volatility.

Mike:

And that sounds bizarre because we're humans and years is a really

Mike:

long time for us, think of where you were five years ago in your life.

Mike:

But the markets, ebb and flow with a much longer time horizon.

Mike:

So the classic economic cycle business cycle would be five to 10 years.

Mike:

I'm going through these and troughs.

Mike:

So you have to take a really longer term.

Mike:

Time horizon.

Mike:

So that is just not very long to even evaluate an investing strategy.

Mike:

of five or 10 years just not that long to evaluate that kind of investing strategy.

Mike:

So realize that first, but let me ask you this question, Matt.

Mike:

So now we're thinking, okay, given the backdrop, we just talked about

Mike:

this economic environment shifting,

Mike:

if you looked at it, he said geez, maybe international will

Mike:

be better than the U S I have.

Mike:

I've got a That investing the international markets be better or

Mike:

this sector the financials or energy.

Mike:

I think that sector will be better over the next five to 10 years.

Mike:

If you have some thesis like that, first of all, how

Mike:

confident are you in that thesis?

Mike:

Let's say you're 60% confident.

Mike:

geez.

Mike:

Better than a coin I don't know, 50 50.

Mike:

So I hopefully feel more confident than that.

Mike:

I'm 60 or 70% confident.

Mike:

Okay.

Mike:

So you're going to go and make those bets.

Mike:

So I'm gonna invest in these sectors, in this thing.

Mike:

What if you're wrong?

Matt:

Yeah.

Matt:

What I would probably do, I guess the general version of the question

Matt:

is if you're making a decision and you're 60% confident, it

Matt:

depends what the stakes are, right?

Matt:

If I'm 60% confident that my house is going to blow up this morning, Then I'm

Matt:

pretty worried about the 40% 40% is bad, like 40% chance of my house blowing up.

Matt:

That's not great.

Matt:

So I, if it's 60% that I'm going to get a good chicken club sandwich, at the which

Matt:

by the way, downtown Concord has the best that's side note, but the point is, yeah.

Matt:

I, I, if I'm, if there's a 40% chance that I'm wrong, I don't really care.

Matt:

So if you're talking about the investments,

Mike:

Let me ask it, let me ask you this So you are, you've got some thesis.

Mike:

Hey, I think this thing based on the macro economics, I think it's more

Mike:

likely this a better investment outcome.

Mike:

I'm about 70% confident.

Mike:

I Obviously you're not going to be a hundred percent and you probably

Mike:

won't even be like 80 or 90.

Mike:

So what would you do?

Matt:

I'm going to hedge.

Matt:

I'm not going to go all in on it.

Matt:

I'm not going to I'm 60% confident.

Matt:

So my thesis is w let's say my thesis is, you don't want tech stocks these Facebooks

Matt:

Googles, they're not going to do.

Matt:

well.

Matt:

They're going to go through a rough patch in the five to 10 year So I'm

Matt:

going to, I'm not I'm bearish on those if that's my thesis and sure

Matt:

there's a way I could figure out how to place a bet on that in the market.

Matt:

But am I going to put my college fund into that?

Matt:

like I might, I'm going to hedge.

Mike:

All right, fine.

Mike:

you say, I'll take, I'm going to just tilt, we call it tilting your portfolio,

Mike:

away from those technology Okay.

Mike:

So 10 to 20% of your portfolio is tilted away from the companies.

Mike:

You don't they're going to do as well in the future.

Mike:

Like they've done, screamingly.

Mike:

In the past, now we have said this a few years ago, there were a lot of articles

Mike:

around breaking up, big tech companies.

Mike:

And then look, what's happened the last couple of years, you

Mike:

have missed out on all Okay.

Mike:

So now my next question you met is, are you taking that.

Mike:

In your portfolio, when do you reevaluate that?

Mike:

If you're Right.

Mike:

or wrong,

Matt:

That's a one.

Matt:

Just gut instinct.

Matt:

I, based on everything that we discuss on this my gut is you don't reevaluate

Matt:

like every day or every few weeks.

Matt:

I probably would, if we're talking about a five 10 year horizon, I'm probably

Matt:

going try hard, not to reevaluate for six

Mike:

Right.

Mike:

So I love the way you answered that, because you said you would try.

Mike:

Not to reevaluate.

Mike:

Now I started this with telling you investing time horizons five

Mike:

to 10 years is pretty short.

Mike:

And so now you're in a situation just you and the listeners out

Mike:

there imagining their own thesis and how they would, make those bets.

Mike:

And now they're putting themselves in the future like are and saying

Mike:

I would try hard not to think about it stress about it slash reevaluate.

Mike:

Now, what if it's turning against you?

Mike:

Oh, in one year, which we know is a very short investing time around.

Mike:

Your tilt is not working out in your Jeez, Facebooks and apples and Microsoft,

Mike:

they're making money, hand fist still, things that whatever happens, they're

Mike:

still doing really well this year.

Mike:

And you're your tilt, isn't working out in your favor.

Mike:

Do you stick with your stress?

Matt:

I probably do.

Matt:

probably do if, and the reason is if I had a strategy that was a five to 10,

Matt:

if the way you it, the way investors put it, I had a which is here's,

Matt:

what's going to happen in this time.

Matt:

If I have something that disproves my right?

Matt:

Let's say my thesis.

Matt:

Relies on.

Matt:

I am confident that regulators are gonna break up Facebook

Matt:

. But for that to happen my timeframe,

Matt:

If something happens to disprove my thesis, then I'll change strategy.

Matt:

But if my thesis is still valid and if I'm tilting with an amount of money, That

Matt:

I can afford to tilt with, that isn't going totally destroy my future then.

Matt:

Yeah.

Matt:

I'm probably sticking with it.

Matt:

I feel like I might be wrong

Matt:

but that's my gut.

Mike:

look, all of this has to do with individual investing in, the framework

Mike:

for how you want to do that investing.

Mike:

And we started this with the listener question, Hey, I think, given the

Mike:

backdrop, do you have a thesis?

Mike:

My answer is I don't really have a macro thesis.

Mike:

I'm walking you through where I would get to in terms of investing,

Mike:

which talked about in this show, but also today's episode.

Mike:

Why.

Mike:

I talk about it in this way.

Mike:

So what we're going through is your own and thinking about your

Mike:

and when do you evaluate it?

Mike:

This is important.

Mike:

Question to me is how you just answered that if have a thesis and you invest

Mike:

in that, write it down and revisit it every so often, that means you ahead of

Mike:

time, I'm going to revisit it on the, on this schedule and think about it.

Mike:

what I don't want you to do is switch strategy.

Mike:

Every other year, and it's much better to stick with a strategy than to switch it.

Mike:

And what I'm trying to say is if you were 60 or 70% confident, that means

Mike:

there's a good chance you were wrong.

Mike:

And if there's a good chance, you're wrong, then what does it cost you?

Mike:

That was your point.

Mike:

And what do you gain if you switched 10 or 20% of your portfolio to

Mike:

hopefully make five or 10% more over a or 10 year time horizon.

Mike:

With not that great of confidence.

Mike:

Yeah.

Mike:

Maybe it works out and maybe it doesn't and you've caused yourself a lot of

Mike:

stress in the meantime, revisiting this allocation, monitoring your portfolio.

Mike:

Now, if it's fun for you and you like picking some individual

Mike:

stocks doing that's great.

Mike:

But the question was more given macro economics.

Mike:

Would you shift your portfolio and buy what we've talked through today?

Mike:

You see how hard it is and why it's not really.

Mike:

Worth the effort, because you're just not that confident.

Mike:

Even if you came up with a thesis, you're not going to be that confident

Mike:

and you'll probably end switching straps.

Matt:

I don't want to literally bet the house and I don't want to get into

Matt:

a where I'm second guessing myself.

Matt:

It sounds like part of what you're saying is that key

Matt:

question when do you reevaluate.

Matt:

Yeah, that has to part of your strategy.

Matt:

You have to write down here are the circumstances that are,

Matt:

which I think my thesis has disproven and it's time to bail.

Matt:

And here is the timeframe that I'm going to look at this, and

Matt:

I'm going to put that in my drawer

Mike:

And also I want to realize how much money you could potentially make or lose.

Mike:

And I would look at that ahead of time.

Mike:

Look, I'll bet you, like you said, maybe 10 or tilt a portfolio.

Mike:

What are are your expectations about coming out or behind making

Mike:

an extra five or 10% put some dollars behind it and then realize.

Mike:

It's not to change your You're not starting a new company

Mike:

that you hope to, have an IPO.

Mike:

You aren't, betting, like you said, betting the house on one thing that you

Mike:

hope to double in a year that would really have significant impact your lifestyle.

Mike:

We're talking about tilting things and making some bets so that

Mike:

behind us, let me tell you why.

Mike:

I talk about things that I do on this show, which is investing for the long-term

Mike:

and keeping it very simplified portfolio.

Mike:

Look, if I believed that there was a reason to invest certain sectors or

Mike:

to invest in a, tilt a portfolio of certain ways, then I would definitely

Mike:

tell the listeners, okay, this isn't trying to avoid some extra work,

Mike:

and effort and thinking the point is that not only can you avoid all

Mike:

that extra work by having simple portfolio, you actually come out of.

Mike:

So it's a double win.

Mike:

You're going to come out ahead and you're going to avoid all the stress in the work.

Mike:

And here's why Matt, because I've looked at the past.

Mike:

And the research behind it.

Mike:

And so when we're talking about actively managed funds passive, all

Mike:

these active managers, you can give the, a port, a fund manager, some

Mike:

money, and they're doing this exact thing that we're talking about today.

Mike:

What's the macro economic environment.

Mike:

Where should we tilt portfolios?

Mike:

Where should I invest?

Mike:

I this country is better than this country.

Mike:

I think tech is, not so good.

Mike:

I think better.

Mike:

They're actively managing.

Mike:

The money.

Mike:

This is what they do.

Mike:

And when you look at the results, 80% of this is the large cap funds.

Mike:

we can look at actively managed versus passively passive index like

Mike:

an S and P 500 large cap us large cap at 80% of actively managed

Mike:

us large cap funds, underperform the simple S and P 500 over 10.

Mike:

So 80% of these managers to predict what we are today, the listener

Mike:

question, what's the macro economic environment, where am I going to dollars?

Mike:

That's what fund managers do all day long and 80% of them underperform, a

Mike:

simple buy and hold of the S and P 500.

Mike:

And this is why I recommend what I do a simple buy and hold of a

Mike:

well-diversified portfolio will outperform 80% of active managers out.

Mike:

there.

Matt:

It's.

Matt:

So it's going back to your example and it could be the chicken

Matt:

sandwich or the house version of it.

Matt:

It's not that I'm confident it's that I should be 80% confident that I'm wrong.

Matt:

That that whatever thesis I have is probably not as good as not having a

Mike:

Yeah.

Mike:

Now part of it's the fees.

Mike:

I do want to be clear part of it like the active managers underperform after fees.

Mike:

Cause you can just buy and hold the S and P

Matt:

Oh, I

Mike:

for so cheaply and you might charge you 1%, so now they have beat the S

Mike:

and P by that 1%, just to make up fees.

Mike:

So if you're doing it on your own, obviously you you should pay yourself

Mike:

for all that time and effort, but you probably don't track it that way.

Mike:

that's point so what you just said.

Mike:

I'm 80% confident a simple buy and hold of the, of a large index funds

Mike:

will outperform, actively managed over 10 years, time horizons.

Mike:

Looking backwards, historical.

Matt:

Let's say you have some money that you want to tilt You feel like

Matt:

you're well-diversified, you're like, look, there's a certain portion

Matt:

of this where I, it is fun for me.

Matt:

Or, I just, I want to be a little bit more aggressive.

Matt:

Where would you go to develop a

Mike:

What I would do there is for that individual that has some money that

Mike:

they want we call play with in quotes.

Mike:

I want to make some active bets, just make sure again that how

Mike:

much are you going to do?

Mike:

What's the dollar amount and what is your own framework for doing that?

Mike:

Hey, I'm going to do this dollar amount and I'm going to

Mike:

invest in these kinds of things.

Mike:

Hoping to achieve this.

Mike:

Now everybody has their own, there's no place that I can send, listeners

Mike:

to that because everyone has their own concept of oh, I like these kinds of

Mike:

companies or I work in this sector.

Mike:

I know, I've got some inside information about companies I think would do well.

Mike:

And that's great.

Mike:

And a lot of my clients have that itch.

Mike:

They need to scratch.

Mike:

And so we set aside some amount of money and make a little game or a frame.

Mike:

And say, okay.

Mike:

$40,000.

Mike:

And just track that the number one tip I can give you is to

Mike:

track what you do over time.

Mike:

And then in one or two or three years, just compare it to a low cost index fund.

Mike:

If you're betting on us companies just do it versus the total us stock market,

Mike:

just see, that makes it a more fun game.

Mike:

Did come out ahead?

Mike:

How did you, do you know, how's working out for you?

Mike:

So I would definitely just

Mike:

give that tip

Matt:

yourself honest.

Matt:

And you may or may And you may or may not want to share your performance

Matt:

versus that with your spouse.

Matt:

It really depends on how you It really my advice to you advice to you

Matt:

is even if you did well, that means that your spouse is going to want

Matt:

to spouse is going to want to know the don't set yourself up that way.

Matt:

don't set yourself up that way Don't do the laundry Don't do the

Matt:

laundry well when your spouse asks, All right Mike Borton All right,

Matt:

Mike Borton thanks very question.

Matt:

We have a, another We have a another us question pending with us.

Matt:

I'm looking forward to getting to that one in our please listeners So please

Matt:

listeners, keep sending those along for Mike Morton nine Matt Robinson.

Matt:

We'll see you next

Matt:

time

Mike:

Thanks Matt

Mike:

Thanks for joining us on financial planning for entrepreneurs.

Mike:

If you like, what you heard, please subscribe to and rate the podcast on

Mike:

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Mike:

You can connect with me on linkedin or mortonfinancialadvice.com.

Mike:

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Mike:

If you have a comment or question, please email me at

Mike:

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