Your Questions Answered—Q1 2022 | Podcast

Your Questions Answered—Q1 2022

May 4, 2022

Episode Description
FEATURING Charles Toole, Jeff DeMaso and Steve Johnson

You asked, we answered. During our recent webinars, we were pleased to receive a bevy of questions from participants—but there simply wasn’t enough time to answer them all. Now we’re back with our investment experts to tackle these pressing topics, including:

  • Are I Bonds a good fixed-income option in the current market?
  • When is the right time to go to cash, and where should you keep it?
  • Is this the right environment for tax-loss harvesting?

Investors have been on a rollercoaster so far in 2022. Jeff, Steve and Charlie can help you understand how to deal with the dips. Listen now to learn more! And if you missed them on the first go-round, click to catch up on our Quarterly Webinar and our special Bond Webinar, where we tackled even more of your questions while providing our broad outlook on the current market climate.

Episode Transcript

Charlie Toole:

You asked, so we’ll answer. There were too many questions for us to address at our recent quarterly webinar and special bond webinar. Join us as we address the topics that you care about.

Joining me today is Jeff DeMaso, our director of research. He’s responsible for overseeing the investment team here at Adviser, and he’s also the portfolio manager of our core mutual fund portfolios. Jeff, welcome.

Jeff DeMaso:

Hey Charlie. Good to be here.

Charlie Toole:

Also joining us is Steve Johnson. He’s a vice president and portfolio manager. Steve and I co-manage the Dividend Income portfolio, and Steve is also a CERTIFIED FINANCIAL PLANNER that works with clients. Steve, welcome.

Steve Johnson:

Happy to be here today. Thanks for having me, Charlie.

Charlie Toole:

All right. So we got a lot of questions and as I mentioned, bonds were down nearly 10% to start the year, so we’ve got a lot of questions on bonds and that’s the first one we’ll address today. Specifically, I bonds, Treasury I bonds, are they still a good place to invest at this time? And Jeff, I know you’ve done a lot of work on I bonds, so I’ll kick it to you first.

Jeff DeMaso:

Yeah. Thanks. It’s a really good question. And I do like I bonds, up to the point that the government lets me like them. So let me explain what they are and what’s good about them and some of their limitations. I bonds are savings bonds, they’re issued by the U.S. government, and they pay a rate of interest that adjusts every six months based on inflation. And they’re actually supposed to adjust this morning. I have not seen them update their website. Just refreshed the website, great. In the prior six months, I bonds have paid an interest rate of over 7%. That just went up to 9.62%. That’s great. U.S. government backed bond that’s paying 9% interest, over 9% interest. What is not to like about that? Come on, back up the boat.

Jeff DeMaso:

All right, well, there’s a few considerations. The first is that you need to buy the bonds directly from the U.S. government via Treasury Direct. So you can’t own them in your Fidelity account, your Schwab account, your Vanguard account, wherever you house the rest of your money. Second is that you can’t sell them for 12 months, and then if you sell them within the first five years, you have to give up a little bit of interest. But again, we’re talking 9% on a government backed bond. That seems tolerable. So both of those, I would kind of consider administrative headaches that you have to navigate around.

Jeff DeMaso:

The really big one, and you know why I say I like them up to a point, is that you can only buy $10,000 worth of I bonds each year. You can bump that up to an annual total of $15,000 if you’re willing to buy $5,000 as paper bonds and hold onto the piece of paper at home, adding to the administrative work you’ve got to do. So look, if it weren’t for those restrictions, particularly that $10,000 limit, we should back up the boat and you should buy I bonds as much as you can.

Jeff DeMaso:

Given those limitations where I think they’re useful and I’ve started doing this myself, is building them out as part of my emergency fund. It’s backed by the government, it’s going to increase with inflation, but I’m limited in how much I can buy. And so I’m in the process myself of just going $10,000 a year. I’m not bothering with the paper bonds, it’s kind of a step too far for me, but spending a few years building out and transitioning my emergency, my rainy day fund and moving it over to I bonds. And I think that’s kind of a good use of it, given that you’ve got that cap in terms of making it hard to move the needle in your investment portfolio.

Charlie Toole:

Right. And Steve, more on the financial planning side. And we did get a question about this, is where do you keep your safety money? And my advice is keep it in a place where you can easily get it. This is certainly one of those areas. And to your point, you’re earning a lot more with the I bond than you would be in a CD or in a bank savings account.

Jeff DeMaso:

Yeah. And that’s why I’m willing to make a bit of that hassle, doing it over a few years, because again, when you first put it in, it’s locked up for 12 months. That’s not your rainy day fund anymore because you can’t get it. So yes, I agree for that rainy day, safe money, it needs to be accessible. And you want it to be, I’m going to say, low volatility. For some people that might mean no volatility. And that might mean a CD, it might mean cash, it might mean Treasury bills, where you know you’re not relying any volatility. But also maybe you’re willing to accept a little bit and use something like an ultra-short-term bond fund. Do you need your rainy day fund to be exactly making it up $15,000? Does it have to be $15,000 day in day out or if it’s down $14,800, is that okay? Is that still going to cover your emergency?

Jeff DeMaso:

And in that case, maybe you can go to something like an ultra-short-term bond fund and try and pick up a little bit more yield, but you want to be cognizant of just the risks and what that means. And again, to your point, it’s financial planning, how much of a rainy day fund do you have? How much of emergency can you cover? Can you pull from somewhere else if you need a little bit more? Again, the financial planning, this is the foundation of your plan really.

Charlie Toole:

Right. And Steve, as a financial planner and working with clients, what do you recommend for your clients to keep in that sort of rainy day, easily accessible pool of money?

Steve Johnson:

Yeah. And it really depends. Yeah. I mean, I think every client’s situation is different so it’s difficult to have just a general rule of thumb, but, we advise having 12 to 18 months. And I think now, you can actually make that case even more strongly as opposed to last year. And I think to Jeff’s point, this is pretty amazing, what we’re talking about here. If we were doing this podcast last year, we’d be scratching our head going, gosh, I can get maybe 0.10% on a Treasury. You know, my cash is zero. And so that’s why we had everyone talking about putting it in alternatives and looking at stocks.

Steve Johnson:

But now, you can buy a one-year Treasury at 2%. A two year is at 2.71% this morning. I mean, pretty extraordinary when we think about the income that people can now get, even on the short end and for their emergency funds. So it really has changed the landscape, I think, for investors in the fact that there is now a place for them to put money, as Jeff mentioned, either I bond or even real short term Treasurys, you’re getting a return now.

Charlie Toole:

And that’s good. That’s because, as you said, a year ago that was almost like cash under the mattress. And speaking of cash, we had a lot of people asking, is now the right time to go to cash? Should I hold extra cash? Should I just stay in cash for the rest of the year with the markets and even bond markets down to start the year? So is cash, should that be where investors move their money? Jeff, I know how you feel about this, but I’m going to let you go first.

Jeff DeMaso:

All right. Yeah, I’ll go first. And Steve, round me out a little bit here.This is kind of a bit of a market timing question, right? Should you be in cash? So are you pulling from your stock portfolio? Do you think cash is going to do better than stocks? Are you pulling from your bond portfolio? Cash going to do better than bonds? And I get why people are saying this, as you said, stocks had a rough first quarter, rough first four months of the year. Bonds absolutely had a rough first four months of the year. And that was on top of a negative 2021 for bonds. I certainly get the frustration.

Jeff DeMaso:

But as Steve pointed out, you’re now getting more income from your bond portfolio. Some of the damage has been done. So now you’re earning more income from your bonds, which means that you are either getting more income or if you’re reinvesting, you’re buying more shares of your bond fund at lower prices. And as we talked about in both podcasts, bonds have this self-healing feature where they mature at par. What that means is, you know that at a certain date, the maturity date, the borrower is going to pay you back in full. ou know exactly what that bond is going to be worth at a future date.

Jeff DeMaso:

So I think that bonds still have this role in the portfolio, helping to offset equity market risk. And I know it hasn’t felt that way in the first three, four months of this year, but I still think and have confidence that’s going to play out over a longer time period of 12, 36 months, five years down the road. And I’m going on here, but it comes back to that financial planning question. If you have your rainy day fund taken care of, if you have your immediate spending needs taken care of, what we’re talking about your investment portfolio, which should be measured in terms of years, not in terms of months or quarters. And even though you are getting a bit more income on your cash, you can still find higher yields and hence better returns on bonds over time. Again, assuming it matches up with your time horizon. Steve, help me out here.

Steve Johnson:

Well, no, no. You know, it’s funny, Jeff. I’m going to agree with you mostly on this. I do think there is a role for those people and those clients who perhaps don’t have the strength to hold on the whole time and are looking for a little bit more of a tactical solution. And albeit it’s not for everyone, in fact there’s probably a small number of clients, but there are those out there who really just have a low tolerance for loss, don’t understand what’s going on now. And perhaps a solution that is more tactical that has the ability to be more reactive to the market, go to cash, be able to have more of that as a safety, there’s clearly room for that in a, in a portfolio. And I think here at Adviser, we offer several of those solutions, especially on the fixed income side for those clients who are perhaps really in need of this cash and aren’t willing to lose a as much. And so there is a place for that.

Steve Johnson:

But to your point, the bond side right now, my gosh, I mean, if you’re a bond investor, you’ve got to be so excited. I know it’s short-term pain and it’s terrible when you’re looking at your portfolio. I’ve got a meeting this afternoon with a client and who asked just that question about their individual bonds and they’re showing 6%, 7%, 8% losses in those. But as I’ll point out, they’re going to mature at par, so that loss that they’re seeing now is not going to be a loss, and the hard part is just being able to see through that. But in the meantime, all of a sudden, your income has gone up threefold here in the last couple of months as we’ve seen that.

Steve Johnson:

So actually I’m rooting, get it over with, let’s get that two year up to 3%. We’ll see the 10-year at 3.5%, and then people can buy as many bonds as they want, because as we know, at some point that does become an option for investors and it does compete against perhaps stocks. I think you’re right, Jeff. I think the argument for cash, with the markets down as much as they are now, is clearly not as good as it was several months ago.

Steve Johnson:

And right now, actually there are parts of the market that are attractive. And I think, we’ve talked about this for a long time, and the theme of our podcast over the last couple years has been kind of stay away from that excessive speculation. And it was hard last year because everyone made money and now the market’s down 12%. But as we’ve seen, those areas of speculation are down a lot more, and I think that’s an important point is that markets have been down, but really, if you are diversified and such, it hasn’t been as bad as if you were really concentrated in those areas.

Jeff DeMaso:

Yeah. Steve, that’s great. I just want to pull on two points just to reemphasize them. I think on the tactical side, you’re absolutely right. Being more reactive makes sense for some clients. And what’s great about our tacticals, it’s disciplined, right? It’s not just going by the feel of your gut, oh, let’s put our finger in the wind and go cash here now and all over here the next day. It’s disciplined, it has a process, it’s designed to get you in and out of the market. And again, I’m going to say it again, in a disciplined way. We think that’s different than just jumping all in and out based on how you’re feeling when you wake up one morning. So completely agree on that.

Jeff DeMaso:

And, yeah, your point about being diversified. Some of the headlines, particularly around tech stocks and the NASDAQ, there’s a lot of damage there, but chances are, if you’re a diversified investor, take a look at your portfolio. You’re probably not happy with it, but it might not be as bad as some of those headlines look.

Charlie Toole:

And one more point I’ll make with the tactical is, it’s a piece of a client’s portfolio. I think you said, Jeff, not all in, not all out. And that’s how we use it. It’s a small piece that can take down the risk a little bit of a client, and it’s not all in the market or all out of the market. It’s not a binary decision. It’s a diversified piece of the client’s overall accounts.

Jeff DeMaso:

Yeah, I think that’s great. I mean, look, the three of us are going to finally round our tactical together, and it’s designed, as your point, as part of your portfolio. There’s a real emotional cost to being all in cash or all out of cash, I think. When you’re all in cash, it might feel safe, but as the market’s going down and feel good, but it’s really hard to get back invested either as things go down or when they start rebounding, it kind of takes an emotional toll for a lot of people just seeing the market not coming in and out. And again, that’s why we run it in a disciplined way that’s meant to take emotion out of investing.

Charlie Toole:

And I think one of the benefits that we have so far this year with the losses, not that we want to see losses, but we can harvest those losses in taxable accounts, and there were a few questions. Should I sell my stocks? Should I sell my bonds to take these losses? And we have been doing that, so I think the default answer is yes, but Steve, from a financial planning aspect, what’s the benefit of harvesting those losses?

Steve Johnson:

Yeah. It’s a great question and it’s probably one of the, well, I guess you can say it’s a positive out of a negative, right? I mean, we don’t like to have losses, but what we found last year is that the market’s gone up for a very long time and people are calling this year saying, Steve, I can’t believe I’ve got to pay estimated taxes now because I’ve made so much money over the last couple of years. And folks didn’t have to take their RMDs. So there was a huge issue around taxes that we’ve seen in the last couple of years. So this year early on, what has been great is yes, we’ve been able to harvest some losses.

Steve Johnson:

And with so many different funds that are out there and so many different ETFs that are just different enough so that you can avoid what’s called the wash sale, investors have a lot of options. And so yes, to be able to take a loss, either in an individual stock now, buy something that’s in the same sector that will perhaps act similarly for that time period, that’s a good strategy. But even in the bond piece, there are obviously so many different types of bonds, but being able to take that loss. And then, what you’re able to do at the end of the year, we can take a look at kind of, if there are gains to offset. And because obviously if you’re buying stocks now, odds are pretty good that a year from now, you’ll have some gains. And so being tax-aware could really help you next year, when you have to go do your taxes.

Charlie Toole:

And I just want to clarify one thing you said, the wash sale rule. When you sell a security and take that loss, you can’t buy it back for 30 days. So you have to stay out of that security. But as you said, there are a number of different substitutes, whether it’s funds or ETFs, where you’ll be able to find, as you said, a like security that gives you the same experience. If you sell the S&P 500, you can buy the Russell 1000, which is going to give you a very similar investment experience, and that’ll allow you to remain invested, but capture that loss. So one of the other questions, Jeff, I think you mentioned self-healing for bonds. Obviously, a bond matures at par. There were a number of people asking, does that self-healing philosophy also apply to bond mutual funds and bond ETFs?

Jeff DeMaso:

It absolutely does. Maybe not if you own long Treasury, the long Treasury fund, and it’s not going to own that bond to maturity because it’s supposed to just own the longest Treasury, so it’s kind of rotating through. It’s going to be a little bit different, but fundamentally it does play out the same way. And that’s because your bond fund owns bonds. The bonds themselves, if their prices are healing, that’s going to funnel through into the price of your mutual fund. Then it too is going to heal.

Jeff DeMaso:

And I think a great example of that is looking at it from the other side of the equation. And that’s saying when your bond goes up in price, so yields fall, your bond goes up in price. It goes from 100 to 105. That’s great, it feels good, but guess what? They’re still only going to pay you $100 at maturity, right? So in that case, your price is actually kind of getting pulled down.

Jeff DeMaso:

So if you take a look at something like Vanguard total bond market index, and you look at it from 1990 to today. And so this is Vanguard, it’s index fund of just high quality Treasurys, corporates, mortgage backed securities, and you look over the past 30 or so years in this period of falling interest rates in rising bond prices. Well, that funds NAV has traded pretty much between nine and 11. So it’s kind of bounced a bit around 10. So the price return’s only been about 20% and it’s supposed to be this big bond bull market. Well, pretty much all the return, the fund is up over 400% over this period. It’s come from the interest that you’ve earned. There’s a case where you’re own a bond fund and you’re still kind of being impacted. Its price over time is being pretty stable as bonds, the prices go up and down, but eventually they do get pulled to par, pulled to that 100. And again, it’s really that income and reinvestment of income that drives your return, not the price on bonds.

Charlie Toole:

Couple of questions on increasing risk or buying the dip, if you will. The basic question is, is now a good time to buy some solid stocks at the depressed prices, or do you think the market has a lot more downside? Steve, I know you have a crystal ball, so you’re able to answer this one, but go ahead.

Steve Johnson:

Yeah, no, Charlie and Jeff. You know this podcast would be two days long if you kept allowing me to talk and I probably have 17 different opinions during that timeframe, because I guess the question of that goes back to the planning piece of it. You know, we stress when we do every financial plan, what is your needed rate of return, right? And so unfortunately, investors have been taken by the excess returns, I guess, in some names over the last couple years. And people have risked, maybe taken a little too much risk. And what we’ve seen over the last couple of months is just this re-rating.

Steve Johnson:

So how much are investors willing to pay for kind of growth? And what we’ve seen is some pretty large declines in some of those most popular names, whether it be the big draw down that we saw in Netflix, or even Amazon on Friday. These are names that everyone, if you asked in your neighborhood, if anyone talked about stocks, even for investors who didn’t do a lot of investing. What stocks did you own? And they would tell you, Netflix, Facebook, Tesla, Amazon, we could talk some AMC or Game Stop. And obviously crypto.

Steve Johnson:

Well, what people have realized that, maybe I need to be a little bit more diversified. And so, should you buy this dip? It depends on your situation, but from what we look at on the broad market, we’ve seen a lot of damage already. You’ve seen a lot of damage in large cap growth stocks. You’ve seen it in the smaller growth stocks as well. And on the flip side, you’ve seen things like utilities, consumer staples, those do very well. And at some point, this rotation that we’ve seen, where everyone is gravitated toward the kind of were perceived as safer stocks, they will reach a point to where they will become probably overvalued. And those technology names, they then have an opportunity.

Steve Johnson:

We saw this in 2000 to 2002, coming out of that. We saw that investors change. And so, we like to say it’s time in the market. But now is an opportune time to kind of look at the portfolio and to perhaps rebalance. Some of those names that you owned have done very well on the defensive side. And that may continue again for another month or two, we don’t know. We do know the Fed is raising interest rates this week and probably next month as well, but things will change again. And so that’s why it’s so important to remain balanced and diversified, but take advantage. I think we don’t advocate people be all in, as Jeff said, all in or all out. Right now is a great opportunity to rethink your portfolio and reposition and rebalance. Take advantage of some of these weaknesses and some of these kind of, I would say, these real big movements that we’ve seen over the last couple of months.

Jeff DeMaso:

Yeah. Steve, I agree on that about it depends on your time horizon here. Is it a good time buy for the next month, two months, three months? Who knows? I mean, Charlie, you joked about the crystal ball. But longer term, absolutely could present some interesting opportunities and your point about rebalancing. It doesn’t mean you have to go all in on one sector or all out of another sector to take advantage of what you might perceive as opportunity.

Charlie Toole:

Yeah. And I did joke about the crystal ball. I think the long-term crystal ball is clearer than the short term to your point. If you’ve got a long time horizon, some of these stocks, as Steve mentioned, are depressed. And if you’re looking five, 10 years from now versus five months from now, a lot more confidence that the market’s going to be higher five or 10 years from now than over the next five months.

Jeff DeMaso:

Yeah. And I think there’s an important point to make here about some of these talks. Let’s take Netflix, because just had big, whatever that was 30%, 35% one day drop. And it’s down 60%, 65% from its all-time high. Netflix has been through three other drawdowns of 60% or more since its IPO. And over that time, it’s up some, I don’t know, 10,000 plus percent. Point being, even if look back and said, oh, this was a great stock. This was a huge winner, no brainer decision to buy it. Why didn’t I do that? Even if you did make that obvious in hindsight decision, it would’ve been really hard to stick with it through time. So I think that’s a underappreciated fact of owning stocks, is that it’s a regular occurring set. Individual stocks, markets to a lesser extent don’t go as big a magnitude of decline, but even markets have large drawdowns regularly, too. And it’s more a feature of investing in stocks than a bug I would say,

Charlie Toole:

Right. That’s a great way to end, is that stocks have volatility and just make sure you’re comfortable with that, whether you’re increasing risk or holding stocks in general.

Charlie Toole:

All right, Jeff and Steve, thank you for joining me today. This has been Charlie Toole, Jeff DeMaso and Steve Johnson from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you’ve enjoyed this conversation, please subscribe and review our show. You can check us out at Adviserinvestments.com/podcasts. Your feedback is always welcome. And if you have any questions or topics that you’d like us to explore, please email us at info@Adviserinvestments.com. Before closing, I’d like to thank Kailey Steele and Ashlyn Melvin. They do all the hard work making this podcast possible. Thank you for listening.

Podcast released on May 4, 2022. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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We don’t advocate that people go all in or all out. But now’s a great opportunity to rebalance and take advantage of some of these big movements that we’ve seen over the last couple months.


Steve Johnson

Vice President, Portfolio Manager

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