Managing Your Wealth: Your Vision, Our Guidance
Managing Your Wealth: Your Vision, Our Guidance
Diversifying Your Portfolio: The Last 10 Years and the Next
Join Brennan Hollenbeck, AIF®, Wealth Advisor, and Sal DiTusa for an in-depth discussion on diversifying your investments portfolio, ways to accomplish this, and trends in the industry over the last 10 years.
For more information, please contact:
Brennan Hollenbeck, AIF®
Wealth Advisor
bhollenbeck@muellersolutions.com
312.888.4638
Learn more about Mueller Financial Services' Investment Management services: https://www.muellerfinancialsolutions.com/services/investment-management
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Securities offered through LPL Financial. Member FINRA / SIPC. Investment advice offered through IHT Wealth Management, a registered investment advisor. IHT Wealth Management and Mueller Financial Services, Inc. are separate entities from LPL Financial.
Hi everyone. You're listening to"Managing Your Wealth: Your Vision, Our Guidance," the Mueller Financial Services, Inc. podcast. I'm Emily, and today I'm with Wealth Advisors, Brennan Hollenbeck and Sal DiTusa, who will be sharing insight into the importance of diversifying your portfolio, ways to accomplish this, and trends in the industry. But before we get into the topic, let's do some introductions. Brennan is an Accredited Investment Fiduciary, and has 13 years of experience providing wealth planning and financial services to high net worth individuals, multi-generational families, executives, entrepreneurs, and their closely held businesses. Sal also brings over 13 years of experience in the financial services industry. He takes the time to understand the true goals of his clients with custom tailored investment and insurance strategies that pursue their needs. So Brennan, when we were planning on this topic of discussion, you mentioned that diversifying your portfolio has actually changed within the last 10 years or so. What can you tell me about this?
Brennan:Yeah. So, if we just start with the basics and coming out of the Easter holiday, I think this is appropriate, but you really never want to put all your eggs in one basket. I think that's the most cliche thing you can say when you're talking about diversifying your portfolio, but it's probably the most important. But when we talk about diversification, we're not just talking about the assets, which obviously matter, but even take a business owner for example. They might have 90 or 95% of their net worth tied up in their business. And so, for them even diversifying the makeup of what assets they own can be very, very important. So, there's a lot of different things to think about when you think about diversification. You know, the old adage was that as someone retired and got closer to their final years of work, they would take their investment mix and make it much more conservative because now they're going to start to spend down that money, and they might do that by buying very safe investments, things like CDs or treasury bonds. And in the olden days, let's say the fifties, sixties, seventies, even eighties, these debt instruments or bonds would yield them maybe four or 5%, sometimes even six. And because of that, they didn't have to own a lot of different stocks and other investments. They could just hold the safer ones that would pay them some income. Well, today's is a lot different world. And so this concept of what we call modern portfolio theory came about, which is basically you should have a mixture of assets in your portfolio. And if we talk about a moderate level of risk, we usually mean something that's an approximately 60% allocation to stocks or equities, and that can be diversified. But usually around 40% of the portfolio then is in those safer bond-like investments. There's been a lot of talk, even in the last, I would say five years about how the 60/40 portfolio though, could be dead, meaning that a retiree will have to even think about their portfolio differently than just that. They have to diversify away from the traditional 40/60 concept or 60/40 concepts. So, over the years, things will change and we certainly think that they will continue to, but when it comes to diversification, it's, it's really a loaded question and we're going to get into that a little.
Sal:Excellent Brennan. And I would just kind of expand on that a little bit, as far as diversification and the objective of diversification within a portfolio is really this idea of having different asset classes within a portfolio that react differently to the same economic environment. So, say for example, you know, we had gas prices shoot up. We've seen that recently. Well, if you owned a basket of airline stocks that rely on jet fuel, you're more likely to see a downturn in your stock price. Right? Well, if you diversify those, you know, airline holdings to maybe include, rail holdings. Right? So, trains and things like that, that may not have, may not be as lever to gas prices. Then that's a way that you're going to get differentiated returns from holding similar type stocks, but diversifying away from airlines and holding things like, you know, rail cars is just kind of one example. So, I think the idea is to kind of understand the objective and how to diversify the portfolio. And we say diversify, you know, Brennan and I talk a lot too about diversifying money for your portfolio and diversifying risk within your portfolio. They're two very different things. So, when we talk about diversifying your money, we're talking about 12% goes into large cap growth, 10% goes into small cap value, whatever it happens to be. And that's that kind of drives your asset allocation mix and that's one form of diversification, but we also pay a lot of attention to diversifying risks within your portfolio. And what we mean by that, for example, using bonds. Well in bonds, you have two different kinds of risks. There's interest rate risk, which is the risk of interest rates moving against your position. So, most likely interest rates going up are going to hurt your bond positions unless you're shorting bonds. And so, that's one type of risk. The other type of risk is credit risk, which is basically, is this person gonna pay me back my money? Or is this company going to pay me back my money? So when we're putting together bond portfolios, we're not just putting different money in each, in each bucket, We're actually diversifying the risk and saying, okay, how much interest rate risk do we want in our bond portfolio? How much credit risks do we want in our portfolio? And diversifying amongst different kinds of risks to me is really one of the true powers of diversification. And what that does is that gives you this kind of zig and zag portfolio to where, you know, if something happens in the economy, one part of your portfolio might zig while the other zags. So, you want your portfolio not acting in lockstep with each other, but you want it behaving differently, given the different economic environment. So as I said, assets, that react differently to the same thing going on in the economy.
Brennan:And I think that's even more so important in today's economic environment. We have rising interest rates. We have the highest inflation we've seen in a long, long time. And then you couple it with, you know, geopolitical risks out there, and it really becomes important that you are working with an advisor or a financial planner to make sure that you have the right diversification in your portfolio because different asset classes are not acting like they used to and you know, who knows what they might do in the future. But that's what we're here to try to help our clients dive through and digest. Yeah.
Sal:Excellent, Brennan. And, and I think that's a good job of kind of explaining what diversification is. But also I think a, a minute or two on what diversification isn't, it is kind of a good topic to, to broach as well. So, I get clients and friends and prospects, and they'll say, you know, I want to diversify. So, I'm going to put a million dollars with this advisor and a million dollars with that advisor and a million dollars with that advisor and diversify across three advisors. That is not diversification. Each of these, you know, advisers, if you own this example, all buy from the same stock market, all get the same bonds from, you know, each of the portfolios within the bond market and things like that. So, this idea that I hear from a lot of clients is I'm going to just use different advisor and that's diversification. That's not diversification. The other thing I get and hear from clients, is this idea of diversifying amongst the same asset class. So, if you have large cap growth, for example, and I want to buy Fidelity's large cap growth, and then to diversify, I'm going to buy, you know, Eaton Vance's large cap growth. That's not really diversifying either. You still have kind of the long, only equity risk and large cap growth, that's driving the portfolio. So, I think those are two misconceptions that I hear about diversification. I don't know if you have anything to expand on that with.
Brennan:Just that if you know, I do have clients that tell me why I'm going to think about using another advisor to diversify, like you just said, and in reality, if you're going to do that, you would want those advisors working together anyway. You don't want them working in two separate boxes where they might be doing something completely different. They should be working towards your collective goals as one unit. So, that right there can actually hurt yourself because maybe they are acting in lockstep and your whole thought process is flawed from the get-go. So, absolutely.
Sal:That's right, Brennan. That's a good point because we do work with several high net worth individuals. And I say, once you're in kind of that 20 million and over range, you might want to, you can start considering kind of different advisors, and we have clients of that makeup that do have, you know, two advisors and have, you know, large asset levels and exactly right, Brennan, we work with their other advisors. You know, we may be running more of the private equity, private real estate, alternative type of portfolio for them on our side. And the other advisor might be running a core equity or core bond portfolio on their side of the ledger. So, absolutely we do have folks that do that and we do communicate back and forth with the other advisors.
Emily:I think that's a really nice segue into a follow-up question. What tools does Mueller financial services use to help clients diversify their portfolios?
Sal:Yeah. Thanks Emily, I could take that one. And as far as tools, you know, I interpret that as investment vehicles. So, you know, predominantly the asset classes, you'll diversify a portfolio across are going to be stocks, bonds, cash, and alternatives. And within those different asset classes, we can use mutual funds. We use exchange traded funds or ETFs. We also use private money managers. We use alternatives like private, real estate and private equity, which have a very different kind of sequence of return, which provide good diversification. So, to us, it's more about making sure we're we have the right asset location as far as well as the right asset allocation. So, to diversify a taxable portfolio, you know, we're going to use more exchange traded funds and municipal bonds because we want to run a tax sensitive portfolio. So, we'll use those assets, those investment vehicles to diversify. If we're using, you know, if we're looking at a retirement account, like an IRA or 401k, we'll use more kind of mutual funds because we're not really worried about the tax liability and the long-term gains coming from the mutual funds. So, we're fine using those in a IRA type portfolio and for, you know, clients of substantial net worth say maybe over a million dollars in taxable assets, we'll use more private money managers and private alternatives to help kind of diversify their portfolio. You know, likely we work with clients that have, you know, retirement assets after tax accounts, Roths, 529 savings accounts. So, all those different vehicles, we use different investments to kind of diversify depending on the tax ability of the account and the objective of the account and things like that.
Brennan:Yeah, I think the one thing I would add to that is just the importance that Mueller Financial Services is an independent wealth management firm, and Sal and I get to sit across from our clients, you know, and truly tell them that we are just trying to absolutely build them the best portfolio that is in line with not only their risk tolerance and, and what their objectives are, but really what are they trying to accomplish within that portfolio? And so to us, we are absolutely agnostic when it comes to, if it is a mutual fund or an ETF or as Sal mentioned alternative or something of that nature, we put that in a client's portfolio because we are a fiduciary to them and we truly believe that it is the best asset to use for that specific client. You know, we get a lot of questions about, for instance, Bitcoin and, you know, it's, it's not in our core portfolios. Who know if it, who knows if it will be someday, you know, Sal and I can both speak intelligently about it, but we recognize that there is a lot of asset classes out there when it comes to what clients have to choose from and what investment managers have to pick from, and to us, we're at we're very much agnostic in our, in our goals and what we're trying to, to do with that portfolio. Sal mentioned just briefly, but even it comes down to, you know, how tax efficient do we need to be in this portfolio? That's really gonna determine what tools we use, some funds and some ETFs and some different things are much more tax efficient than others. And so, we have to be very conscious of that when we're drawing from our, our toolbox and tool shed.
Emily:You mentioned a number of different investment vehicles, but is there such a thing as too much diversification?
Brennan:You know, I think that the important thing to understand is just that taking a targeted approach and having a reason as to why is, is important when it comes to diversification, Sal, and I will, we'll see a lot of portfolios from time to time. They might have 60, 80 stocks in there. So, this person has one or one and a half percent in each name. And they're all tied to the same category. You know, they they're missing one whole side of the market or they have absolutely no international exposure or they worked with someone to only buy, you know, three to five-year municipal bonds. Well, that's one very tight segment of the market. So, you know, at the same token, you don't just want to sprinkle the infield. You want to have a reason as to why you've got your pitcher out there and your first basement and your outfielder. They all have a specific spot on the team and they all should have, have a reason. So yeah, there can be too much diversification. Because it comes down to then, you know, how was that acting towards the actual outcome? Is it, is it actually adding to the success of that outcome? Or is it just there as a, as an extra name in the portfolio?
Sal:Yeah. I think when we look at constructing portfolios at a minimum of an allocation to have it really be meaningful, and an allocation is usually like four to 5% of a specific strategy within an overall portfolio. Now, if it's just a stock portfolio, wouldn't be probably four to 5% of an individual stock. But if we're talking about a diversified portfolio of mutual funds, usually for it to have any additive benefit for diversification needs to be at least a four to 5% weighting.
Emily:And how might someone's age or life stage affect their portfolio makeup?
Sal:Yeah. Yeah. Good question, Emily. And to me, the questions should really be how does their time horizon affect their portfolio makeup? And we certainly look at that when dealing with clients across the whole spectrum of life cycles that people find themselves in. So, you know, typically when someone's in accumulation phase or growth phase, you know, we have clients who are a hundred percent equities, maybe 80% equities and 20% bonds, and we'll have them in that phase, the kind of accumulation phase for awhile. Then once they they're within say maybe five or so years of retirement, we will dial back the risk to kind of protect a little bit more. So, there you'll be in more of a moderate to moderate growth portfolio. Call it 60% stocks, 40% bonds. Or 70% stocks and 30% bonds. And then typically when they get to retirement, you're looking at more of a moderate to moderate-conservative portfolio. So, a portfolio, let's call it maybe 50/50 stocks and bonds, or 60/40 stocks versus bonds. And so as they do get closer to retirement, we're certainly making the portfolios more conservative. But in addition to that, we're making the underlying assets potentially more conservative as well. So, as you get closer to retirement, we're going to do more strategies to kind of hedge the downside risks. Because that's one of the biggest downfalls you can have going into retirement; retiring, and in one or two years suffering significant investment losses and your portfolio will have a pretty big impact on your overall financial plan. So to us, it's just as important to avoid the big potholes as it is to get the fancy investment returns in retirement. That's for the accumulation phase and things like that. So, the portfolios will get more conservative and then the underlying investments will also get tweaked to be, you know, have more downside protection. We're also going to focus on income. Once you get into, you know, the distribution phase or retirement phase, we're looking for investments that generate more dividends and more income and things like that.
Brennan:And name of the game, just to add on that Sal, I think the name of the game when you head into retirement is how am I going to replace my income? Right? You go from getting a paycheck every couple of weeks to now you're leaning on your investment portfolio to generate that paycheck for you. So, as Sal mentioned, it becomes very important that you have a investment manager and a financial planner that are managing your cashflow, and that all ties to how your portfolio is diversified. Like Sal said, using those, those dividend payers and some, some funds that are not going to act as aggressive on that downside becomes very, very important. I like to give the old adage sell that, you know, if you start out with a dollar and let's say you lose 50% of that, you're down to 50 cents. Well, how long does it going to take for you to recover back to that dollar? It's going to take you a hundred percent return. So, when you go into that, that distribution phase or retirement phase of your life, it is really, really important to protect on the downside because you just don't have the time to make it up. You know, if you're younger and you're in the accumulation phase, you're going to be saving for 20, 30 years. So, absolutely the stage of your life and, and the, the timeline that you have left should, should absolutely affect the makeup of what you're doing inside your, your investment assets.
Sal:Yeah. Yeah. And to expand on that even further, Brennan, is we also even take it a level deeper and look at, you know, okay, so, we've changed your asset allocation. We've given you less volatile assets now that you're retirement well, the final step is to look at kind of your portfolio construction and what we like to do for our clients and distribution phase say you're taking five grand a month off the portfolio while we have six months worth of cash set aside out of the portfolio that isn't at market risk. So, in this case, we'd have$30,000 sitting in cash ready to come to you for your monthly paycheck, like Brennan had alluded to, totally out of the market. So, as things like COVID hit and rates spike and the market gets volatile, we don't have to worry about going into your portfolio and selling equities when they've just taken a 10% sell off to generate. For your distributions that would lock in a permanent loss of capital, which is why we set it outside of the market, ready to go to you for you. And then we can let the portfolio kind of ride the ups and downs of the market and then kind of do what the, the economic environment does during that time period. And we are fine because we have your money already set out of the market.
Brennan:Totally agree.
Emily:Taking everything that we just talked about into consideration when it comes to portfolio diversification, what do you think the next 10 years have in store?
Brennan:Yeah, I think I would just start out by saying, Emily, that the, you know, the last 10 years was very fruitful. We had very, very much positive returns across the board in almost any asset class you looked at. I also think it's interesting that there were some asset classes that came about that were never there. You know, we talked about this whole digital asset thing, just touched on it, but the Bitcoin right, or any other cryptocurrency. Who knows what's going to be created in the next 10 years. So it, it is a little bit of a loaded question there, but a very good one of what do we think the next 10 years are going to hold? I think that from a portfolio construction standpoint, it becomes even more pivotal that you're working with someone that truly understands what you're trying to accomplish because, it's not going to be a, probably a marketplace and we've seen it this year already with all the volatility. It's not going to be a marketplace where you can. You know, by any asset class and you're generally going to go up, you know, eight, 10, 12%. We just don't think that's, that's how things are gonna move. We also think that, you know, there's a lot of things that are going to cause different asset classes to act differently. So, you know, real estate, for instance, we like the asset class, we've got an allocation to it. But it's what kind of real estate do you own? Do you own retail and office space, which are on a downtrend or do you own multifamily housing? And, you know, well, let's say a shipping and receiving type of warehouses. So even, even that, as an example is, you know, one asset class can act very differently given different market conditions. So, it's why it becomes really important to make sure that you have a plan for what you're trying to do. And then you have a well thought out blueprint and execution to that.
Sal:Yeah. And to just kind of expand on that. I mean, I have no idea really what it means for diversification, but I definitely agree with Brennan that the last 10 years are gonna look nothing like the next 10 years, in my opinion, you see the last 10 years have been accommodated with easy money policies, you know, accommodated fiscal and monetary policies, near zero rate borrowing. And, you know, we've already seen rates spike and what that's done to kind of growth assets. So, you know, to me, it just means it's going to put more emphasis on diversification and to me, probably further diversification into the private market. So, it's things like private real estate, hedge strategies, private equity. I think those are going to be the next leg of diversifying a, you know, a typical kind of investors portfolio for the next 10 years. I think you have to take advantage of the private markets, and a lot of the investment managers have come to market with solutions to kind of help the typical client take advantage of those opportunities. And we're using those in portfolios as well. And I think those are going to just become more important as time goes on.
Emily:Some really great information to unpack here. Thank you both very much for joining the podcast today. And if any of our listeners have any questions or would like to learn more, can you please share how they might be able to reach you? Let's start with you, Brennan.
Brennan:Yeah, sure. So, my direct phone number is(312) 888-4638. My email address is my first initial, B, last name, Hollenbeck, at muellersolutions.com. If you Google our website, you can also find Sal and I's contact info on there. And, I even have a, a link where you can book an appointment with me if you'd like. So, you get availability of all my calendar, and if you want to ask me a question, I'm more than happy to talk about portfolios or planning or the economic environment. There's a, there's really nothing that I wouldn't be available to, to discussing. So, please do feel like you can use our firm, myself, Sal as a resource for any of your questions. We always say we would much rather you get some advice from us. If it takes us 15, 20 minutes to explain something and you make a wise financial decision because of that, that's what we're here to do. We don't want people out there Googling answers, cause you never know what you'll get.
Sal:Absolutely, and I can be reached at my direct phone number here at the office is(847) 717-8302. And an email for myself is S as in Sal. And then my last name is DiTusa, which is D I T U S A at muellersolutions.com, and like Brennan, standing by ready to help with anything you may need.
Emily:Thank you again for joining today's podcast, Sal and Brennan. It was really great to have.
Brennan:Thank you for having us.
Sal:Thanks guys.
Emily:And thank you for listening. If you're interested to learn more about diversifying your portfolio or more about Mueller Financial Services in general, visit muellerfinancialsolutions.com, where you will find out more information about the firm's services and team members. You can also follow the firm on LinkedIn at Mueller Financial Services, Inc. for more firm updates, insights, and upcoming events. Member FINRA/SIPC. Investment advice offered through IHT Wealth Management, a registered investment advisor. IHT Wealth Management and Mueller Financial Services, Inc. are separate entities from LPL Financial. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. No strategy assures success or protects against loss. There's no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor's portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.