Investment Management

Jessica: Market summit event. Lots of familiar faces out in the crowd here. I'm Jessica Cannella, co-founder and president of Oak Harvest Financial Group. I wanted to personally thank you for attending one of my favorite events, whether you're attending live in person or on our live stream on YouTube. Before we get started, I wanted to go over just a couple of housekeeping items. Please take this moment to silence your cell phones. We're going to ask that everybody hold their questions until the end. We have a designated Q&A session, and I wanted to remind you that it is being live-streamed. If you forget, you can just look around at all the cameras surrounding us.

If you do choose to participate in the Q&A segment, it will be recorded for future broadcast. Live stream. I didn't even know really what those words meant just a couple years ago, and I wanted to tell just a quick story. It wasn't very long ago, maybe I think right during COVID 2020, that my business partner Troy Sharpe called me after hours and said, "Hey I have a crazy idea." I sat down and he said, "I'm thinking about starting a YouTube channel that's going to add a lot of value to retirees or those approaching retirement and help educate people on what their options are in retirement. It's going to be called Oak Harvest Financial Group YouTube channel."

I said, "Wonderful idea, Troy. What's the plan of execution?" He had it all written down on a one-page business plan, and he got to work. A couple weeks after that, Troy popped his head in my office. We have one wall of separation, a thin wall, between our offices. He floated the idea during construction if we wanted to have a door or a window, and I said, "No thank you. We can use our respective doors." He popped his head in my door and he said, "Hey I just want to let that we have 16 subscribers on my YouTube channel." I said, "Troy you go on with your bad self. Go record some more." I am so proud of Troy in the way that he has showed up because today we have 50,000 subscribers.

We hit 50,000 subscribers earlier this month. Thank you for the team at Oak Harvest and everybody responsible for that, especially you guys, our valued clients and viewers on YouTube. Please continue to like, subscribe, share, and help us get the information out that is changing people's financial lives. We appreciate you. Now I mentioned that this was one of my favorite events, but I didn't tell you why. This is a unique opportunity to hear directly from the individuals that are responsible for managing your money behind the scenes.

We're going to hear from a couple of our key contributors on the investment team this evening, including Chris Parris, who is our Chief Investment Officer, and Charles Scavone, who is our Director of Investments at Oak Harvest Financial Group, and the one the only Troy Sharpe, CEO, co-founder of Oak Harvest, will be moderating tonight. This is unique, I found out. It made a lot of sense to Troy and I from the outset that, of course, you would want to be able to talk directly to the people who are responsible for making financial decisions around your portfolio, especially as it relates to your investments. It turns out that's not very common in the big box brokerage firms.

I remember we had an advisor that started with us over the summer. She's here in the back, Janice. Say hi. Janice really brought this to my attention because when we were interviewing Janice, I think it was on maybe her second or third interview, she said, "Hey, I'm really interested in this position. If you'll consider me for employment, I just wanted to know if I'd had the opportunity to meet Chris Parris and Charles Scavone. I read that they're affiliated with your firm." I said, "Janice, I'll walk you back right now. You want to go meet them?" She was like fangirling. "Oh, my gosh, they work in this office?" I was like, "Tell me something. What do you know that I don't know about Chris Parris and Charles Scavone?"

She went on to share just the amount of impact that they've had in the investment world and industry. Now if you've read any bios, please make sure that you go back and read theirs if you haven't because they're super impressive. I won't stand up here and tell you everything about them. When you're in the vacuum of business ownership, I didn't know just how impactful and what celebrity status that these gentlemen had. Thank you, Janice, for bringing that to my attention. What I enjoy most about Chris Parris and Charles Scavone is their generosity of spirit, which my team will tell you is a core organizational value at Oak Harvest Financial Group.

What I mean when I say "generosity of spirit" is the willingness to give of oneself for the benefit of another. Charles and Chris exemplify this in their ability to take complex, sometimes technical, nuanced financial information, or as I like to call it, jargon, and break it down so that we can all understand what the heck is going on with our money. Not only our clients but also our advisors. Chris and Charles have spent countless hours with myself, with other team members, helping us to be able to translate how they are managing portfolios, relay our investment philosophy, and they have done an excellent job of keeping y'all connected to your money. Which brings me to my last point, which is what we're going to cover tonight.

Tonight we are excited to share with you a recap of what transpired in 2023 and a market outlook and forecast for 2024. Included in that will be a discussion around the importance of active management and why active management of your portfolio is more important now than it has been in the past. Lastly, we'll address the hottest topic that will only get hotter as the year progresses. How will the election affect our portfolios in 2024? Without further delay, I'd like to introduce to you, to the stage, Troy Sharpe, Chris Parris, and Charles Scavone. Thank you.

Troy: Hello. How we doing? Thank you very much, Jessica, for the kind words. I'm glad we got on stage. I was just going to let you run with the whole thing. She does a great job. Very, very appreciative for, obviously, everything that Jessica does. One more time, give it up for Jessica.

[applause]

Troy: Okay, so we're going to-- You turn me down just a little bit or am I yelling?

?Chris: Just excited.

Troy: We're going to jump right into it, guys. Stock market forecasting. What's the importance of a stock market forecast? Do they have any accuracy, historically, short-term versus long-term? Charles, we're going to start with you. Why do we do these market outlooks every six months? What is the purpose of it? How does it impact people in retirement? What can people expect to get out of tonight?

Mike: Yes, thanks, Troy. Thanks, everybody, for coming. I don't know how to follow up the kind words from Jessica. Really appreciate that. To the point, it's a big question, right? Why do we do this? Why do we do any of these things? We think it's important to reach out and speak with you folks personally, the folks that watch the live stream, and explain what it is that we do, and then try and follow that up by doing what it is that we say that we're going to do. Part of that is this idea of having a market forecast, and Chris does a phenomenal job with this. It really is one of the marquee elements of what he brings to the table and what we try and bring to the table as a firm.

If you know anything about me and the things that I've said in the past, it's all about how do you bring process? How do you bring order to what typically is chaos in capital markets? What do we use and what have we done over the long careers we've had to help us maintain a steady path? What do we do to give us the best opportunity, the best chance to deliver good returns? Part of that is taking a look and looking outward, being forward-looking, and trying to develop a roadmap for what we believe is going to occur over the next reasonable period of time. For most people, and Chris will get into this, it's about six months.

For us, forecasting is important because it allows us to communicate and try and, I don't know, educate or communicate with our clients what we believe is going to happen. Then it helps us in terms of how we manage your money by creating this roadmap that allows us to be forward-thinking, never being reactive. Think about it like a, we're going to go on a trip somewhere, right? We need a roadmap. Where are we going to go? How far away are we going to go? How many turns, twists, and turns might there be along the way? If we're going to HEB, it's pretty simple. It's going to take a couple minutes, boom, we're right here.

We need to be a little bit more forward-thinking, so we develop this forward-looking forecast to help guide us in what we do and do a better job of managing your money.

Troy: Part of the goal or the overall strategy is within that framework that's created because it's dynamic. As things change, as we get new news from the Federal Reserve, from the economy, we don't like to talk too much about government reports because they're so backwards-looking as far as the data that they represent, but it's the ability to be dynamic within the investment management framework as things change in the economy or markets.

Mike: Yes, it's so important and it sort of brings in this idea of active management. Everything that we do, we try and be very disciplined in what we do. We talk about when we've spoken before about picking individual stocks and how do we do that. It's a process-driven approach that leads us in a particular direction. It's because without that, it becomes a sort of haphazard exercise and you come up with all these random ideas. The same thing holds from this top-down view, and you have to have a view of where you're headed or else you're lost. We then talk about being disciplined in what we do, and that's the discipline. Discipline doesn't mean that you're static.

Capital markets are anything but static, they're very dynamic. You have to maintain a degree of flexibility and be active and be engaged in what you're doing, but still have a disciplined process in terms of how you look at data, what data do you look at, what's relevant, what is really relevant. Again, I'll continue to praise him, that's the approach that Chris has always taken. That's not something new that he started doing when he started at Oak Harvest, he's always done this. Jessica mentioned we've been doing this for a long time together, and that's sort of what helps bring, I don't know where it is, I always tell people, I know that Chris and I are like brothers from another mother. It's true. It's important. It's-- Now I forgot where I was going with that though.

Chris: There's a fine line between age and experience. Charles and I have worked together three times over the last 30 years, we're great friends, we're great cooperators in managing money. I think the first outlook we actually did at Oak Harvest was Christmas Eve of 2018 in the midst of essentially a stock market decline, crash, whatever, into Christmas Eve. We were getting phone calls from clients, advisors were getting calls, and our response was the same, and I was like, okay, we have to do something because we need to settle down our clients to think more about the longer term, whether it's beyond six hours or six days or six weeks, six months, six years, something like that.

We put out an audio version of our first half outlook for 2019, and we've done it I think every six months since. For me, it's an educational tool for our clients and prospects. I personally have done this probably the last 20 years, but I've never really had to communicate it to our client base. At our other shops that we've worked at together, we use it as a management tool, like Charles was saying, for a roadmap, a guide to how much of certain industries might we want to invest it in, where we are in the economic outlook. For clients and prospects, we try to do them to anticipate the questions that you're going to have before you even have them.

If you look at some of these outlooks that we've done over the last two or three years, we're already talking about, this is back in 2000, when was the last election, 2020? We're talking about the 2020 election back in January of 2020. Even before people are talking about what's going to happen and stuff, because we're looking at data and process to try to take the emotion out of your money, because finances is very emotional. We're trying to withdraw the emotion and get back into fundamentals and quantitative outlooks and process to help manage your money.

Troy: Referencing what you said there and tying into, Chris, what you just mentioned, the emotional detachment. I know when you and I first met, Charles, you talked about this. It's not just having the ability to understand where markets may be going and what could potentially happen, but then also having the ability to say, you know what?

It's not quite working out the way I thought, and the ability to exit that position, either when the fundamentals change, when we talk about the bottoms-up approach or from a top-down perspective, maybe the economy, maybe the Federal Reserve, maybe those things adjust, the ability to detach from that position or to have emotional detachment to your previous convictions, and being able to say, "You know what? This was our forecast. We like these sectors. We like these individual companies. At the same time, the data is now showing something different. We're not going to be stubborn as a pig here. We're going to be dynamic and make some adjustments."

Mike: The old adage, when does somebody become bullish? It's after they've bought a stock or after they've gotten invested. They're trying to justify it because it becomes this whole behavioral finance sort of exercise. I had a presentation one time. I was giving a presentation to a big group. It was actually before the market opened, which was very unusual, and it was just all heck was breaking loose behind the scenes, in the markets, and somebody came up to me and said, "You certainly seem very calm in what you're doing," and I said, "The last thing you'd want is some stark raving maniac managing your money and becoming so emotionally involved they couldn't make a decision.

What you want and what you need, I think, but it's hard to do for most people, is somebody who is process-driven, and we see so many people become emotionally attached to particular stocks or particular things. It's like, we don't care. We're looking for particular attributes that a company is exhibiting. We know what we're buying. We know why we're buying it. If those reasons which caused us to buy it change, then you better change your-- Something's changed, right? It's time to change your decision. We've got no reservations about turning on a dime.

Troy: I don't want to go too far down this path, but every time you enter a position, you also have a strategy to exit that position. The dynamism, essentially, is being able to also adjust as factors change.

Mike: You bet.

Troy: How many people were at the Westin about six months ago? I see a lot of familiar faces in the room, not to be shy, I think about maybe half of you. Chris, the mid-year outlook that we did in 2023, you put the YouTube video out first, the podcast, and then we did the mid-year outlook at the Westin. The title of it was Down and Then Up. This was the 2023 outlook for the second half of last year. Down and Then Up. What did you get right? What did you get wrong? How did things transpire based on that outlook and presentation we gave that day?

Chris: Thanks, Troy. Yes, the 2023 outlook, the entire year was titled The Old Normal. I blatantly plagiarized Mohamed El-Erian from Allianz's The New Normal because we're back in an environment of economic cycles and a normal environment. The second half of 2023, we had thought the market would pull back into the October timeframe. It peaked in late August, I think. It went higher than we had initially thought, and then into October, it went lower. It just so happened that we had a livestream, myself, Troy, and Charles on Thursday, October 26th, and we sat there and basically said for the whole world to see that a normal environment was the stock market would essentially bottom tomorrow at the close, which was a Friday. Essentially it did.

Now, no guarantees that that'll happen again at any time soon, but so far since October 2022, the market against the backdrop of political, economic, Fed, everything else has been behaving in a very normal fashion for recovery, and that's where we stand right now. We got the downside right. It went a little farther than we thought. It turned when we thought it would. It's been led by essentially what we thought it would, which was growth stocks for the most part. It's been a little stronger lately, probably the last week, than I thought it would. Our forecast for the first half of 2024 in writing is 5,000 on the S&P 500.

I can get a little higher than that, but you've got to remember that the year closed at 4780, and our outlook for the end of the year at 2023, at the beginning of the year, I think I put in writing was 4735 or something like that, and the market was 3,900. As portfolio managers, we deal in percentage returns, and I know as retirees you deal in dollars, and there's a huge difference, right, a huge difference. You're going to turn on the TV as a retiree and you're going to see the markets at new all-time highs, and you're going to see all this FOMO fear of missing out right now, and the S&P's up like 2%. It might be 1.5% higher than it was three months ago.

It's when we're talking about market outlooks, I can say I have a very positive outlook because I think the market's going higher, but on a percentage basis, it's not a lot. I can't go like in October when we were talking, things look like a really good buy. The market was setting up. The market's up 20-something percent in four months. That's not the current setup right now.

Troy: I appreciate you going actually back to the first half outlook of 2023 in addition to what I asked you about the second half outlook. We keep all of the videos that Chris does about our outlooks on the website, but I encourage you guys as clients to go back every six months and see what we said six months prior to this next one that we do here and actually look to see how things panned out. I really, really encourage you to do that. I've just been tremendously impressed. You do a great job, and I know I appreciate it, and I'm sure everyone here does appreciate it as well.

One of the questions that we get often is, "Troy, I listened to Chris's outlook, and he said the market was going to go down 10 percent, but you didn't make any of these dynamic shifts inside of my portfolio." We're going to talk about the solution that we have to that we have spent the last, let's call it eight months, really developing. I think for many, many people in retirement, approaching retirement, that maybe are tired of some of this volatility but still want long-term growth similar to the markets but just don't want to lose sleep at night. In the second half of tonight's presentation, we're going to get into a little bit of detail about that.

To summarize what Chris said, and I want to make sure everyone remembers because it's difficult to keep things in context, or at least for me a lot of times, remember what everyone was saying and what we were feeling back in December of 2022 or January of 2023. Does anyone remember what most of the pundits on television, the Wall Street Journal, CNBC at the beginning of last year with how they felt the market was going to be in 2023? Recessions, gloom, and doom, crash. [inaudible 00:22:03] One, let's call it pundit, that I believe called for a bullish year in 2023, and besides that person, you're the only person that I know that at that time was calling for 25, 30% gain in the S&P 500.

Chris: There's maybe two or three people that we follow out of the probably 100. The reason we do these forecasts is for you, our clients, and stuff, because you're bombarded if you turn on CBC, if you turn on Bloomberg, Fox News, you're bombarded with, "The end of the world is coming. October 1987 is replaying," and it's trash. Most of these people are coming out there, and I'm very emotional about it because they don't manage money. They write newsletters, and they're not fiduciaries, and they've never managed a dime.

It's just it's excruciating for someone who actually has been pledged with your trust to take care of your money and is a fiduciary in that when we make a decision on a stock or a sector and it goes down, he'll tell you, I feel horrible, and everyone around the office will tell you, don't go back there. It hurts. It may not hurt me in the wallet, but it hurts me emotionally because I'm working for you, and I'm trying to do the best I can, and I'm on your side versus I'm selling a newsletter because I want to scare the hell out of you, which is what most of this stuff on TV is, and that's rambling, but--

Troy: You want to talk about Harry Dent, right?

Chris: I do because Charles and I, it's actually the most--

Troy: You got it going now.

[laughter]

Chris: Yes. We'll just drop that.

Charles: He's great. He's a great author. He's a great self-promoter. It is interesting that when, and we do, we keep track of some of this stuff. It's an interesting indicator, and it's all this idea, this concept of recency within behavioral finance again, and I just love the way they trot out all the doomsayers. Coming in towards Halloween, they'll bring out all the fabulous short sellers and all that. I always have sort of my own saying is like if you maintain the same opinion long enough, eventually you'll be right, and then you got to strike while the iron's hot, and these guys do well when eventually they might be proven right, but they provide very, very little value.

Troy: Chris, you mentioned a few minutes ago the old normal. I want to make sure everyone understands. We went through a period of really about 15 years where the Federal Reserve lowered interest rates to zero, kept them there for a very, very long time, and that was what was deemed the new normal. ZERP is the acronym, Zero Interest Rate Policy. When you mentioned the old new normal, it's because for decades prior to the Federal Reserve's massive intervention into financial markets, it was normal, hence the old normal, for interest rates to be far more reasonable, which makes capital markets, stocks, bonds, perform differently than they do in a zero interest rate environment.

When interest rates are zero, corporations can go out and borrow billions and billions of dollars, take massive risks with that money, and only need to make 1% to 2% return on that capital in order to increase the bottom line, because they're borrowing that money at zero. Now, when interest rates are 5%, 6%, 7%, and they're borrowing money, they actually have to be much more judicious with how they allocate that capital across the investments that they have to choose from, which requires managers to do more research, to do more diligence, and companies to perform in a much more-

Charles: Thoughtful.

Troy: -thoughtful, thank you, Charles, fashion than in that zero interest rate environment. Charles, active management versus passive management. The way to invest, no doubt, in that zero interest rate policy is like we've all heard, don't fight the Fed. If the markets are going to go up because companies can make money by borrowing it for free and reinvesting it, what has changed in this economic environment? Interest rates, obviously, but what else? Why are we moving into this different era to where things are going to be more challenging, we expect more volatility, but also, the ability to be more selective can pay more dividends than prior years.

Charles: Thanks for bringing us back on track. The other thing that it did, in addition to allowing corporations to invest in very low-return projects, is, remember, they could continuously issue debt at a low cost and buy their stock back. That fueled a lot of stock buybacks.

Troy: It sounds familiar with the federal government.

Charles: If you think about that, if you start buying your stock back, then your earnings per share go up, and investors like that. It's financial engineering. It's not true generation of economic value. This whole zero interest rate policy led to a lot of investment that had very low marginal returns on them. You could get away with it. To Troy's point, sort of where we're going here, in that sort of environment, passive investing in an index made perfectly good sense because all stocks moved in lockstep with one another. They all moved the same direction. Now we've, and mutual fund firms are business entities that make money by selling more of what they produce, which are mutual funds.

There's very low cost of capital to doing that. You can do more of it, and you generate a nice story around it. You talk about passive investing, and it's the low cost of doing it. You know what? That was great. It worked just fine. That paradigm has shifted in two manners. One is which we've moved away from the zero interest rate policy, and now we've moved up very substantially to tackle a number of different challenges that existed in the economy. That's number one, that whole paradigm that Troy described of being able to invest, companies investing in low return projects that gave the impression of being very high return doesn't work anymore.

Then the ability to fund share repurchases with free capital, that doesn't work anymore either. There's a greater degree of scrutiny as to the capital allocation of different companies. The other thing is global economies are now all operating on different paths. It was the point where every global monetary authority was on the same path towards zero. Now, for a number of reasons we could talk about later, but these paths are different for different countries, different geographies. It creates a whole lot of differential uncertainties, different paths that companies or countries are pursuing with their monetary policies. That changes this entire paradigm to where now and going forward, what worked in the past was great.

That's not what we're here to talk about. Everything we're talking about is what's looking forward because capital markets are forward-looking beast. Now greater degree of scrutiny is placed upon how companies allocate that capital. What is the return on this project? What is going on here? Selectivity in terms of the selection of the particular companies in which you invest is going to make a difference. We're seeing that and we can talk about it statistically how we're seeing a greater dispersion of returns. Companies that have higher return on assets, return on capital are generating or garnering higher valuations in the market.

Everything is not moving in lockstep any more. It becomes very important to pay a lot of attention to how we allocate capital to particular names or particular investments within a portfolio.

Troy: You're seeing it perfectly with NVIDIA. It's a little bit. Obviously, there's some hype there because everyone's piling into the same stock. No one wants to miss out. NVIDIA is a great example of what Charles is talking about. It's a company that is taking the capital that they have and they're investing it in technologies that the market perceives are going to generate tremendous returns on that capital in the future. Therefore, that company is being rewarded by much higher stock prices, by an increased valuation. We can debate whether that valuation is correct or not. It's not the point. The point is the market is shifting dollars to a company like that that is investing capital in what is perceived to be very, very high profitable or high return on invested capital projects.

That's exactly what's going on with NVIDIA. Now go back to the zero interest rate policy period and it was the FANG stocks. They all may not have been performing as well or investing their capital in projects that return expected the same perceived value. They all went up basically the same amounts. There's greater discernment within institutional investors, investment managers, and just capital markets with the decisions that companies are making with their capital.

Charles: Why did that happen? What were the mechanics that caused those stocks to go up in those proportions? It's because every person that gave every dollar to an index fund or a passive investor, that money was invested in those companies based upon some mathematical formula every day and it went in and it went in every day. There's a complete misallocation of capital.

Troy: Just to summarize, in a higher interest rate environment, the new normal or old normal that we have now reentered, we believe, companies are punished for poor performance and companies are rewarded for investing their capital intelligently.

Chris: I may be jumping the shark or whatever, but it leads to the title for our first-half outlook for 2024 was Goldilocks Meets Volatility. Goldilocks is, believe it or not, an environment of 4 to 5% interest rates, which is what we're currently in. We're not in a zero-interest rate environment. That wasn't normal, zero. Historically, look over the last 100 years, goldilocks for the economy is 4 to 5% interest rates. It's 2% growth and 2, 2.5% inflation in stocks. Companies can invest and understand what their cost of capital is going to be, what the revenue growth is going to be. They can grow. They can manage. They can't manage when it's 9.5% inflation like it was two years ago. They can't manage during COVID. They just have no idea.

Troy: They get silly when they can borrow money for free.

Chris: They get silly. They do things like Facebook did, where they were spending $20 billion on, what did they change the name to?

Troy: The metaverse.

Chris: The metaverse. Which was just dumping money down a hole but with no returns in any time frame that an investor like Charles or myself or someone else might see. People are like, well, how come Facebook turned around? It turned around as soon as they started firing people and stopped spending all that money that there was no foreseeable investment return under their dollars.

Troy: Right after on the conference call that they said they weren't going to do that.

Chris: Correct. Right. "We're not spending $20 billion. We're going to spend $15." The stock stopped going down. It's gone up ever since. We're in this environment now where we're 4% to 5% interest rates, goldilocks economy if you turn on the TV, but there's volatility because we're still, we don't know. Is inflation going to come back? Is growth going to decelerate over the coming year because consumers are going to start to slow down? We're in this uncertain period, even though the market in January is doing pretty well.

Troy: Okay. Transitioning here into the first-half outlook for 2024. Goldilocks as you said, that's typically when the markets are going up. We're seeing goldilocks we expect it to be married with a little bit of volatility as well. Chris, I'll let you take it 2024, the first half outlook, where are we at? Where are we possibly going over the next six months?

Chris: We've had an outlook and I've written about it probably on LinkedIn and on the weekly podcasts for a year. It's good and it's bad. If you overlay the time period of October 1998 with October 2022 through the internet top, which was April-ish 2000. Now we're doing the exact same thing. Exact same thing. Economy, stocks, NVIDIA. NVIDIA came public in 1999. If you want, I can send you the overlay. It looks the same. Luckily, we may actually manage money through the internet bubble. We've actually launched some strategies that we've currently launched at Oak Harvest, into the internet bubble and out of the internet bubble.

Because of the heightened uncertainty and volatility, it's likely to come, have a positive outlook for the year. It's just we're expecting higher volatility here in the first half and then the second half of the election. Earnings are okay, but we expect inflation to tick up in the first half here. It's going to start to create some volatility. Growth in the economy is actually slowing. What you read on TV about the jobs data, it's not real. The way they calculate it, we can get into detail. I think I've done this in podcasts. I'm going to digress really quick.

As far as a government job, if you're working at Microsoft getting paid $500,000 and get fired, that job is worth less than the three part-time jobs you get making minimum wage the next month. You get fired at $500,000, you get rehired at $20 an hour with three jobs. According to government statistics, that's growing the economy. You can see it in the data behind the scenes, which is what Charles and I look at and why I do not. if we want to get into discussions about government statistics, I'll do it for a very short period of time.

Troy: Until his head explodes.

Chris: Until my head explodes, right? Because we want data that is going to help us manage your money. We're looking at the detail, and the detail says the economy is not as good as people on TV are talking about. It's not bad, but it's definitely slowing down. I'm seeing a lot of signals similar to February of 2000 when after the Christmas of 1999-2000, everyone was like, "Hey, the economy is great, the economy is great." All of a sudden in February, the consumer didn't show up because they'd spent everything they're going to spend as the last hurrah in January and in December. We're seeing some of those indications, whether it's car sales with Tesla lately, or home sales, or just sales [unintelligible 00:38:46].

Troy: Visa transaction volumes today, consumer credit card delinquencies, the signs are there. They just don't get picked up into the broader data until much later.

Chris: It doesn't mean it's bad. It's just not as good as they're trying to make it sound on TV. Just like in October when we were saying it's not as bad as everyone is saying, it's the opposite now. It's not as good as they're saying on TV. We're going to look for opportunities over the next month, six weeks, and I'm actually hoping in the portfolios the market finally takes a breather.

Troy: The media would have no reason to change our opinion on how the economy is actually doing this year.

Chris: No. Never. Not with an election coming up.

Troy: Whichever way that goes. The point is, it's not bad. These are things to keep monitoring.

Chris: The stock market is, it's a momentum market. Is the economy getting better or worse? I think they printed, I don't know what the fictitious GDP number today was.

Charles: 3.3 or something. I don't know.

Chris: Two months ago when the market was down, it was supposed to be zero. Now the market's all the way up and they're high-fiving each other that it's 3% when it was really inventory gains and some one-time items. We're trying to look ahead, and given what the market's done, it's time to be a little more cautious given valuations have run or to look in areas of the market that haven't participated as much as tech stocks. It's not that we don't like tech stocks, it's just there's some areas that haven't moved that we historically, given our research, know that this part of the economic cycle, they're going to start to catch up some.

Troy: How much would you say is the anticipation that the Fed will lower rates? How much of that is fueling the run-up that we've seen in some of the, I think it's the Magnificent Seven now, or some of the tech names?

Charles: Hard to say. Those numbers are shifting sort of all the time.

Chris: I'll say 2%. The market's up about 2%. Remember, the market was 4,100 on October 26th the night of our livestream, I think on Friday at the close. The market had rallied to, I think, 4,700 or somewhere around there. By the time the Fed came out, I think it was December 14th, and said, "Hey, we're done raising rates. We may look to cut rates." We've gone from 4,700 to 4,900, which is maybe, I guess, what is that, 200 points? Okay, it's 3.5%.

Charles: 4%. The markets didn't explode to the upside based upon a Fed pivot that every time-- [crosstalk] It was already baked into the markets.

Troy: Heading into, let's say, the next four or five months, with the presidential election on the horizon, talk just a little bit in the context of history, what does the market typically do in an election year? Then contrast that with anything that you may see is different this year that we should be paying attention to or aware of.

Chris: Normal would be down February, up into the end of March, April, maybe July 4th, you might get to 5,100, and then down into the election. By down, it's not like down 15%. It's down back to probably where we were before Christmas, something like that. Then I don't know. People ask, "Well, what about beyond 2024?" The historical stuff I look at and the economic stuff I look at, I can get 6,000 on the S&P 500 in 2025, and I can get a recession. I don't know.

Troy: One of the things I think, because we always get a ton of questions about the election and what the market could do if Republicans win or if Democrats win, but historically, it really doesn't matter what happens in the short term. The three, four, five months after an election.

Chris: It's historically the market goes up. If you looked at the peer statistics, if Biden wins, the market will be up about I think it's 8.5% this year. If Trump wins or the Republican wins, it'll be up 12.5%. Those are the numbers. There are not that many data sets, but they're both positive on the year. They both put the year-end over 5,000 on the S&P 500.

Troy: A big part of that is just simply that the uncertainty is removed. The market knows, okay, if Democrats are in place, these are the policies that we can expect. If Republicans are in place, these are the policies that we can expect. Just the removal of that uncertainty historically has acted as a catalyst post-election for the markets, generally speaking. Okay, getting back to the second part of the question I asked you a minute ago, because history is great, but past performance is not indicative of future results. I figured I'd throw that in there. What is going on now? What risks are out there that maybe we have not discussed yet or if we have, maybe drill down a little bit more?

What's going on right now that could cause us to deviate from the historical performance of what the market does in an election year? What's keeping you up at night, more succinctly?

Chris: What keeps me up at night right now is I think the market goes down in February and it hasn't started yet, because inflation should rise and growth should slow. We want the opportunity to upgrade some of the names we have in the portfolio, buy some better stocks in the portfolio. I don't think anything disaster-wise is happening here in the first half, but the market has gone farther than I thought it would go the last week. You can see it. The FOMO has kicked in. I'm getting the eerily similar feeling, which I've discussed for quite some time, of the internet bubble in the first quarter of 2000, where I know exactly where I was standing when the stock market peaked on March 24th, 2020. I know exactly where I was.

Troy: 2000.

Chris: 2000, I'm sorry. Yes. We're not there yet. The composition of the stock market is different now than it was then. Back then, tech wasn't as big in the S&P 500, but the valuations were much higher. I think Cisco and some of the names in there were trading at 100 times earnings. Microsoft's not trading at 100 times earnings, neither is Facebook or any of these other companies. The valuations aren't there, but at the same time, that momentum in the market feels like it's there. We're on conference calls. We left a couple conference calls to come over here.

We'll be on there tomorrow morning trying to figure out the risks that Christmas was the peak in the consumer, and the consumer gets weaker in the first half, and inflation, because of what's going on in the Red Sea, and politically, and on-shoring, and minimum wage increases, and those kinds of things. Inflation picks back up again after coming down when everyone said it wasn't going to come down. Not everyone. We didn't. Most people said it wasn't going to come down. It doesn't start rising again. If inflation starts rising and growth starts slowing, the markets are going to come down some, which I actually want. As a portfolio manager, I want it to calm down.

Troy: Risks?

Charles: No. You covered them. This is like the last market outlook is pretty easy for me because he does the heavy lifting.

Troy: Tying all this in, volatility and the presidential election, active management versus passive management. Many of you know the new strategy that we've been developing for some time. We had an event where we talked a little bit about it, and the short version of it is one of the most difficult things for the investment team is when they have an outlook of where we think the market's going to go, up 5%, 10%, 20%, your typical average summer stall where the market's down, post-election, or pre-election, where it may get a bit volatile, or post-election, where we could have a bull run.

With a separately managed account system, Charles and Chris, and James and Duane on the investment team, we've actually added another Chris to the investment team, Myrick. He's been with us for 10 years, though he's not a new face. They know many of you, but they don't know your investment allocation. They don't know individually your risk tolerance. The questions that we get often are, "Well, Troy, why wasn't a move made when you guys forecasted the market to pull back 10%?" The reason is pretty simple. The investment team doesn't know every single person's investment allocation, your risk tolerance.

In what's called a separately managed account system, where we're managing separate accounts, thousands of accounts for individuals, we have to stick by what your advisor has told the investment team. 60-40, 70-30, 80-20. The investment team just can't go in willy-nilly and start moving some people to lower-risk investments or selling bonds to buy stocks when they're lower. We have to stick to a long-term investment strategy. We've been asked many times over the years to develop a strategy where we can hedge risk out of the portfolio when we have a forecast or a belief or a strong conviction in the direction that things may be going.

We can reduce risk without sacrificing the potential to still have market-like returns. We needed a strategy to be developed. Then you and your advisor to sit down and actually say, "Hey, this makes sense for me in my retirement. I want to allocate X% to this strategy." Then the investment team doesn't have to understand your personal asset allocation. They know their job is to manage that strategy according to their convictions, their beliefs, their forecast, to be able to take advantage of opportunities, and also reduce risk when the economic clouds are starting to get uncertain on the horizon.

What is hedging? How does it impact a portfolio when we're starting to see clouds gathering, skies darkening, and we want to make some adjustments? We want to take risk off the table. What is hedging? How does it work in this new strategy?

Charles: One thing, I want to go back for just one second and say in the separate account manage part of our business. What we do, do is that we've described to you many times how we have this bottoms-up stock selection process that allows us to build this model portfolio based with our best ideas. Then we do take a step back and put that top-down hat on, what is our forecast? Do those two match? Does your top-down forecast match what your bottoms-up portfolio construction looks like? If it doesn't, then we make adjustments. We do make some adjustments and we make those across the board.

That is the extent to which we can have hopefully a beneficial influence on what the characteristics of what this stock portfolio looks like to as best we can mitigate or, navigate, I should say, some of what we see coming. There are other strategies that enable fund manager to put in place structures that allow you to mitigate or to hedge out a lot of the market risk, just the overall market risk that you can't really forecast so much or control as much as you can.

We make a very conscious decision as to the individual investments that we make because we believe we've done a good job of modeling what that expected stream of future cash flows look like. Man, there's a lot of other things that you can't model or forecast, so why not try and mitigate that as much as you can? You can create these types of structures, it's just not possible to do it in a separate account-managed structure.

Troy: Ultimately, you can't buy options in individual accounts. They need to be done in a set structure.

Charles: There are certain benefits of having collective, referred to as collective structures that allow you to execute certain strategies. It allows portfolio managers like us that have experience in doing things like this create structures that are much like what hedge funds hold themselves out to do, hedging mitigating downside risk.

Chris: All I can say is anecdotally I think it was January of 2020 across the hall, we had our first half market outlook. The title for 2021 was, Curb Your Enthusiasm.

?Charles: 2020.

Chris: Yes. 2020. Thank you, and we did it across the hall. I sit over there and I'm like, "There's a correction coming." I didn't think the market was going to go down as much as it did in 2020 because no one predicted COVID. Correction coming, talk to your advisor. If you feel uncomfortable, have them change your allocation. As a portfolio manager, I don't know everyone's tax position. I don't know everyone's, is it, are you 45? Are you 75?

Are you leaving it in a trust for the next 50 years to your kids? Do you care?" We don't know that. If you have an outlook that says the market's going down as a fiduciary, the way things are structured in SMA, almost impossible to sell 20% of everyone's accounts and have half our clients go, "Why am I paying taxes this year? Because it's a taxable account. Why am I not?"

We have strategies now that are pooled that take those kind of decisions out of the portfolio manager's hand and allow us to just concentrate on the individual stocks, the sectors, and the market, and let the advisor figure out the allocation. Because they know your risk tolerance. They know if you're 10 years from retirement, if you're 10 years into retirement, how much risk do you need to take? If taxes are a big deal or not.

As Troy said, we have this new tool, this new strategy that's out there that we're super excited about. The reason we've done this now and Charles, like I said, we've worked together, this is our third time in 30 years, is because the time I believe I went to Troy a year and a half ago and said, "It is finally time to do this," because the pathway of the markets in the economy likely over the next 10 years is not what it was over the last 10 years.

That doesn't mean 2024 is going to be bad or 2025, but it shouldn't be as easy as it was with the Fed just saying, "Zero interest rates, no problem. We'll save you if things go down." Which is essentially what they've said to current retirees, whether you felt it or not, that's what they've done for the last 15 years. Market goes down, they cut rates, save the market, market goes up.

Troy: It goes back to the financial plan, because when we look at our dividend strategy, okay, dividend stocks are designed to be much lower volatility. Dividend stocks did tremendously well two years ago when the S&P was down like 30%. This past year, dividend stocks were up 5%, 6%. Over a two-year period, they're basically the same as where the S&P 500, just the experience was like this. Whereas the S&P 500 was like that over a two-year period. That's one strategy.

If you start to think about financial planning, and the retirement success plan with step one, the allocation, what we're trying to do is to allocate your investment dollars according to your income needs and your long-term retirement goals. If you compartmentalize the purpose for your money, the best way, and easiest way to think about it, is in buckets. This bucket, I'm never going to touch. I have 50 years or 30 years. My kids, my grandkids are going to inherit this money.

You probably don't need a strategy that's hedging out systematic, or non systematic risk or market risk, or securities-related risk. You probably don't need that downside protection or risk mitigation because we believe capital markets over the next 50 years should do quite well. That would not be an ideal candidate for a strategy that reduces risk. The dividend bucket, okay, that's for providing increasing income.

If we're trying to supplement social security, maybe some pension income, annuity income, real estate income, we want to see increasing income. That's where the dividend stock and the dividend portfolio fits in. It's not about trying to get market-like returns necessarily, although almost all academic studies show long periods of time, dividend stocks do outperform growth stocks, but in the short term, anything can happen.

That third bucket, let's call it, and really there can be an unlimited number of buckets, but for this discussion, that third bucket is, "Hey, this is money where if the market's down 10%, and I go from a million to $800,000 or $900,000, I'm having trouble sleeping at night. Or if the market crashes 30% next year and I go from 2 million to 1.4 million, I can't sleep, I don't feel well." Or if that's not the situation, you just don't want to be up or down double digits in either direction.

You just want a smooth plane ride in first class with Delta, I'd say United, but I'm kind of upset with United right now.

[laughter]

That's more of what that risk mitigation strategy is about. It's designed to give a much smoother ride without sacrificing real, true long-term growth potential. It's not a strategy for everything, quite possibly. It's another tool in the tool belt that your advisor can use inside a financial plan because as much as we like to talk about investments and we do these outlooks, it's far more about the plan than it is about the portfolio.

The portfolio was a tool used to generate income to make sure you have security for as long as you live and your spouse and your family, but all of these different pieces need to be working together. Guys, you want to add anything to that or did I do a really good job also, Charles?

Charles: [laughs] Perfect. I have some closing thoughts, but I think maybe, I don't know, do you want to see if there's any-

Troy: Yes, go ahead. Any closing thoughts? Then we wanted to save about 15, 20 minutes tonight for Q&A. Some closing thoughts and then I'm sure we'll expound upon some of these topics a bit more deeply as questions come in.

Charles: I love this concept of the Goldilocks economy and Goldilocks, right now where we're sitting, you're not sure if it's too hot or too cold, but Goldilocks is shoveling in a whole lot of porridge right now, and she might be about to get sick.

[laughter]

Troy: I wonder if he was saving that for a couple of days.

Charles: Actually, I just thought of it.

[laughter]

Troy: That's the closing thought?

Charles: That's it. [crosstalk] Oh, I'm sorry. That's why you hired me to provide that sort of insight.

Troy: I like it. It's very good. [laughs] I kept waiting for that. You're actually brilliant.

Charles: There's nothing brilliant coming out.

[laughter]

Troy: Okay, Megan, we have some questions. Joel? I think they're going to bring a microphone over.

Joel: I think we talked about- [unintelligible 01:00:01]

Troy: There you go. It's on.

Joel: You talked about the market outlook, right? You also said that statistically about 98% of all the money managers predicted that there would be a recession, sometimes this year, right?

Troy: Roughly. Yes, sir.

Joel: All right. The way I look at it is like predicting the weather. Yesterday, me and Zenobia were wondering that there's going to be a lot of rain. Can we even make it here today? There was no rain. If the market outlook is so unpredictable, my first question is, what sense does it make to predict it in the first place? My second question is, that you have to go by some criteria to invest money, some criteria to buy certain stocks, some criteria to sell certain stocks, bonds.

When you predict the outlook, whatever you predict, how does that impact your selection of the stocks? Because then you can distribute depending upon the individual's risk element and et cetera, et cetera. You have to explain to me the buckets. How does the market outlook? Do you use the market outlook, whatever right or wrong prediction you make, how does that impact into your investments?

Troy: Thank you, Joel. Thank you, Joel. It's really obviously, a two-part question. You talked about one, you talked about the other, but quickly, I'm going to-- What you said about 98% or whatever, that's incorrect. Most of those people don't manage money. 98% of the people that you see on TV who come out and say the S&P 500's going to 5,000 or 5,500 or 3,000, they don't manage a dime of money. It's like me going on a plane and writing as a passenger and telling the pilot he's doing-

Chris: Bad job.

Troy: -a bad job. They don't risk capital. If you see someone on TV and they're not bald, they're probably not putting-- It may not be my capital, but it's your capital. That's why you hired me and that's why we hired Charles. He didn't want to go bald. He knew where his hair was going if he kept doing it. Just to differentiate Joel, what I was referencing was simply the people on television, the news outlets, the CNBC, all of those people.

To Joel's point, forecasting is, the longer you go out, it is very inaccurate. Now, it doesn't mean we're always going to be able to do that. It doesn't mean maybe it's just dumb luck, but-

?Charles: Thanks, man.

[laughter]

Troy: I know Chris well enough. I know the methods. I know the math. I understand what he's doing. To your point, Joel, it's not just the ability to forecast, but then the second part of the question, act and have that go through to your portfolio. This gets to the second part of your question. In bringing on Charles and bringing on Dwayne and bringing on Chris, we've created new tools over the last 18 months or whatever that there's the dividend growth fund and then there's the growth fund.

These outlooks have allowed us to, we benchmark each tool, and then based on the outlook, we may overweight certain sectors and certain stocks depending on where we are in the economy and where we are in the cycle. Our dividend growth stock portfolio right now does not look like a normal dividend growth stock benchmark. It is much more growthy. That doesn't mean it owns Nvidia and stuff because Nvidia doesn't pay a dividend, but it owns much higher technology weights than most out there.

Chris: Let me just jump in real quick because I think it's an important point for not just Joel but for everyone. Until we develop the new strategy that we have now, we would do these outlooks and forecasts for informational purposes, not necessarily for proactive implementation within a portfolio because it's impossible to do that, as I said earlier, across thousands of accounts because these guys don't know everyone's asset allocation, long-term goals.

Some of you, if the market goes down 50%, you don't bat an eye. You're fine because you believe strongly it's going to come back up and you don't ever touch that money. If they were dynamically going into that portfolio and going to cash or shorting or buying options to mitigate risk, that client would be upset because these guys don't know the risk tolerance of that individual. Whereas some people in the room, they may lose sleep if the portfolio is down 10%.

Now, that person may want us to proactively implement the strategies based on the forecast, but we can't just do that across thousands of accounts because they don't understand that. We've always done the forecast, the podcast, YouTube videos for educational and informational purposes. What's different now Joel, is-- Again, there's no guarantee we'll continue to be accurate as we have been in the past with these forecasts, but we have a tool now where we have maneuverability based on short-term movements in the market but also able to quantify, literally quantify the amount of risk inside a portfolio and able to hedge that out to the extent that Charles can get in and really talk deep about.

The new strategy that we're launching gives us the ability to now implement the convictions and beliefs of the investment team in a way that we've not previously been able to do.

Charles: To Troy's point, something important perhaps for you guys to think about is that our job in the investment team's job is to build the best possible products we can to offer our advisors as tools that they can use when they meet with you individually and understand your specific needs, then they know how to use those tools within your specific accounts. We're just building the product.

To Troy's point, based upon our previous experience and understanding what a lot of our clients' wants and desires are, there needed to be a different means to build a tool to achieve some of those. The firm has spent a considerable amount of capital, monetary capital, human capital, intellectual capital to help accommodate that. It is something that we would encourage you to speak with your financial advisor about.

Troy: Just real quick, we'll take a second question, but the second part of your question, Joel, just to provide you an answer, the outlook provides the framework from which other decisions are based on moving forward when the addition of new data comes in. There's a base framework that is part of the overall structure and process of how decisions are made, and as new data is coming in, that framework acts as the basis, but then it's a dynamic framework so to speak. Maybe not dynamic framework, but dynamic from that point forward.

Joel: Thank you.

Troy: You're welcome, Joel. Good to see you. [unintelligible 01:08:09] [laughs]

Gary: There was a famous senator that made a statement during one of his presidential, John McCain. You know what he said? Bomb, bomb, bomb, bomb, bomb Iran. How does that affect our portfolios? I think that's-

Troy: Yes, Middle East conflict, what happens if Iran gets a nuclear bomb or something goes off in the Middle East to a greater degree? Gary, thank you for the question. I'm sure that's on other people's minds as well. How does some type of, it's called a Black Swan Event because that's really what that is. I think even a better question is in some type of Black Swan event like that, what we're talking about as far as mitigating risk, how would that new strategy perform in something like that completely out of the blue?

Obviously no guarantees, but it wouldn't quite be as effective in a scenario like that is what I'm getting at, but how do you think the overall markets and how that impacts people's retirement?

Charles: We own Lockheed Martin, right? Next question.

[laughter]

Charles: You can't forecast or predict Black Swans, but they make for interesting conversation and they sell books. We understand the dynamics that exist in capital markets and understand how to create a strategy that can help mitigate unforecastable events. That's why we implement part of that but there's a cost to doing that. How much are you willing to pay in your portfolio? We'll hedge it up tomorrow. How much are you willing to pay for that?

What if it never happens? There's a whole lot of what-ifs I just gave you there. I'm asking you those questions. I know you don't know the answer to them. I don't need either. Your question is kind of interesting. It makes you think about some things, but it's not a huge influence on what we're going to do today or tomorrow. We certainly consider geopolitical goings-on and factor that in.

Just looking at previous market cycles and what goes on, we're along a lot of energy names, because if what you said happens, even if it doesn't, our outlook for energy is still pretty good right now. We're in a win-win situation. Take care of what you can control and try and do a good job of that. What you can't just try, if you can create a structure and a different strategy that allows you to mitigate some of that, then all the better

Troy: To my point with the new strategy where we're talking about hedging out risk and mitigating risk, if something like that happens, Gary, it's going to cause the bottom of the market to fall out, at least in the short term. You're talking 10% in a day, possibly a more rapid decline in the subsequent months. The strategy isn't designed to reduce the impact or have a zero return in that type of event. We would expect it to perform better than a long-only portfolio, of course, because it will benefit from the market going down.

That type of event is something that you can't hedge out that risk. To Charles's point, you can do it I guess, but it's going to be very expensive. It's going to cost you tens of thousands of dollars monthly.

Chris: Black Swan hedging is a waste of time. It's an academic notion that pension funds use to justify spending money on stuff. If you believe in a nuclear war, you should be 100% cash on gold. Probably not be anywhere near this meeting. I knew this question about war was going to come out because it's probably going to be one of my YouTube videos coming up, because the returns during war in the United States had been actually above average.

World War II, I think after-- It wasn't Pearl Harbor, but it might have been Guam or something like that, stock market returned 18% a year for the next 10 years. It was off the charts because we rebuilt the economy, we loosen economic conditions, we're investing, we're reunited. Is it different this time? If you're a pessimist, you'd say yes. For an optimist, you'd say, "Humans are humans. They are going to react the same and we'll coalesce together."

I'd never lived through a pandemic, but it took me three days to research the Spanish flu and come up with what I thought the outcome of COVID would be. When we released our outlook back in March of 2020, and pretty much it was spot on. The waves were the same for COVID as they were for the Spanish flu. The stock market did the same thing. The economy did the same thing. How is that possible? I wasn't alive in 1918, or whenever it happened. It's just human behavior is similar.

The strategy that we're talking about, it's not a [unintelligible 01:13:39] risk fund. We're not going to spend money just rolling options, buying puts, hoping that the day ends and that we make some money and we're the last man standing, to do what?

Audience member 1: Eat your gold.

Chris: Pardon me?

Audience member 1: Eat your gold.

Chris: I've had this conversation with people. I don't want gold. You know what I want? I want natural gas, oil, and a bunch of water, and a gun.

Troy: Toilet paper.

Charles: Toilet paper.

[laughter]

Troy: I'm buying toilet paper.

Chris: Gold won't do any good. It's not going to do any good. You want things you can consume and have to consume.

Troy: Anyone else?

Charles: Next question.

Chris: Come on, something more optimistic.

[laughter]

Charles: Yes, really.

Audience member 2: My biggest concern, you talked about the ebb and flows of the stock market, that doesn't keep me up at night. What really keeps me up at night, and I just read something today about China and Xi Jinping about his intent on taking over Taiwan this year. Not in 2025, '26, or '27. If China was to be successful in taking over Taiwan, and the United States did nothing, just took a passive role, "Man, go ahead, do your thing or whatever." What kind of effect would that have on the stock market?

Troy: It's more in these guys' domain but what I will say before they have an opportunity to talk is, it seemed like a lot, maybe not as to the extent of Taiwan, but prior to Russia invading Ukraine and now that war going on for over a year now. For the first couple of months, it was a little bit of a shock to the system. Now, it's mostly a forgone talking point for the most part. Not quite the same as China taking over Taiwan but the administration, I believe, just last week said that they don't believe Taiwan has its own independence from China.

I'll let you guys talk to that. At least from my understanding, I didn't go too deep into what the administration just said, but I saw that they don't feel that Taiwan is an independent nation.

[laughter]

Chris: I don't know. I have an engineering degree and a finance degree. You're talking about politicians and academics. The markets will go down. What does Taiwan outside of semiconductors, provide the world? Nothing.

Audience member 3: Nothing.

Chris: Nothing. Nothing against them. Nothing. It's probably why Texas Instruments is spending $5 billion a year on expanding their fabs. It's probably why Taiwan Semi is trying to build fabs in Arizona, but they spend nothing. Actually, all the intellectual property that goes into the fabs in Taiwan comes from the United States and the Netherlands. It doesn't come from Taiwan. The markets will go down. He's not going in there this year.

They have so many problems domestically with real estate and everything else. I don't see it. I don't know. I didn't study PoliSci because I like black-and-white answers, not gray nebulous stuff. I don't know.

Troy: Do you want a positive question?

Chris: Yes.

[laughter]

Troy: Come on.

Chris: We're in Houston. Energy prices should go up soon. No positive, no.

Charles: I should have saved my Goldilocks remarks until now.

Audience member 4: You talked earlier today about risk tolerance, and the process y'all have developed to help us figure out what our risk tolerance is. Can't you take a pill or something and just [unintelligible 01:18:05]

[laughter]

Audience member 4: What are some of the ways in which you can get someone like me who I'm very probably on the low end? How can you get us to open that a little bit? Is there a proof of the pudding somehow that can convince that, yes, that's a reasonable approach?

Troy: I'll share a story with you. It was probably 10 years ago, maybe not quite. I had a client that stock market never, she was always, "Troy, don't ever put me in stocks. I can't stand the risk." She heard me on the radio talking about dividend stocks and how they can provide income whether the market goes up or down, that income payment continues to pay out likely.

She came in and she said, "Troy, I heard you on the radio this weekend, and I want to try those stocks. I said, "Are you sure? Because you and I both know that it's not going to be a good idea." She said, "No." She says, "I'm serious this time. I want to try the stocks." I said, "Okay." She brought over $100,000. We opened up an account, we bought some dividend stocks. Very first day, the market goes down a quarter of a percent. She calls, she looks at her account it's down $300.

She calls me up and says, "Troy, sell everything immediately."

[laughter]

Troy: I share that story because depending on your financial plan and your income needs and where you are in your retirement, you may not need to take any risk whatsoever because that's what we call risk willingness. Your willingness to stay invested and committed to the plan that's been put in place. You can have the best plan in the world, but if you aren't willing to stay committed to it through times of ups and downs, you have a very, very low willingness to take risk, and you probably shouldn't even consider it because you don't want to lose sleep. It's just not worth it.

There are treasuries, there are fixed annuities. You can get guaranteed rates right now, 5%, 6%, unless you need 9% or 10% long-term growth, you don't have to take the risk. Now, if the second part of that question, if you have willingness with a certain portion to see it go a little bit up and down, you can have a conservative portfolio. The next question becomes, do you have the capacity? Meaning, if you have a million dollars and you only need to take $10,000 out per year to live off of, that's 1% of that portfolio.

If the account loses a lot, your life won't change because you're only needing to withdraw 1% per year. Therefore, your portfolio has a bigger capacity to take on risk. It won't change your life if you decide that you don't have the willingness and you sell and get out, you can still provide that 1% income need, your security won't be jeopardized. Risk willingness, risk capacity, those two components understood and planned out together can hopefully get you into a portfolio that is comfortable for you.

As long as you have the ability to or I should say visibility, to see how ups and downs in the market affects your security, that's the decision that you should be basing it off of. If you don't have the willingness to stay committed, I would just stay away. It's just not worth it because you can make 4%, 5%, 6% with very, very, very, little risk today.

Chris: I've worked for Troy for six years now and I've learned a lot. Let me summarize. Are you trying to meet your needs or your greeds in retirement? I say that on the podcast, on the YouTube videos. Retirement is different than accumulation stage. It feels great to earn 25%, but do you need that? Or is that just greed? You can't spend percentages as a retiree. You can spend dollars, that's it. You may see tech stocks up, Facebook, everything else up huge right now, but I'm missing out on that. Do you need it?

Or is that just a greed kicking in like, "Hey, everyone else is doing it. I need 15%, not 5%."

Troy: I'll give you a real quick. You know how we do the probability modeling and the financial plan that you have? Have your advisor do $50,000, $100,000, $200,000. Just find some comfortable number and then you promise us that you won't look at it for a full year. If you can't look at it and if you can actually go through that time frame and not look at it, I don't know if it'll be higher or lower, but I think that's the mentality that you would want to have.

If you could do that, find some number, $50,000, $20,000, whatever it is. If you think you could invest it and not look at it for a year, because then you're not going to drive yourself crazy or lose sleep.

[laughter]

Troy: If you couldn't answer that question, yes, I could do this and not look at it for a year, then you probably don't need to take that risk because it's all about quality of life, not making higher returns. Chris gave the short answer. [laughs] Guys, anything else? All right, head back to the bar. Thank you.

[crowd applause]

[01:24:35] [END]