The Little Market That Could

On this week’s show, Karl discusses the market’s ability to grind higher.  It’s despite some early losses early in the week, the stock market managed to move a bit higher and is closer to new all-time highs. Plus, mutual fund fees aren’t always what they appear to be.

Hey, everybody, welcome to The Eggerss Report. It’s your investing playbook. Thanks for joining me. I appreciate it as always. Hey, we’ve got a really good show for you today. We’re going to talk about a few things, but, first, let’s give you our website, which is eggersscapital.com , E-G-G-E-R-S-S-capital.com. Our telephone number, 210-526-0057, 210-526-0057 , and, of course, we’re on all the social media, Facebook, Eggerss Capital Management; Instagram, Eggerss Capital Management. We have a Twitter account. That one is just @KarlEggerss. We also have @etfcharts. If you just want charts of ETFs, that’s the place to go for that and, as far as the podcast is concerned, we are on Apple Podcasts. We’re on Spotify, Overcast, Stitcher … what else … iHeart Radio. We’re on all those different ways to get podcasts.

You can listen to our podcast, which we put out every week on Saturday mornings, so grab yourself a cup of coffee, sit back, and let’s do this thing. All right, so let’s first get into what the markets did for the week. It’s interesting. We started the week out looking as if the stock market was going to pull back, and it did. We’ve been saying for at least this past week, even on Monday during an interview that I do each week in south Texas on a radio station, I said this could be a pause, but, longer term, we still see the market in a bull market.

We got that pause at least for most of the week until Friday, it seemed like, and so, for the week, the Dow was flat. The S&P was up about a half a percent and bonds were flat. It was pretty much a flat week really with the exception of the Nasdaq, up about .6%, but, overall, a pretty flat week for the markets.

Now, we did see a little boost into the end of the week, and let’s go through really what had the markets moving. Monday, of course, we had that mixed market, but a weaker tone. Tuesday, the eight-day winning streak for the S&P 500 ended. We heard about new potential tariffs. We heard about the IMF. It said that global growth would slow, so that really hurt the markets, down about .7% for the stock market. Came back Wednesday. Pretty flat day. Nasdaq was really strong, and the Fed said that a rate hike could still happen this year. “Some participants” indicated that if the economy evolved as they currently expected with economic growth above its long-term trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year. We’ll see about that. I don’t think they’re going to do anything.

A pretty quiet day Thursday, and then, Friday, we had a big merger and acquisition out of the M&A space. Chevron bid to acquire Anadarko for $33 billion in stock and cash, and then Occidental Petroleum, which, full disclosure, we own Occidental Petroleum in our Dividend Plus strategy, they apparently are wanting to do the same thing, so let’s see what happens there.

We did see late in the week also that there … They call it Trump’s trade war on China. We’ve heard that for the last year. It may be moving over to Japan, so they’re hoping that they can strike a deal, the US that is, with Japan on agriculture. Japan’s economy minister will be in the US on Monday and Tuesday for talks, but the thing that got the market going at least on Friday, we had a big update on Friday, was Jamie Dimon, who, of course, is the CEO of JPMorgan Chase, came out after the results and said, “You know, just because the economy has been doing well, it doesn’t mean it has to end. Uh, we don’t have to. We don’t … This thing doesn’t have to end, uh, right now,” and he said, “We may not get a recession in 2019, ’20 or 2021.” Obviously, he’s in the middle of a lot of deals, a lot of lending, a lot of investment.

The market took that as a positive sign. We saw a nice update on Friday with the Dow Jones being up about 270 points, but, again, for the week, a pretty flat week, because we’ve been saying that we’re probably due for a little bit of a pause, but we still believe new highs will be reached in the weeks ahead.

For the week, some of the outliers, we did see interest rates up a bit. We saw financials up about 2%. We saw oil and gas exploration and production companies up about 2%. Insurance companies and banks up about a little less than 2%. Transports up, railroads up pretty strong. Semiconductors up a little over 1% and, on the flip side, on the down, we saw biotech down over 4%, pharmaceuticals down 4%, metals and mining down three and a half percent, steel stocks down over 3%, healthcare, so really a mixed bag which, when you average it all out, you end up getting the flat market, so that’s what we got.

As we’ve been saying, I mean, look, the stock market has had a pretty unbelievable run, and I still know people that are saying, hey, it’s run, but it’s due for a pullback. It maybe due, but that doesn’t mean it has to happen. The market goes up more than it goes down and the bears are just … They’re clamoring for it to go down. They want it to go down because a lot of them are sitting on the sidelines with cash and they don’t know what to do about it, and that’s a tough place to be.

We talked a little bit last week about trading and why it’s so difficult because, when you take profits on something, not only do you pay taxes potentially, but, if it goes in your favor and the thing you’re selling goes back down, are you going to buy it back at the appropriate time to overcome the taxes or are you going to buy something else?

I mean, there’s this pressure of having to make the money because, again, if you’re sitting out and the market keeps going up, then you start falling behind. You would have been better off hanging in there, and so it’s challenging, and that’s why I’m a real big advocate for really looking at a portfolio and figuring out, number one, what are the goals. That’s just financial planning 101 for the money in terms of when it’s going to be needed, et cetera, but having this core group of investments and stocks that stays there, it’s invested, that’s your inflation hedge, that is your long-term growth. You should expect to make the most money on that part of your portfolio, but you’re going to have to put up with some volatility, so is it an appropriate amount?

Then you have your income portion, which is your safer money, and that is the money that you either are going to need soon. It needs to produce an income so you can live off of it. If you want to have some things on the fringe for trading, fine. You can do that, but I still to this day, no matter how many times I’ve mentioned this, I still have a lot of people that email that have a portfolio that is of an all-or-none portfolio.

We talked to somebody this week who called and said, “Look, I’ve done well when the market has fallen because I have gotten out of the way, but I cannot get myself to get back in,” and that is precisely the issue, so, again, if you on the fringe had reduced your holdings and, again, on the other side, increased them when you saw it was appropriate, that’s fine to do, and keep that core in the middle. That is fine to do, and some of the satellite things, maybe private equity, or they may be long, short funds or managed futures or … You name it, but the core, the meaty part should be more plain vanilla because of the fact that, again, if you look at the chart over the long term, companies produce profits. Profits going up means their stock is eventually going to up as well, and, yes, we have corrections and we have bear markets/

We’ve talked about this. If you look at where, even if you would have bought prior to a drop and held through that, you still would be okay, so, again, it all boils down to when do you need the money, right? That’s why we always say that, but it just amazes me that I still talk to a lot of people that email me and say, “Hey, here’s my portfolio,” and it’s like real heavy cash, and I understand it because our mentality … I mean, think about it. The mentality we all have is that, if you’re bearish, why would you go to 10% cash? Why not go to 70% cash or a 100% cash, right?

The obvious answer is because you could be wrong. We’ve all been wrong, and that’s the challenge, so I really think portfolio construction is really the art of this whole thing. It’s easy to pick a stock maybe that you think is going to go up or you want to get out of the way of the market going down, but constructing that portfolio that’s specific to you is really the key, and it’s not always easy.

Now, I do want to switch gears for just a minute.

As we kind of transition from that trading talk, like we talked about, to mutual fund fees and ETF fees … We know that fees, for a lot of those types of investments, have been coming done over the years, especially as commission type investments kind of verdin, which is a good thing for you. And we don’t do commission type investments so it hasn’t really been an issue, but a lot of things have been coming down in cost. However, we’ve always been willing, us as Eggerss Capital Management, have been willing to pay a premium for a mutual fund that does something very unique or eclectic that we or you as an individual can’t do on your own. So if they’re doing something and they’re packaging it in a nice, clean mutual fund, and it’s very different, it’s worth paying a premium.

Now, if they’re going to buy a basket of mid-cap growth or the S&P 500, yeah, you can get an ETF that costs virtually nothing to do that, but when we’re talking about something unique it is worth paying a premium for that mutual fund.

But I do want to caution you on something, and I saw Joel Greenblatt, who’s a mutual fund manager bring this up, and it’s a really interesting point, a lot of the times you will look at a mutual fund and say that mutual fund has high expenses, and often time, number one, some of it could be because it has high expenses because of the fact that they trade overseas. It’s a foreign fund and those naturally have higher expenses to do that. Number two, it could be a fund that’s a long-short fund, and this is really interesting, because on a long-short fund, which means part of the portfolio is own stocks like you would, but part of the portfolio was short meaning they basically borrow the shares and sell them short and they’re betting against. They benefit from a fall in the stocks. And so the goal would be that the long ones go up and the short ones go down and you make money, but oftentimes those two things kind of counteract each other and it minimizes volatility.

But here’s the deal, what’s interesting is the cost to borrow those shares and pay the dividends goes towards their expenses sometimes, and you see that, but they don’t get the benefit of offsetting that from the income that they receive. It’s not really a fair apples-to-apples comparison for them and thus for you, and that’s interesting and that’s obviously not a lot of funds are long-short but the ones that do some eclectic stuff … You have to look at their true expense ratio and sometime you may not be able to get that.

Joel Greenblatt did bring that up saying, “Our expense ratio was much, much different than what’s published because that’s just the industry standard.” We get dinged on the bad stuff but they don’t give us credit for the good stuff coming in and it’s not a fair assessment. So when you’re looking at fees be very careful about just taking what it says with a grain of salt.

And on that same, somewhat note, when you’re researching fees, a research in mutual funds I should say, take a look at … A lot of people like to look at the stars, the Morningstars, be very, very careful in doing that. The reason I say that is if you look at the methodology of how they, they meaning Morningstar, grades mutual funds, they grade on things like how long the managers been there, how much they beat a benchmark, all these different things, but on top of that they will also grade it based on how it compares to other funds in its category. Well, a lot of funds, especially ones we choose sometimes, don’t fit in a box. They don’t fit in a category and that’s precisely why we own them as they’re so unique that you can’t really compare them with anything, and they get dinged for that. In other words, they may show as a two star, or a three star, you look at it and go, well that doesn’t make any sense, the X, Y, Z mutual fund that’s been around for 30 years and just buys stocks is a five star, Why is that one a two or three star? Well, it’s because there’s nothing to compare it to And so their algorithm dings it for that. And when I say dings it I mean lowers the star ratings or the ratings in general.

So when you’re doing a research be very careful on where you’re getting information. Really dig into the fund and see what the methodology is and then see is it worth paying these higher fees for some of these too if they have higher fees. Some don’t, but if they do, don’t just look at it and say, oh that fee is too high. There’s a reason why. And I think in general, the more unique strategy, the more you should be willing to pay for a mutual fund.

And if you’re just wanting market beta, meaning I just want to be a part of the market, whether it’s the gold market, the stock market, the bond market, if it’s just plain vanilla, those fees should be very, very low because you’re just trying to participate and there’s lot of ways to do that. So that’s just a little bit about mutual funds that I’ve been seeing lately with the fees.

Okay, so last week I did ask you guys to let me know what you want to hear, pros, cons, all those kinds of things, got some feedback, and one of the ones I got back is basically from a gentleman who says, “I would like to hear a show about portfolio construction and asset allocation examples for retirees. Give an example, assume someone has $500,000 in their 401(k) with a million in taxable account for a 65-year-old who will retire at the end of the year. Assume that person has income at $100,000 now, no children at home, no health issues, how should they asset allocation going forward? How much with social security investments can they expect to have at retirement?”

And I think, again, as I talked about earlier, portfolio construction is huge and furthermore, sticking with it is a bigger deal because I can create an asset allocation, which we do, it’s can the client stick with it? If they can … I don’t want to say it’s predictable but it’s much more predictable, it’s when they are using more resources than they told us they’re going to use … In other words, instead of taking $100,000 a year using that, they’re actually using 150, or 20,000 here and 60,000 extra, or they simply say I don’t like the stock market, I’d like to shift into the bond market, and then when the coast is clear we’ll go back in. That’s what makes my job very, very difficult.

Now, to answer this question, this, unfortunately, doesn’t have all the information we need because I need to know what this person, and this is a fictitious, I guess, scenario he gave me, but what is the background of this person? Have they invested in stocks? Have they been somebody that sat in CDs for many years? What’s their investment experience? Do they want to leave a legacy? So in other words, is this money, which basically he’s saying here somebody has a million and a half dollars, which let’s just say that you could pull off $60,000 a year from that, and with social security it may be 2,500, so that’s about another 30,000, that person could be pushing $90,000 a year from their portfolio and social security to replace that $100,000 income. But do they want to leave money to their children or to a charity after they’re gone? Do they want to do any gifting right now or later on? Those are things I need to know because that changes the scenario. In other words, do they want to have the money exhausted by the time they pass away or do they want to leave a certain dollar amount at their death?

Those are all things that the advisor has to know. Yes, we need to know how many children living at home, we need to know if there’s any health issues, we need to know is there another spouse that has social security as well, is there any kind of pension that’s going to come, is there any kind of inheritance we should be looking for, does that person have any other part-time income they’d like to do to bridge the gap between their salary now and when they go into full retirement? Those are all things that we talk about in those meetings to get a portfolio and recommend a portfolio to a 65-year-old because a 65-year-old, if they’re healthy, they may live another 30 years in retirement. So here’s the deal, that portfolio, that million and a half dollars, should, number one, has to generate a good chunk of money but it’s going to have to have stocks in there to some extent. It has to because of the fact that that’s the inflation hitch. That $100,000, if that’s what somebody has an income right now, I don’t know if that’s what they’re spending, they didn’t give you the expense side which is a huge missing fact here, but if they want to spend $100,000, that 100,000 in a few years is going to be $120,000 a year, then it’s going to be $140,000 per year because of inflation.

And the government says we don’t have any inflation, but we know we do. You go to the store, you buy gasoline for your car, or you buy new cars you have taxes, things pop up, there’s health issues sometimes, so those expenses are going to go up. And that’s the problem is when somebody says, okay, well, I have a million and a half dollars I can afford just to kind of throttle it back, put my money real safe in CDs. That will work for the short-term, but overtime it’s like the frog in the boiling pot of water where it creeps up on you, inflation creeps up on you, and all of a sudden where you’re comfortable today you start having to do what? Your lifestyle starts to change and it changes because you intentionally spend less which means you’re not doing as much because

… you’re spending more on things you don’t want to spend more on, like groceries, and so you stop going out to eat as much, you stop taking trips. That’s what happens. So it’s hard to answer his question because I don’t have all the facts, but those are the things we start to go through, and again legacy, expenses, all those types of things, and then modeling it … and then what’s interesting is we can do what-if scenarios. If inflation is a little bit more, if we earn this percentage or this percentage, what will it … and how it’ll impact the portfolio. Then, when to take social security. I mean, if you’re a 65-year-old, are you taking social security now? Or do you wait until 70? Well, it all depends. Are we going to also do any Roth conversions? Because if your income at 65 stops completely, and you’re not taking social security, maybe we do Roth IRA conversions to take advantage of your low tax bracket. There’s no way to answer an asset allocation question unless you kind of go through some of that exercise, because until we know what that income looks like, or what you’re going to need, it’s hard to develop a portfolio.

Once we’ve figured out, and we start figuring out what kind of income we need to pull from the portfolio, then that does obviously tell us how much we need to have in income-producing investments versus capital gains oriented investments. Stocks that don’t pay dividend, that just we’re hoping to go up over time, and appreciate in value over time.

Then the other thing that he mentioned that’s really interesting is when he says 500 000 in a 401(k), versus one million in a taxable account. I’m glad he put it that way because, again, where the investments go is really, really important. Because the taxable money is money that has already been taxed. You can take that $1 million right now, and you’re not going to pay any taxes on it. But the 500 000 in the 401(k), every bit of that’s going to be taxed, and guess what? At age 70 and a half, you’re going to have to start taking out a portion of that, probably something in the order of $20 000 a year in the first few years, and then it’s going to go up from there.

What really helps is to model this to where you can look and say you know what, at age 70, I already know, if I’ve done some Roth conversions on what my 401(k) might be worth, how much my taxes are going to be … because taxes in retirement are a big deal … and then like I said, social security claiming strategies. So it’s impossible to answer this question with this limited amount of information. I do think that is the problem that people have, is they want to plug these numbers into something, and have it spit out an allocation, and there’s tools to do that. There are software to do that nowadays, unfortunately.

Until you have a conversation with an advisor, and have somebody know your situation, know your likes and dislikes, what you’re trying to accomplish, what’s going on, do you have any kids? Do they have any issues, or are there any concerns with their spouse? Do you have grandkids you’re wanting to gift? Those are conversations you have, and relationships you build over time, to where you know … I know, personally, which of my clients are aggressive, and which ones are not. I know which ones, when the markets get turbulent, are going to call. I know which ones that are going to call and say, “Hey the market’s down, let’s take advantage of something.” I know those clients because I’ve talked to them for years, and I know their personalities, I know their situation.

Those are all great things that involve conversation, and we’re not at the point yet, with technology, where a computer knows all that about you. Maybe someday, right, artificial intelligence is real. We know that’s going to happen, and algorithms and all that. But for the time being, to plug in 500 000 in a 401(k), and a million in a taxable account, and I’m 65 years old, and I have $100 000 income, yes it will probably spit out a number, and it will probably spit out an allocation even, but it’s going to be very plain vanilla. 60% stocks, 40% bonds, as an example. That is only part of the story. All these other things I’ve been talking about, the computer didn’t even bother to ask, or know.

Then, even so, what type of income do you need, and where do you get that from? Are you just going to get it from the bond market? Or should you invest in any kind of commercial lending? Should you invest in commercial real estate? Should you do any private lending? Should you do any private equity? Should you invest in individual stocks, mutual funds, ETFs? I mean you see how this is much more complicated than just, “Hey, I’ve got a million-and-a-half bucks, what should I stick it in?” There’s plenty of people that will answer that. Unfortunately, some of those people have agendas, like insurance products, or they just want to get that money and move on, and answer your question and move on to the next client. But this involves conversations. We’re not mind readers. I don’t know, necessarily, what all’s going on with somebody that’s a new client, so we have to kind of ask these questions. That’s why it’s an in-person kind of sit down and talk through these things, and really then come up with a game plan.

I really think that year-by-year planning, cashflow analysis, to say, “Look, did you know in six years you’ll probably be spending this? Your investments should be around this, and if that’s the case, here’s the best thing to do from a tax standpoint.” If you do all of that, then you have a game plan, and then guess what? When you have 30% stocks, or 60%, or whatever that number is, then all of a sudden you already know that I already accounted for some volatility, because we’ve already stress tested, we know, we’ve run it through the machine to understand that hey, given your specific situation there is going to be some turbulence, and we’ve already done all of that analysis to know that that portfolio can handle some volatility, just like we saw in December, or really the fourth quarter of last year. That was volatility, but guess what? It was either A, a great buying opportunity, or B, a big nothing. For long-term investors it was nothing. You think a 25-year-old … some of them didn’t even know that even happened in their 401(k), that’s really how you should treat some of your money, even if you’re 65 years old.

I appreciate the question, and I like these case scenarios that I like to bring to you, but you see that I got a little bit of information, and really until you have a conversation with somebody it’s impossible to really tell them what the asset allocation should be. But keep the questions coming, and again, it’s not a one size fits all. Do you understand, also, one other quick thing. That scenario of somebody with 500 000 in a 401(k) and a million in a taxable account, 65 years old, do you understand that person that’s being described there … I could have five, or six, or even 10 different customized portfolios for that exact person, because their situation is different from the other person that’s a 65-year-old with a million-and-a-half dollars. You see that’s how intricate this can get if done correctly.

If you would like to email me, Karl, K-A-R-L, @eggersscapital.com. Thanks for sending that in, because I love that type of question. I hope that helps answer that, that it’s not that easy. Thanks for listening everybody, and don’t forget to go to the website, eggersscapital.com. If you need our help,
210-526-0057 . Don’t forget you can always reach out to us, you can share the show, we appreciate that, and give your feedback. Share it with a friend. Thanks for listening. As always, take care and have a great weekend.

This show is for entertainment only and information provided by the hosts, guests, and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show, for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment, or get yourself a trusted advisor.

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