Don’t Fall for the Marketing. Take a Deeper Look.

Paul Winkler: All right. Welcome to “The Investor Coaching Show.” I’m Paul Winkler, talking about money and investing.

Good to be here. It’s beautiful, beautiful outside. Oh my gosh. It’s hard to get me inside after a day like today.

This is a fall day, man. And I heard, is it going to rain tomorrow or something? I don’t know. I didn’t even pay attention to the weather.

I should have. No, I won’t. If it’s going to rain, I’ll just be depressed, so I’m not going to pay any attention to that.

Nobody Can Predict the Future

Just for the past several days, I had my head in a hole, not paying a whole lot of attention to the news. I’m going to tell you, all I do is watch the financial stuff every day, and that was fine. You don’t get a lot of the other day-to-day type of news. But for me, it was blissful not knowing what was going on, and then you turn it on, you go, “Ah, this is happening, this is happening, this is what’s going to happen.”

And I think for me, it’s blissful just because I get to the point where I go, “Nobody can predict the future,” and that is such a critical thing to get about investing.

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People cannot predict the future. They try, they do what they can, and they’re woefully inadequate at it, is really what it gets down to. 

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So often what happens though is that people invest based on the idea that somebody’s got a future prediction. They can tell you what’s going to happen next.

And if you ask an investment manager, if that’s what they’re doing, they’re going to tell you, “No,” adamantly, “no, no. You can’t predict the future, you can’t.”

But then you watch what they’re doing, and this brings me to what I was talking about on Channel 5 this week. I made this comment, and I was talking to my staff about this too. I said, “You know, if you ever have kids, if you got married, you’re dating somebody or you have hired a contractor to do a job for you, don’t hear or listen to what they’re saying to you. Watch what they do.”

Isn’t that the case? So we’ve got to watch what people do.

You’ll hear people say, “We don’t do this. We don’t do that. You need to just try to forget about … Don’t let your emotions get carried away and invest emotionally or do things based on what you feel and your feelings and those types of things.”

And then you go, “Well, you know what? Hey, it sounds like they got it down. Yeah, you don’t need to do that. You don’t need to be pulled every which way but loose when it comes down to how you manage money.”

And I hear investment firms say that, “That’s where people get it wrong.” Matter of fact, somebody sent me an article this week and they said, “Hey. Hey, check out this article. It sounds like you, Paul.”

And I said, “Yeah, sounds like me, but it’s not what they do.” I know the company. I know the investment firm.

That’s not what they do. They are telling you, “Don’t get whipsawed by your emotions,” and yet they manage money in a way that is driven by active stock-picking, market timing, which is really driven by emotions.

Because when we’re trying to move around, you could say, “Hey, I’m going to be a contrarian. Whatever the masses are doing, I’m going to do the opposite,” and people think that being a contrarian, you can get higher returns.

There are mutual funds that have been sold based on that idea of contrarian investing, going against the crowd, and ended up doing abysmally bad because the more they try to go against what everybody else is doing, they actually end up doing something that all the other contrarians are doing, and that doesn’t work either. So it’s just funny how people try to market themselves one way.

Are People Really Diversified?

Well, one of the things that is marketed, and this is what I was talking about, is diversification. “You need to diversify your investment portfolio.”

Ben Hall and I got into this conversation — he’s a reporter on Channel 5 — and he’ll talk about diversification. I said, “Ben, you say, ‘diversification’ a lot when we have these conversations.”

And I love talking to him. Oh, man, I love talking to him. He’s so much fun.

And I said, “I am going to go against your diversification because this is what people think they’re doing, but they’re not necessarily, and I’m going to prove it today.” And he said, “Oh, that sounds like fun. Let’s go, let’s go, let’s do this.”

So what I did is I pulled up ads from different mutual fund companies, and in the advertisements and in the things that they had on the internet, it had all this “how we’re going to diversify.” One of the ads was “Vanguard’s framework for constructing diversified portfolios” was the first one that I showed.

The second one was T. Rowe Price, “Diversification matters. It’s really, really important. You’ve got to diversify your portfolio.”

And the third one was Voya, “Diversification,” and you have this man in a suit sitting in front of three baskets, and of course, what are in the baskets? Eggs, right? That’s the sign of diversification.

And then you have the third one, State Street Investments. It’s funny because Scott chose State Street as the third fund company just to highlight here.

A lot of you may have never even heard of State Street. I actually, that’s where I started. That was my very first broker-dealer. It was State Street Investments.

But anyway, they have their PRIV and PRSD. “Our exciting strategies that investors can use to help diversify potential sources of alpha,” which is you’re trying to beat the market, “and income within bond portfolios.”

And they have Capital Group and American Funds. “Diversify your assets, retirement planning. What’s asset allocation? Diversify your assets.” And they have Fidelity, “Diversification through a single fund.” So you have diversification, everybody is saying to you that this is really important.

Then what I did is I pulled up these fund companies, and I took their asset allocation funds, and I was showing this visually, and for you, I’ll just walk you through it audibly. And if we look at, let’s say, Vanguard LifeStrategy Growth Fund.

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You look at the market in nine different segments, large companies split up into three parts: value, blend, growth. 

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Those are three distinctly different areas. So when somebody says, “What did the market do today?” You hear them talk about certain areas, and I’m going to talk about that in just a second. So just hold on because I’m going to come back to that because I had a great visual, and I’ll give it to you auditorily in just a second.

Diversification from Mutual Fund Companies

But you look at this area and you go, “Okay, so how much of the money is in large companies?” It’s well over 70% of the money is in large companies in this fund.

How much is in small value where you’d expect the highest return? Two percent.

So we look at this and say, “Okay, so diversification would mean that I would own these dissimilar asset categories, these things that don’t move with each other. And what I should have is I should have fairly even splits between these areas because that’s the idea. I don’t put one egg in one basket and 19 in the other basket over here, because if I drop the basket with 19 in it, I’ve got a problem on my hands. I’ve got scrambled eggs and I’ve got only one in this other basket.”

Well, that’s basically what we’re hearing right here. We have well over 70% of the money in big companies, only 2% in small value, which is something that, like in 2001, would’ve moved the total opposite direction when we had the tech bubble burst. It was the one area that would’ve been a saving grace in 2001, and you got 2% of your money there?

Then you’v got Fidelity Asset Manager. Is it only Vanguard doing it? No.

Fidelity Asset Manager, this is a mutual fund that is designed to be 85% stocks, 15% bonds, and what do they have? Again, about 70% of the money, a little bit over 70% of the money, in large companies. Oh, they got 3% in small value. That’s an improvement.

That’s 50% more if you want to lie with statistics. You can go 2% versus 3%. They got 50% more. No, they got just about nothing.

Then you’ve got T. Rowe Price Spectrum, and you look at that and go, “Well, there’s 18 and there’s 34.” So that gets us up to what, 52%? And then another 20%. That gets us 72% in large companies, 2% in small value.

Well, what about American Funds? What do they have? Twenty-five and then 30, that’s 55, 65, 75. And okay, so that’s 77% in big U.S. companies, 1% in small value.

How about Voya? You see their great commercials with the squirrels.

They’re cute commercials. They really are. Talking squirrels. Who doesn’t like a talking squirrel?

Well, what do they have? Fifty-five, okay, so 70, 74%. Quick math, 74% is in the large, 3% in small value.

How about State Street? Again, it’s literally 73%. I have to do the math quickly in my head; 73%, 3% in small value.

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What we are seeing is six different major mutual fund companies with asset allocation portfolios, and it’s the same thing over and over and over again. 

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And the question that was asked is, “Well, why, Paul? Why is this the case?”

Market Reports

Well, if we look at the reporting on the markets, what did the market do today? What area of the market, what’s going on right now?

You hear “the market report, sponsored by,” you’ll have whatever investment company, and then you’ll see outside some of these investment firms that they’ll have these signs that tell you what the Dow did or that tell you what the S&P is doing, what the NASDAQ is doing, or go on on the internet or look at when you open up your phone, the first thing you see when you open up your phone if you have a stock market app on there, what do they have on there? The Dow and the NASDAQ are typically what’s on there.

Well, if we look at the Standard & Poor’s 500, the S&P 500, you will notice that about 70, 80% of the money is in large U.S. stocks right there. How about the Dow?

The Dow, you’re about 80, 90%. Well, I’m looking at the S&P. It’s more like 80%, a little bit over 80%.

If you look at the Dow, it’s about 90% large U.S. stocks. If we look at the QQQ, which is a benchmark, which is basically an ETF that tracks the NASDAQ, we’re looking at somewhere in the neighborhood of about 90%, about a little bit over 90% of the money is in large U.S. stocks. So large, large, large.

If you manage an investment portfolio for the public and “the market,” which is the Dow, the S&P, or the NASDAQ, either one of those things are up, all of those are up, let’s say, let’s say that goes up and your investment portfolio is up a like amount, their job is safe. Because people often ask me this, “Well, why do they do it?”

You hear people say, “Well, we do well if you do well,” and it sounds good, but if you’re moving right with this area of the market long run, that’s an area of the market, the large U.S. companies, that would have a lower expected return long run than small companies, or value certainly. Historically, 96% of the 20-year period.

Ninety-six, that’s a pretty high number of 20-year periods. Value has a higher return than growth does, but yet this is where they’re focusing mainly, is this particular area of larger growth companies. So if we look at this and say, “If you’re moving with that, you’re more likely as an investor to stay with the investment manager if they’re both going up and they’re going up a like amount.”

Now, if they both go down, everybody’s standing around the water cooler going, “Oh, you see the market today? Our 401(k)s went down. Oh, man. But you just got to stick with it,” which, as I point out, is true. You don’t want to jump in, jump out, but you want to stick with it if you have a well-diversified portfolio and you’ve actually mixed it better than what we’re seeing here.

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If we’re all in one area of the market, we can get really upside down in a hurry when that area of the market goes down and starts to dive. 

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And that’s basically what we see here is you’re more likely to stick with them as long as they are moving with the market, what you perceive to be the market.

Moving With the Market

So for an investment manager, a mutual fund company, this is really good for them. People ask me, “Well, why do they do it if it’s not necessarily better for the public?” Because their job is to get and keep your money under management.

If you’re moving with a market, you’re more likely to actually stay with them. You’re more likely to stay the course, which in a way can be better for you because you don’t bail out when markets go down, but it’s really good for them.

Now, I said, “In a way, it’s better for you.” The problem is that you can go very, very long periods of time with absolutely no returns with large U.S. stocks.

And historically — I’ve given periods of time — if you look at the 1920s through the 1950s, almost no return. You look at the 1960s, 1966–1982, you look at that period of time, the return after inflation for the S&P 500 was zero. You look at 2000, more modern, to 2012, zero return.

So you look at these long periods of time and say, “Well, I may not have that much time, 20 years, 10, 20 years, to be able to go without return,” and this is why diversification is so important.

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Now, how do we measure diversification? How do we define it? We define it by things moving in dissimilar fashion. 

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During that 2000 to 2012 period that I just named where the S&P 500 had no return, you had market segments that tripled or quadrupled, but they wouldn’t be represented by the Dow, the S&P, or the NASDAQ because they were actually outside the U.S. And you look at so far this year, the area of the market that had the highest return was not a U.S. market.

What Diversification Really Means

So one of the things I fight is that you have the investment industry saying, “We diversify. We diversify. Diversification is important. These are all things you need to be doing.”

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Watch what they’re doing, not what they’re saying, is my point. Because it’s really easy to say, “Hey, we’re diversifying.” It’s a lot more difficult to do it. 

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Because if you’re an investment manager, what you’ve got to do is be willing to look different. And what I mean by that is that you can have a period of time where large U.S. stocks do better than other areas, and you have to be willing to not have a return that is as high as the S&P 500.

Conversely, though, when markets go the other direction, when the S&P goes down, if you’re diversified and the S&P is the worst area of the market, let’s say, like what happens so often as I just talked about, at least you’re not doing the same thing. So you’ll never have the best or the worst when you diversify.

As one client of mine said, I loved it because he was a rocket scientist, a brilliant guy, and he says, “Diversification means always having to say you’re sorry,” because you won’t ever have the highest return when you diversify, but you also don’t find yourself getting hosed — not if markets go the other direction, if large U.S. companies go the other direction, when they do.

The idea is to reduce the variability of a portfolio. Everybody says, “I want to have a portfolio that’s safer, but I want to get market returns,” and those types of things. Well, the reality of it is the thing that we can do is make sure that we own these things in lots of different segments.

And I think one of the things that really shocked Ben when we were talking is I made the comment, “If you look at my portfolio, I might own somewhere in the neighborhood of about 40,000 stocks in 40 to 50 countries around the world.” He was like, “What?”

Because you think diversified means I own 20, 30, 40 stocks. No, 100 stocks. No, 200 stocks. No.

No, because think about it. If I have 200 companies, let’s just say that every stock in the world would have the same expected return. Now, that wouldn’t be true because small companies have a higher expected return, a little bit, than large and value has a littler higher expected return than growth. But let’s say they all have the same expected return just to keep this simple.

Is it smarter to have 20 stocks, 30 stocks, 40 stocks with an expected return of 10, or would it be better to have 30 to 40,000 stocks with that expected return? It would just stand to reason that you would have a lot less risk if you were more spread out, casting it all over the place, because you don’t know what calamity will befall there. You don’t know what might happen.

Looking at Historic Returns

So this is why we want to diversify in this manner, and that is because it’s the philosophical grounding that I’ve taught for 25 years on this show, that companies want to pay you as little as they possibly can to use your money, you want to get paid as much as you possibly can, and there is the friction. Both of you want something different.

So that’s why, if we look at historic returns, with large companies or small companies, we have an expected return that is based on this friction, and you can’t figure out which stocks are overpriced or underpriced or which markets are overpriced or underpriced. Nobody can, because every time you want to buy a stock, there’s somebody on the other side wanting to sell it. Every time you want to sell a stock, there’s somebody on the other side wanting to buy it.

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So what makes investing beautiful is that you don’t have to be a person that can predict the future to be a successful investor. 

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If I take two companies at any point in time, the expected return, if they’re similar companies, is the same. Now, what will happen, I don’t know, because if one outperforms the other, it is based on news or something that wasn’t predictable.

So therefore, what ends up happening as an investor, if I look at these two companies, I go, “Well, I don’t know which one’s going to do better than the other, so I might as well own both,” and that is wisdom that literally is 2,800, I think it’s 2,800 years old. That’s when Solomon wrote Ecclesiastes, something like that.

That’s basically what he said. So you think about it, this is old, old wisdom. “Nothing new under the sun,” to quote Ecclesiastes again.

There’s a lot more interesting stuff in the news regarding, oh, there’s news regarding gold, there’s news regarding some really interesting data on cap-weighted indexes. The interesting stuff about gold, I’ll hit that real soon here too. Quantum stocks, interesting stuff about that, and more. I’ll just have to leave you wondering what the more is after this.

Our Workshops

We are getting into high gear as we go into the fall to update some workshops and things like that. We have the workshop that we just did on Medicare for those of you that want to check that out. Because people are looking at Medicare supplements and shopping that market and wondering a little bit about it.

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People want to know something about that whole world, but not necessarily learn it from somebody that has a dog in the fight. 

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That’s why you can go and check out our video on that because we have somebody from SHIP, they have the state health insurance people. It doesn’t show the P in SHIP as people, but I’m just thinking about that. I just did the acronym, but it was close. But anyway, so we have somebody that actually has a whole unit that helps people walk through these types of things.

And we have Christine, who came on with me, and we got into a conversation about how that all worked. That’s a world I came from years ago.

Matter of fact, we’ve got a video coming up that we’re going to be doing fairly soon. I’m not going to ruin it. I’m just going to say it’s going to be really cool. I’m doing an interview with somebody from the state as well, or one of the government — I don’t know, it may be a county government person, but it’s going to be really interesting on something that people have asked me about, a type of insurance.

And I’m going to save that. I’ll tell you about it when we do it. I think that may be even this week that we do that, and we’ll put it on the website as well. But just write down paulwinkler.com, because we’re always putting down some good videos, some good education to help you through some of the financial decisions you’ve got to make.

And I like doing it from a perspective of somebody that isn’t selling stuff. And you can go to these steak dinners and you can listen to presentations on social security and Medicare and all that garbage, and then all of a sudden you’re going to be sitting through an annuity presentation before you know it, or something else you probably shouldn’t be doing.

Why Did We Have a Run-Up in Gold?

So anyway, there was talk this week, and it was regarding gold and why did we have this run-up in gold? This is something I’ve talked a little bit about, but there was some discussion on what was driving the price of gold in its fluctuation.

I’ve talked about before that if you go back 4,500 years … I took that CNBC clip where the guy was talking about gold prices and the rise in price of gold 4,500 years ago. If you take it after inflation, the rate of return, zero after inflation, I mean, 4,500 years ago, you could buy a certain amount of goods and services for what it costs now.

In Ancient Egypt, if you look at food, let’s say for example, if you look at something that you would’ve had to have in Ancient Egypt 4,500 years ago, the price is about the same. So after inflation, gold really hasn’t had any return, is the point that this guy was making.

But you look at recent years, and one of the points I made a couple of weeks ago was how people that I’ve talked to anyway thought that gold was going to take off because they were concerned that Trump was going to lose the election. So you get this political aspect of things where people make predictions based on who’s going to win the election and who’s going to lose the election, what’s going to happen? And as much as I try to tell people, all knowable and predictable information, even elections are built into stock markets.

As much as I say that, it’s hard for people to wrap their brains around it because they think that somehow if the person that they want to be in office is in office, the market’s going to do whatever. It’s going to do well if that person is the person that they want.

And for Democrats, if a Democrat wins, the market’s going to do great. And then for Republicans, if a Democrat wins, the market’s going to tank. It’s going to be terrible.

If a Republican wants a Republican in there and a Republican gets in, they’re going to think, Oh, the market’s going to go up. But if a Democrat gets in, it’s going to be the opposite, right? It’s going to go down. So everybody has their opinion based on what party they think is going to be best for the economy.

And the point that I always make when I point to a chart on my wall in my office, those of you who have been in my office, you know the chart. It has blue, it has red, all the way back through history. And the point that I make is that blue, it’s Democrat, red is Republican. Market goes up under either, and that’s the point I made.

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The markets will find a way no matter what happens. 

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Well, this person was making the prediction that gold was going to take off because they thought that Trump was going to lose, and they were really in favor of Trump winning. Well, the funny thing is, what happened? Trump won, and gold went up for that reason. It went up for a totally different reason.

Is Diversification Always Good?

You go, “Well, what on earth is going on here? What happened here?” Again, something that was unknowable and unpredictable, and this is the explanation that was given on CNBC for why it happened.

Speaker 1: Ten straight weeks up, we haven’t had that many consecutive weekly gains since 1980.

PW: Since 1980. And I was talking about gold here. We haven’t had that many consecutive weeks of up movement in gold since when?

Since 1980, which was the last time that gold, the bubble popped, and it just went down for the decade of the ‘80s. It was a bad, bad decade for anybody that was invested in gold.

And a lot of people say, “Well, you needed to diversify.” And people say diversification, of course, as I said, as it’s always good. Well, there’s some things that aren’t good.

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You don’t necessarily diversify into things that don’t make sense or aren’t investments from an academic standpoint of what is an investment. 

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An investment, by definition, if you’ve never heard me say this, is where you own something, where somebody is paying you to use your money. They’re either paying you in interest, they’re paying you in earnings of the company, dividends and earnings of the company, retained earnings and dividends, or they’re paying you in rent. So we’re looking at somebody paying you to use your money.

With gold, you don’t have that. It just goes up and down in value based on supply and demand. So I’ll continue here.

Speaker 2: Okay, I have to rely on what the great gold miners say. Sean Boyd from Agnico Eagle, who I think is the best, he said, “Listen, Jim …” Because I was saying, “Hey look, you can buy it at Costco.” He said, “Jim, it’s all China.”

PW: So he’s thinking that the reason that it went up is because people are buying it. The common person is buying it at Costco, as Costco has been known to be selling lots of gold to shoppers.

And of course, as I’ve talked about here, when the Great Depression started, the patriarch Kennedy basically had the shoeshine boy telling him which stocks to buy. And he said, “That’s it. I’m getting out of the stock market.” And he famously avoided the Great Depression, and the stock market downturn there with it, because he recognized that the common person was getting into this, it’s time to get the heck out if they’re buying stocks.

But anyway, he says he thought it was Costco that was the reason that gold was going up. But his friend actually corrected him and said, “No, not necessarily. It’s more than that.”

S2: China? I don’t blame the Chinese for wanting to buy a lot of gold. The government’s buying it, so why shouldn’t individuals buy it?

That’s who’s buying. I think they’re selling what’s left of their treasury holdings.

Speaker 3: Those meager treasury holdings? Well, I don’t know where the numbers are on the Chinese.

PW: So he’s basically saying that the reason that gold has gone up is because the Chinese government and their citizens are buying gold.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.