Jan 8, 2019

Bell’s ‘Chief Investment Guru’ Tackles Questions about Investments, Economy

From his office in Boise, Idaho, Greg Sweeney leads Bell’s investment committee and oversees the overall investment strategy for Bell Bank Wealth Management clients. Under his leadership, the investment team aspires to be the best money managers, locally and globally, with results often beating national averages.

Greg also writes Bell’s Economic Outlook, giving his take on the state of the economy, monetary policy and the markets, and published monthly on bellbanks.com. He recently took some time to answer questions about the economy, financial trends and investments.

Q: How is Bell able to provide strategic asset management expertise with a team and technology resources that are relatively small compared to the big players?

A: We use a different approach for our investment style than some of our large competitors do. The Goldman Sachs, the PIMCOs and the Voyagers of the world are out trying to add value with sector rotation, duration, market timing and similar strategies. We focus most of our resources on underwriting, capturing incremental income, and holding to maturity. By doing that, we minimize market transaction costs, which are extremely expensive, particularly for fixed income. This is different from the equity market, which is a lot cheaper, because business is transacted through an exchange where expenses are minimized. By minimizing those expenses and focusing on a longer-term strategy, we have some very successful results.

Much of Wall Street is built around trying to get their customers to do something different. Wall Street is always trying to make market calls and keep investors frustrated, so those customers think they need to change something and do something different. Wall Street can do that because there's such a large arena of offerings. The reality is that you should have a balanced allocation in your portfolio anyway, and if that balanced portfolio matches your personal investment profile, you should stick with it, rather than trying to zigzag your way through long-term investment performance.

We also focus on delivering great customer service, so we have to have credentials; we have to have experience; we have to be good at asset allocating and reviewing progress toward our customers’ goals; and we have to be good at communicating that progress. We also have to be good stewards of our clients’ assets.

Q: What do you say to clients who want to compare their portfolio’s performance against a major index like the S&P 500 or the Dow Jones Industrial Average?

A: The S&P 500, Dow Jones Industrial Average and the NASDAQ are all stock indexes. Very few investors use an all-stock allocation in their portfolio. Most investors have a balance of various asset classes that was implemented to support their personal investment profile. To take a customer who has 60 percent in stock and 40 percent in bonds and try and compare them to an S&P 500 index is a fool’s errand. In this case, only 60 percent of their portfolio is invested in equities, and equities in general take on many different forms – such as emerging market equities, developed foreign equities and specialty equities like high-tech. The reality is they have a broader spectrum of investments than what is represented by the S&P 500, so the index is a point of information, but it’s not a resource for progress.

The best resource to measure progress is the goal you set when you first come in as a client. We measure what you started with on a timeline that leads to your goal. Every year, you’re either on the line, above the line or below the line. That way we can have meaningful discussions with our clients about progress toward your ultimate goal.

Q: Why might someone focus more on what they see on the news than their own goals and progress?

A:  People live more in the here and now than they live in the prospects for the future. We’re not programmed to focus on the long-term. We have a certain sense of immediacy. If you’re zigging and zagging all the time, you’re never going to reach your goal because you’ll never be in the right spot.

Q: Looking back at 2018, what has had the biggest economic impact?

A: There are so many things going on right now:

  • We have the Federal Reserve reducing monetary policy programs by raising interest rates and reducing the size of its balance sheet.
  • We’ve had a trade skirmish going on for the better part of a year – and a broad spectrum of interpretations and forecasts of what that means and what that might mean moving forward.
  • We’ve had a tax cut, which is economically considered a fiscal stimulus.
  • An unemployment rate near 50-year lows is a significant driver of the economy, because the more people employed, the more gross domestic product (GDP) growth we get.

It’s more of an elixir of multiple items than one factor that has had the biggest impact on the economy.

Q: What do you expect in 2019?

A: I expect moderate economic growth between 2 and 2½ percent – so about the range it’s been for the last five years. That’s probably a little bit less than some economists are calling for; they might be looking at 2½ to 3 percent growth, but I’m Iooking at developed foreign economies such as Japan and Europe, whose growth has moderated to 1 percent.

We can only be the exception for so long in the United States. Eventually, we’re going to gravitate toward more of a world economic average. Emerging markets always grow faster than developed countries just because they have more room for growth.

I expect inflation to continue to be moderate – in that 2 to 3 percent range.

I also expect increasing volatility in the markets because the growth story will come into question. At 10 years, we’re tied for the longest economic expansion in recent history.

We’ll probably see lower equity returns than we’ve come to see over the last five years. The S&P 500 has averaged about 15 percent annualized returns for the last 8 to 10 years. The longer-term average on stocks is about 9½ percent. That suggests we’re probably going to go through a period of subdued returns until the long-term average goes back down to about 9½ percent.

Interest income for bonds may be higher than past years, but perhaps total returns may be lower. Total return is interest income plus change in market value. If interest rates go down, the value of bonds goes up. So if we’re in a declining interest rate environment, it’s easier to get total return on bonds. Bonds have had about a 5 percent total return since 2000. When interest rates are rising, an investor will collect more in interest income, but will experience declining bond market values, which decrease total returns.

There is a benefit to holding individual bonds whether interest rates are going up or down. We can hold individual bonds to maturity, so eventually money comes back, as long as we’ve underwritten them properly, and they don’t default.

I don’t expect a recession in the foreseeable future.

Q: Are there any other investment trends we should be paying attention to?

A: Tech’s under pressure right now, but technology is where all the productivity and improvement comes from, so tech will probably be back at some point. I don’t have a lot of concerns about that, like the market does.

Self-driving technology and alternative sources of energy will probably continue to improve.

I think 5G is going to be a very significant upcoming technology, but 5G does not move around very well, so your phone call and your car’s navigation will still happen over 4G. 5G is usually fixed module to fixed module. So you could replace an internet and cable service provider with a 5G feed, for example.

Bitcoin seems to be fizzling out at a rapid pace. The underlying blockchain technology has a lot of value. I don’t think Bitcoin as a means of exchange has any value at all. It takes too long to process. It’s not stable, like our currency would be. It’s not traceable. It’s not secure. If you wake up one morning, and someone’s hacked the network and stolen your Bitcoin, it’s gone. At some point, blockchain may be able to handle a lot of large, complex reconciliation transactions, but right now it takes too much time and computer power.

Q: What general advice would you offer investors?

A: Always have a portfolio allocation that’s consistent with your personal investment profile. Too many people get wrapped up in the deal of the moment, but then they often end up having to sell at the wrong time.

And follow my four rules of investing.

Greg Sweeney’s 4 Rules of Investing

  1. If it seems too good to be true, it is.
  2. Only buy securities with low “ASL factors.” ASL stands for average story length – if it takes more than 10 seconds, I’m not interested.
  3. If you need an immediate response, the automatic answer is “no.” Underwriting a security or an investment opportunity is essential.
  4. Never let the market force you to do things you wouldn’t ordinarily do, because you’ll end up with risks you wouldn’t ordinarily understand or take.

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