Money Life Podcast – We talk about what determines our buy and sell decisions and discuss mutual funds, ETFs, and the market in general.
Money Life Show podcast hosted by Chuck Jaffe – We talk about what determines our buy and sell decisions and discuss mutual funds, ETFs, and the market in general.
Transcript for Podcast Below:
Chuck Jaffe (Host):
David Rosenstock, Director of Investments and Financial Planning at Wharton Wealth Planning, is here. We’re talking funds and ETFs, and this is the Market Call.
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Welcome to the Money Life Market Call. The part of the show where we talk with experienced money managers about how they do their job, what they look for that determines their buys and sells, what they see happening broadly on the market, and how they are putting it all together. We know you like to hear from new guests that you haven’t gotten their opinions before. That’s what’s happening today as making his maiden voyage on the market call is David Rosenstrock. He is the Director of Investments and Financial Planning at Wharton Wealth Planning. And if you’d like to learn more about David and the firm, you’re going to go to whartonwealthplanning.com, just like it sounds.
Chuck Jaffe (Host):
David Rosenstrock. Thanks for joining me on Money Life.
David Rosenstrock, CFP®:
Thanks for the invitation to be on today’s podcast, Chuck.
Chuck Jaffe (Host):
We always start with methodology, and we’re not familiar with yours. So help us understand what goes into making an ETF or a fund, something you’ll want to invest in, and what goes into the things that you leave for everybody else.
David Rosenstrock, CFP®:
There are four investment principles that we like to follow when selecting investments and putting together portfolios. The first is that simple wins, so we really like transparency in the companies we invest in. We’re investing in large public companies, strict reporting standards, and things that we definitely look favorably upon.
We believe intelligent risk-taking is rewarded over the long run with superior risk-adjusted returns. And we also believe the costs matter. So we want to minimize the costs that we’re paying for ETFs and mutual funds that we’re selecting because we could pass those savings directly on to the client and that improves returns broadly speaking.
I like to look at both value and growth stocks and really have a good mix between those two categories. So we want to build low-cost, tax-efficient portfolios from there. And we think having the right balance between those two categories is really critical. In the fixed income category, we evaluate interest rate environment for different opportunities.
David Rosenstrock, CFP®:
So that’s really the first investment principle. Second, we would like to take a really systematic long-term approach. We think long-term returns are the most important. However, as we all know, everybody has to endure the short term to get there.
So we’re not actively trading trying to pick necessarily what’s going to be the hottest or has the most short-term potential. We think in the long run, asset allocation and diversification are going to be the main drivers of performance and that’s backed by time-tested academically validated principles and financial science. So in the investments we’re looking for we definitely want to see that sort of philosophy. We want to keep turnover as low as possible and use a balanced approach to manage volatility when we’re doing that.
David Rosenstrock, CFP®:
Our third investment principle is that we want to make sure that investments and portfolios are customized to each individual’s risk profile and goals.
David Rosenstrock, CFP®:
I actually think the biggest risk when investing it’s not market risk or what’s happening in the economy. I think the biggest risk is that the portfolio is not properly aligned with the owner’s goals and needs. And I think you can avoid really big mistakes and costly mistakes by selecting the right types of investments and the right type of risk for your portfolio.
So, looking at risk profile and time horizon, when you’re going to need the money, and how long you have to invest are all important things.
David Rosenstrock, CFP®:
The last and final fourth area that we look at is tax efficiency. I think one of the surest ways to improve returns over the long run is to control tax liabilities.
This is actually possible to some degree, so we regularly use tax-advantaged investments such as exchange-traded funds and municipal bonds and municipal bond funds. We also focus on making sure we’re putting the right types of investments in the best types of accounts. So there are different types of accounts. As we all know, there are retirement accounts, and some are tax-free, and some are tax-deferred. Obviously, there are taxable accounts also, and you could actually improve your long-term returns by making sure you’re putting the right investments in the correct accounts. Okay. And so, considering current and future taxes and focusing on long-term tax minimization is a great way to improve those long-term returns as well.
Chuck Jaffe (Host):
I like that. I like hearing about asset location and not just asset allocation, and that’s what comes down to tax efficiency. But I want to ask a follow-up question that gets into something that I heard there because you talked about how, on the fixed income side, you will look to be tactical. And obviously, we’re at a rate change environment, but you also talked about wanting to be tax efficient and wanting to keep turnover low.
Chuck Jaffe (Host):
So you got one thing that could drive you to make changes and one thing that could drive you to make fewer changes. And one thing that could overarch and be the governor on how much changes are you making. So what are you doing? As we’ve now gotten to a rate cut environment, what’s your outlook for how much movement, if any, you will do on fixed-income portfolios as you watch the rate change occur?
David Rosenstrock, CFP®:
Yeah, it’s a great question. As I mentioned, over time, we follow a systematic long-term approach. What we do is rebalancing. Our process periodically guides us to reduce risk exposure to overvalued asset classes and preserve an optimum ratio between asset classes for an individual’s particular circumstances. This is called rebalancing and we try to do it tax efficiently across all investment accounts. Obviously, as you’re making certain changes in a retirement account, that’s often not going to have taxable consequences. And so we think rebalancing helps remove emotion from the process.
With respect to fixed-income, we have seen inflation hit a 40-year high not too long ago. That drove up interest rates a good amount, and that’s created a great opportunity for people who want that fixed income part of their portfolio to receive both a pretty attractive interest rate plus appreciation as well. We believe interest rates will be on the decline a good amount over the next year we think the market is anticipating about a 25-basis cut at each of the next six meetings, so we think there are definitely some favorable opportunities there. We tend to like bonds that are in the two-year to ten-year part of the yield curve as interest rates change. There are different opportunities that present themselves, but we always have an eye on doing things tax efficiently.
So there are plenty of opportunities between those tax advantage bonds, the municipals, and the corporates. We look at everything from corporates to governments, asset-backed bonds, and mortgage-backed bonds and try to pick the best spots.
Chuck Jaffe (Host)
On the equity side right now, what are the areas of the market that look particularly good?
And obviously you’re looking at using that same kind of rebalancing strategy, but what would you be thinking you’re rebalancing towards and away from?
David Rosenstrock, CFP®:
Yeah, that’s a great question. So we definitely like dividend-paying stocks and dividend growth stocks, stocks that are consistently growing their dividends, which I think are particularly interesting. Companies that pay high dividends sometimes are not in the best financial health, and sometimes they could be using debt financing just to keep their dividends high. And so I think a great measure of health is if the company is growing its dividends, then you could see there’s a lot of strength under the hood over time.
And so that’s a good thing and something that we like to look for. We think dividend stocks are a big beneficiary from declining interest rates. So, as interest rates decline, the dividend yields become comparatively more attractive, and I think we’ve been seeing that over the last month or so, and I think that trend will probably continue. Lower interest rates generally lead to improved valuations for dividend stocks and they could also reduce the company’s borrowing costs as well, which is always a good thing. So, in this sector of dividend-paying stocks, utilities, consumer staples, real estate investment trusts, communication services, and financials are some of the more popular and attractive ones. In the dividend growth area, there are also a lot of great technology companies that are growing their dividends, so I think capturing some of those as well is important, you know, could be an important part of a strategy.
Chuck Jaffe (Host):
Let’s jump in and get brass tacks on this. What is a name or two that you’re using to help us understand what kinds of funds you want to use to capture those spaces? What’s a poster child for your methodology in some of those areas?
David Rosenstrock, CFP®:
WisdomTree has a really good fund called U.S. Quality Dividend Growth (ticker DGRW), and Vanguard has something called the Vanguard High Dividend Yield Index Funds (ticker is VYM). And so one of those focuses on dividend growth, and one of them focuses on just higher dividend payers in general, and I think I like those two. I would add that sometimes when you’re looking at ETFs that are picking these dividend stocks, some of them will also look at companies that are doing share buybacks. So a share buyback is an alternative use that a company can use its cash. A company could pay dividends or it could buy back its shares, and they’re essentially very similar in terms of technically the way they mathematically benefit a shareholder. But I think by investing in the strategy of the companies that buy back their shares, you’re not just limiting yourself to certain companies, and you’re not excluding that category. Companies that are buying back a lot of their stock year after year tend to have the cash flow to do it. So that’s a great sign and a great type of company that you want to consider investing in (in addition to those companies that are growing their dividends and maintaining really healthy dividend payouts as the interest rate environment is on the decline).
Chuck Jaffe (Host):
Now we’re going to get your quick and dirty take on some funds that my audience is particularly interested in. And dirty fun will now commence. We’ve actually been having fun already, but now we’re going to ratchet up the fun because it’s the lightning round here, quick and dirty. We call it, and we’re doing it today with David Rosenstock, who is Director of Investments and Financial Planning at Wharton Wealth Planning. Whartonwealthplanning.com if you’re looking for more information.
Chuck Jaffe (Host):
You know how quick and dirty works. Send us your ticker requests if you’ve got them, but we’re going to jump straight in. And today we’re going to start with a request we got from Tracy in Ocean Springs, Mississippi, who wants to know about the Vanguard real estate fund. That’s VNQ.
David Rosenstrock, CFP®:
Yeah. VNQ. I think in general real estate investment trusts (REITs) have a favorable backdrop right now as interest rates are on the decline. Interest rates dictate the financing costs for real estate trusts and interest rates are a key driver for real estate values and returns. So, as lower interest rates reduce borrowing costs for real estate investment trusts, this enables them to finance acquisitions more cheaply, and that’s very supportive of asset values.
In addition, I think real estate investment trusts are generally pretty attractively valued right now because they’re trading at pretty large earnings and multiple discounts to where they historically have been. And so that is always a good thing to look at when you’re making a decision. Third, I think, in general, publicly traded real estate investment trusts tend to be well positioned to go on the offense when interest rates or the cost of their financing is on the decline, and that’s what’s happening right now. And so, as real estate investment trusts use less expensive financing to buy more and become net acquirers of properties in this interest rate cycle that could potentially benefit them. So I think there’s a positive backdrop there. There are some caveats. With respect to the office space, we’ve all heard that based on the pandemic, there are just a lot fewer people going into the office. So there are some sectors of the real estate investment trust market, which I think are a little bit more concerning than others. But in general, it’s an interesting area of opportunity right now.
Chuck Jaffe (Host):
VNQ is an interesting area of opportunity. That would be a buy.
Chuck Jaffe (Host):
Our next request comes from Dan in Williston, Vermont. He wants to know about Vanguard Small Cap Value. That’s VBR.
David Rosenstrock, CFP®:
Vanguard Small Cap Value is a speculative buy. Approximately 30 percent of small-cap companies have their financing in floating rate loans. So, as interest rates go down, they’re going to benefit a lot from that. Also, I think the valuation gaps are pretty large between the large and the small caps right now. And so, based on those two factors, I think it’s a speculative buy and definitely has some good upside, but in a recessionary environment, some downside as well.
Chuck Jaffe (Host):
Buyer beware, dude. So you have to understand that you’re buying it warts and all- a speculative buy on VBR, Vanguard Small Cap value.
Chuck Jaffe (Host):
Our next request comes from Tony in Las Vegas. He wants to know about WFQRX. That’s the Wells Fargo Advantage DJ Target 2035 Fund.
David Rosenstrock, CFP®:
For target date funds in general, I don’t really love them. A lot of times you really want to understand what the exact time period is. So when you’re targeting a certain time for retirement, your life doesn’t end at retirement. Obviously, there could be decades to go. Some of these funds, I feel they can get too conservative once you hit that retirement marker, in this case 2035. And then also, I think you really want to understand what exactly is in the fund, and I think target date funds mix in a lot of things that I might not otherwise put in there. And they could sometimes have higher expense ratios. So for those reasons, I’m not particularly inclined to recommend it.
Chuck Jaffe (Host):
Target date funds did not score well there in general, but specifically WFQRX, the Wells Fargo Advantage DJ target 2035 fund, that was an avoid.
Chuck Jaffe (Host):
Our last two requests today come from Richard in Chula Vista, California. The first is for the IDLV. That’s the Invesco S& P International Developed Low Volatility ETF.
David Rosenstrock, CFP®:
In general, I think U. S. equities offer a better way to gain exposure to the international markets while minimizing certain risks. And so in general, I don’t give a lot of weight into international related investments. I think you could derive a lot of benefit from international growth through large-cap companies in the U.S., which derive 35 of their revenues from overseas, so you could benefit from overseas growth and, I think, take less risk. For that reason, in general, I wouldn’t really be a huge buyer of international right now, as I think there are just better risk-adjusted ways to play that area.
Chuck Jaffe (Host):
Yeah, there’s no place investing like home. That’s what you’re hearing. And of course you can get the international exposure by buying U. S. multinationals, which is why IDLV, the Invesco S&P International developed low volatility ETF is a sell or an avoid.
Chuck Jaffe (Host):
And Richard’s other request, Granite Shares Gold Trust, it’s ticker BAR.
David Rosenstrock, CFP®:
In general, gold is something people ask about a lot and I don’t recommend gold as an investment. I think over long periods of time gold has proven itself to underperform other asset classes such as stocks and bonds as we’ve been speaking about. You know a few percent difference in annualized returns might not sound like a lot but it makes a very large difference over the long term when you’re compounding. In general gold is defensive and I know why people like it and I think it’s a good store of value. But in general, I would prefer high interest rate cash related fixed income investments and other sort of safe havens as opposed to gold because I think it’s better over the long term.
Chuck Jaffe (Host):
So the Granite Shares Gold Trust (ticker: BAR), that was a sell or an avoid because when it comes down to it, you can’t argue with cash. So find the ways to get your income using your cash and putting it to work in high interest vehicles.
Chuck Jaffe (Host):
David, we’ve come to the end of our time. Appreciate you taking the time to join me. Thanks so much. I hope we get a chance to talk again down the line.
David Rosenstrock, CFP®:
Thanks again. Great being a guest today.
Chuck Jaffe (Host):
That’s David Rosenstrock. He’s Director of Investments and Financial Planning at Wharton Wealth Planning. Wharton, just like you’d expect Wharton to be spelled, www.whartonwealthplanning.com for more information.
Chuck Jaffe (Host):
And we’ll come back and let you know what’s happening for the rest of this week on Money Life. So stick with us all the way to the end, which is insight right after this brief break.
For more information on the Money Life podcast please visit http://moneylifeshow.com/
