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What Am I Paying You For?

By: Bart Stevens

•    What are you planning to do to preserve our wealth?

•    Are you planning to take steps to protect my account?

•    There go all of my gains for 2021… what’s your plan?

•    Any suggestions on how to avoid losing more of my money?

•    Where are you going to put my money to stop it from going down?

•    We have lost [$x] in the past [x months], how do we stop the losses and return to even?

These are just a few of the actual (less aggressive, lightly paraphrased) emails that I received around the middle of last week, immediately following a historic rout of the financial markets in the lead-up to Russia’s invasion of Ukraine, but also immediately preceding the market posting the two best days in a year…

As usual, the frustrated commentary came almost exclusively from the exact same demographic (middle-aged men like me and older), but the truth is that I had A LOT of harried contacts in phone and office appointments with folks across various ages, genders, races and socio-economic backgrounds. The fear was both pervasive and palpable.


One of the most interesting aspects of my job is that with so many client contacts each day (25-40 individual calls, and a similar quantity of inbound digital contacts, along with 4-5 appointments on average), I feel like I get an extraordinary glimpse into the existing zeitgeist, which in my experience provides a fairly comprehensive snapshot of how pervasive our modern media has become- but also how powerful, manipulative, and destructive it can be. This becomes most apparent on those days when almost everyone I interact with is seemingly beating to the same drum and worried about the exact same things. 

We all like to think we are free-willed, disciplined and discerning intellectuals. We are confident in our ability to absorb, comprehend, calibrate and react to the world. But the truth is that we aren’t nearly as good as we think we are (I might use different words offline.)

There are days and even weeks where I am convinced that all our inbound calls are coming from people of the same ideological persuasion, who have been kidnapped and are being held hostage in the same room and forced to consume the same news and media content. I even start to wonder if they’re being forced to make these calls as well, because it often feels like they are reading from the same script. For a long time, it just thought it might be me, but over the years I began to observe consistent patterns and overarching themes traversing each successive conversation.

Sometimes I half-expect them to demand a ransom and it takes all my self-discipline not to interrupt them to finish their sentences and respond, because I know what they are about to say. It's odd to say the least, I do admit that it feels like déjà-vu answering the same questions with the same responses all day long- like an actor repeating a scene for a film. 

It’s the job, I guess. I feel like I spend a lot more time on psychology and behavioral finance than almost anything I else I do. This is the genesis behind my desire to begin writing and communicating with clients more often through email. It’s simply a more efficient medium in which to take in the most common or popular questions, comments and concerns and distill them out to our clients, always with a few bad quips interjected to keep things light.

The truth is that I get it. I’m reading, hearing and watching much of the same content. Granted, I’m usually laughing, rolling my eyes and making snarky comments; but I feel that’s more of a GenX thing. We were in our formative years during Watergate, the end of Vietnam and Carter and were destined to become the cynical generation.

After all these years, I’ve decided that the only body on earth more coordinated than the MSM is the military, and to similar effect. The difference is that I feel it’s my job to keep up with everything in the world so that I can respond intelligently and authentically to clients, attempting to synthesize and communicate important and sometimes complex  concepts, strategies and messages.

I do perceive that some people believe that it’s their job to absorb as much news (particularly financial news) as possible each day, perhaps because it’s their hard-earned savings on the line (which is valid) or maybe they don’t fully trust me yet to protect it yet (which feels less valid but still worthy of consideration.) I suspect it's both, and I l know I have to earn that.

The truth is that media consumption is an addiction. And it’s endemic. We look down on our youngest and their addiction to social media, knowing it can often hobble their ability to interpret, discern and recognize nuance and context. But to me it’s all one in the same. Many high media consumers are just looking for a dopamine hit, whether they realize it or not. As much as we profess to hate our media and what it is doing to us- especially social media as the most diabolical- they are simply giving us what we want.

It’s human nature to desire for increased knowledge and education. Deep down, we believe we need to be informed citizens of the world, because we like to believe we are in control. It’s understandable that we are stimulated by all the different tricks and techniques used against us by the corporate media. 

But distraction is the business model of our time, and outrage is the new drug.  I know plenty of folks who  check social media before they even brush their teeth or even get out of bed, and it's my conviction that once at that point, it's time to re-evaluate one's habits. To me, checking or posting ones your thoughts and opinions – unless in some sort of truly  professional capacity- more than once a week (much less a day), may suggest a chemical dependency and codependence with some aspect of one's own relationship with media. And if someone is regularly consuming news from a source with three-letters or a city/state/country in the title, then they surely must know deep down that they're being misled and conditioned. Like a rat in someone else’s cage, with ones'  sense of control limited to very narrow hallways, with very defined options and prescribed outcomes.

I say all of this not to be antagonistic or provocative, nor to anyone in particular. I’m probably speaking mostly to me, because I have been known to engage in all these activities from time to time. Sounds a bit hypocritical to say but I feel like I am acutely aware- perhaps more so than is appropriate- of how damaging the consumption of corporate news is to me and my clients. To me, it's clearly toxic, counter-productive and ultimately dehumanizing.

Sounds impossible, but without a doubt my best performing clients do not watch the news. They have very base-level knowledge of major events but seem largely unaffected. They realize that they have no less control over the future of anyone but themselves than news-junkies. My best performing clients are usually too busy to consume television shows or online click-bait. Like me, they could not physically sit through a sporting event. Many have successfully put themselves- either consciously or not- on a fairly strict media diets because they can see the ruinous impact of what it does to them. 

What excess media consumption does to investor portfolios can be equally tragic. I can think of almost nothing more deleterious to long-term wealth building than televisions and smart phones (except for divorce). And after two decades in financial services, I can track the trajectories of portfolios and usually bifurcate our clients into two categories: those who react to the news and those who barely even pay attention to it.

Like financial Rorschach Inkblots, investors can look at the stock market and see two completely different pictures. Right now, some see the short-term movements of a dismal market in 2022 and think it will never end, or worse. (i.e. that they should jump  out to make the pain stop, only to jump back in at the bottom. Which is hilarious to me. Like if we could do that, then why aren't we both worth $10M?) It's impossible.


Other see the long-term performance of the market going through an inevitable cycle…


Some see the end of the world, while others see a blip on a radar.

Some see doom, while others see opportunity. 

Some see a catastrophe in the making and imminent economic collapse, while others see the market taking a healthy and necessary breather at the end of a 13-year run.


The truth is that I am the one mostly at fault. For some clients, I may have failed to set proper expectations initially and then again on some recurring basis. That's understandable in a 13-year bull rally. For others, I may have been less than thorough in introducing and then reviewing individual investment policy statements that reinforced the full risk and return potential of each portfolio. But most of all, I’ve probably been most remiss with communicating to our clients the changes that we make in portfolios to build and preserve their wealth. 

With this and future communications, we aim to better explain our in-house investment management philosophies and processes. We have been publishing our newsletter for many years, but it’s been lacking in custom genius-level content like this post. In addition, we will be publishing our investment model fact sheets soon and then quarterly moving forward, so that clients who are so inclined can glean enhanced perspective on how their portfolios are actually being managed at a deeper level. This should give them an opportunity to confirm that our models still meet their expected level of quality while maintaining the same risk and return potential that is right for them. These fact sheets are already in production and I’m exited to introduce them to our clients for feedback and guidance.


Sample Fact Sheet for our Discovery model

In this post, I will be somewhat ‘front-running’ the Fact Sheet effort by providing some high-level information and perspective on the changes that our firm has made to portfolios over the last several months. It’s critical for clients to know what is going on in their portfolios, why we did it and then give them a chance to comment or even request changes. 

While our clients rely on us as fiduciaries to invest and monitor their portfolios, and trust us to put their interests ahead of their own, I think that more transparency with greater frequency is always better, and more informed clients will be better clients and investors.

More informed clients are smarter and more discerning, more resilient, less susceptible to media bias, less concerned about the ‘drama of the day’ and more courageous and steadfast when the markets and their portfolios are volatile. 

It will also ensure we’re always on the same page.


At Stevens Wealth, we are constantly evaluating the individual investments in our various model portfolios through a time-tested qualitative lens. These efforts typically culminate in quarterly model reviews, composed of four primary steps: 

1.    ASSET ALLOCATION - We first seek to adjust asset allocations based on economic cycles and sector trends. Certain investment types and categories tend to perform better when specific market conditions are met or evidence of a cyclical change presents itself. We rely on government data as well as in-house leading economic indicators (LEI’s) to identify and react to market technicals and themes that aren’t always well-reported or obvious on the surface.

2.    INVESTMENT REPLACEMENT - We then look to replace underperforming holdings with those that offer improved performance potential. We use industry-leading analysis tools like Morningstar as well as tools from partners like Vanguard, JP Morgan Chase, Blackrock and Fidelity to help us identify the very best investment instruments for specific client profiles, from retirees to first-time investors.

3.    RISK PROFILE - We submit our models through risk/return analysis applications like Riskalyze, FinMason and the firms above to ensure they still reside within pre-designated ranges approved by each investor household. As markets naturally ebb and flow, models will ‘drift’ out of alignment as some holdings outperform others and change the original makeup of the portfolio. In times of heightened volatility, this change can be immense and dangerous. Our tools quickly identify when a model needs to be simply rebalanced or when new investment types and holdings are warranted to achieve a specific objective, like aggressive growth or safe income. 

4.    ACCOUNT PROFILE - There are times when a client communicates a change in goals, risk tolerance or some other aspect of their investor profile (like marriage, inheritance or a move). In those situations, moving them to another model may be warranted or even necessary. We often make those large-scale changes during quarterly reviews to minimize excess trading or costs.


Growth-Value Rotation

Most of our model changes for 2022 actually occurred back in Q3 (Quarter 3 = early fall) of 2021. We anticipated significant end-of-year selling and rebalancing of investments to lock in taxes in 2021, ahead of President Biden’s desired tax law changes in 2022 (specifically involving capital gains tax treatment). While mutual funds did engage in above-average profit taking, we did not see the quantity of trading, nor the ensuing market dip, that often accompanies such an event,

Even back in 2021, we were becoming even quite concerned about heightened and damaging levels of inflation that we had anticipated as early as 2020, as well as the reliable predictions of monetary tightening by the Federal Reserve well in advance of Q2 2022. We have certainly seen the former and continue to anticipate the later to occur at the Fed’s next official FOMC (Federal Open Market Committee) meeting in mid-March. 

We believed the combination of rising rates under a backdrop of “sticky” (indefinite) inflation would present a set of challenging economic conditions that would increase the risk of a market correction. As a reminder, bubble-like conditions in the stock market do not in themselves cause bubbles to pop- those can continue indefinitely in certain environments. They simply increase the odds and severity.

Specifically, we expected to see a sell-off of the high-flying Growth stocks of 2021 by now (think technology, health care and any other sector that benefited from the pandemic.) We knew that the specter of rising rates would also take some of the enthusiasm out of those sectors, which often thrive in low/modest interest rate environments, only to come back down to earth when rates are high or climbing. While we have yet to see the expected interest rate increases, they are all but certain and Wall Street began to price those in by late 2021. 

The retreat of growth is often accompanied by a resurgence of more defensive Value holdings (think Proctor & Gamble, General Electric and Caterpillar) that typically rotate back into prominence as rates tighten. We thought those would also benefit from President Biden’s Build Back Better program and while that has not happened yet, the rotation certainly has, as you can see below.


Value (yellow) overtakes Growth (blue) at the turn of the year

In October, we adjusted our portfolios by decreasing exposure to our largest growth (and highest risk) positions: T Rowe Price New Horizon and Blue-Chip Growth and Parnassus Endeavor. We rebalanced the proceeds into more conservative holdings like: T Rowe Price’s Capital Appreciation as well as Vanguard’s Wellesley and Tax-Managed Balanced Fund. Those early movements have absolutely paid off, cutting in half the average accounts exposure to the market’s downside range in 2022. It might not feel like it, but the change has protected our models ~ 10% during the drop.

Interest Rates & Inflation

One of the most challenging aspects of investment management in recent years has been fixed income (i.e. bonds.) I wrote extensively about this risk in my prophetic (read: lucky) Cash Is Trash series last summer. I went into great depth highlighting the massive vulnerability in a situation where bonds could actually lose value- and a substantial amount- in a rapidly rising interest rate environment.

We were early in considering that the Fed had badly-neglected the impact of money printing and stimulus checks, had misread the economic foundation of the country and would be forced to rates higher and faster than they wanted to. While that event has yet to materialize, Wall Street eventually has eventually come around to our line of thinking and perception is frankly all that matters when you really get down to it. 

Regular bonds- as represented by the AGG index below- have fallen sharply since our rebalance, thus mitigating what could have been the double-trouble scenario of both stocks and bonds selling off at a similar pace. Our ability to see this early on allowed us to remove our position in a long-time bond fund, MetWest Total Return and lower it in our money-market like fund, Vanguard’s Short-Term investment Grade fund.


Old Bond Fund in dark blue, new funds in light blue and yellow

The question back in October then became what to do with the proceeds of the bond fund sales. Based on our trepidation at being exposed to an ugly bond market environment while knowing that we needed to invest in a category that would counterbalance stocks, yet still provide protection from rising rates and possibly even gain in a stock market correction, we moved into funds with enhanced inflation/interest rate characteristics.

We identified and subsequently added two new funds that offered the protection from inflation and interest rates that we were seeking: T Rowe Price’s Limited Duration Inflation Focus Bond Fund and their Institutional Floating Rate Fund. (In light blue and yellow above.) The first fund would be indexed to inflation, which means that it would ideally rise in value as inflation ticked up. The second fund would perform similar but instead adjust upward based on rising interest rates.

In addition, we added two higher risk bond funds (called High Yield) from bond powerhouses, PIMCO and Nuveen. High-Yield bonds and bond funds tend to be less vulnerable to rising interest rates due to their higher risk potential and higher yields (which causes them to sit somewhere between stocks and more generic bond funds on the risk/return spectrum.) In this case, we were willing to trade low-probability issuer default risk for our perception of the almost certainty of rising inflation and interest rates.

While our new bond funds are down slightly in 2022, they have spared our clients significant pain in an investment category that has never seen losses of this magnitude in several generations.

Lastly, we lowered our cash position across all models, which were at slightly elevated levels, based on our continued conviction that inflation will remain uncomfortably higher and longer than most people anticipated. Cash is still viewed as a guaranteed loser as an investment category by most. 

However, there is speculation that we could see a sharp reversal in inflation as soon as the end of this summer (early Q3) and while we dismiss that possibility as remote, we are monitoring that very closely and if it were to moderate, it’s likely we would accumulate more cash. This would be especially purposeful as we anticipate more than one major market dip before the end of the year and want to make sure we have sufficient liquidity to be able to ‘buy stocks on sale’ should that occur.


As a result of these maneuvers, we directly lowered risk scores for all models about 7-10% during our quarterly October rebalance. We then followed up with additional (slight) adjustments downward in risk in both November and December. Now most of our models sit at levels at least 15-20% more defensive than a year ago. When the market held on and even rose slightly in Nov-Dec 2021, we initially fretted that  we had erred on the side of caution. But as 2022 continues to unfold we believe we may be better positioned than ever for the volatility that we have already seen and is likely to ensue for months to come.

For all these reasons, our models have thus far held up fairly well against the drop in the primary indexes - notably the Dow, S&P 500 and Russell 1000. Although it's here that I like to reinforce that in the financial markets, there is no such thing as a free lunch- virtually all portfolios are down year-to-date (YTD)- and to also remind clients  that in order to invest successfully over the long-term, we should all aspire towards maintaining an enhanced degree of emotional fortitude in order to absorb the inevitable and occasional drops in value, in order to later enjoy the possibility of future gains. 

We also feel strongly that beyond short-term emergency accounts, most investor's  long-term investment assets cannot simply sit in cash any more (and can no longer hide in bonds, as was possible during most of the past 40 years) while also hoping to make any money, much less keep up with inflation. There is a case to be made for many investors to maintain portfolios somewhere in the middle in terms of stock and bond exposure, but with a higher allocation towards more conservative value stocks, in order to participate in the TINA (‘There Is No Alternative (to Stocks)] market that the Federal Reserve has cultivated. 

In summary, while all our models are down, each is still trading above the overall market and their respective indexes in 2022. This aligns with our safety-first, return OF principle (vs. return ON principle) strategy for the early part of this year.


The biggest risk to our models following these changes is that the equity (stock) markets from here on out, an environment in which a more conservative strategy may look like a mistake in hindsight. We do recognize this possibility and actually anticipate the market being higher at the end of the year than it is today (supporting the idea of staying or adjusting more aggressive). 

To that, my follow-up is that we expect- based on our deteriorating leading economic indicators- at least one and possibly two major market corrections before the end of the year. If this were to occur, we would be looking for both underperforming stocks and sectors to invest in. We would, of course, also be looking to add to our most aggressive positions, including some that we lowered, or even replaced, back in October 2021.

As such, if you believe that markets are in a better position and perhaps poised for another bull rally, or you simply would like to be more aggressive than you currently are, we have models covering the entire spectrum of risk and I would be happy to show you how we can move you up into one of our numerous aggressive models. These would be sufficiently growth-based (i.e. low cash, low bond, more growth stock, more international and more speculative)

But for now, we plan to maintain this defensive stance across all models until the next major model review in Q2 2022 (late spring). 

If you have any questions, comments or concerns about any of the strategies referenced, please don’t hesitate to reach out to me to schedule a phone, Zoom or office appointment.