Ep 231: QRLT

Hey, everybody.

I recently had a conversation with our firm's Chief Investment officer, Greg Towner, and we talked about some of the guiding principles that our firm and he uses to manage portfolios.

We talked about qrlt, and you're gonna have to listen to the entire podcast to know what those stand for.

And we talked about some investor behavior aspects.

So I thought this was a really great episode.

I hope that you get a lot from it.

And as always, if you have any questions, email me davidarallelfinancial.com all right, here we go.

Welcome to the weekly Wealth Podcast.

I am certified financial planner David Chudick.

This podcast and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money.

We talk about financial strategies, prosperous mindsets, and simply how to build true wealth.

So come on and let's enjoy this journey together.

Foreign.

Chudick with Parallel Financial.

And we are hosting a series of webinars this fall just to put out some valuable information.

The first one today is with Greg Towner.

He's our firm's chief Investment officer.

We'll have Gordon Short talking about some historical tax preservation trusts in the future.

And then in October, we'll be speaking with Cam Knight on some behavioral and mindset issues.

So we're doing the best we can to bring some great information to the world.

So today I'd love to introduce Greg Towner.

Greg is just literally one of the smartest people I know.

And I don't say that lightly, but whenever I'm in the room with Greg, I'm always at the very best.

I'm the second smartest person in the room.

Greg's been in the portfolio management business for a good while, and today we're going to talk about investment processes and some behavioral aspects to managing portfolios.

Hey, Greg, how are you?

Hey, David.

Thanks for having me.

Appreciate it.

Absolutely.

Yeah.

Tell us a little about yourself and take it from here, man.

You're in the driver's seat.

Okay, sounds good.

You're going to find out here in the next handful of minutes why investor behavior is just so important to us at Parallel.

So David started to talk a little bit about my bio.

Let me just cover it here briefly.

I have been with parallel since late 2014.

I've been in the industry since 1999.

And I always point out that I have both my cfa, which is Chartered Financial Analyst, and cmt, Chartered Market Technician.

And I do that not to pat myself on the back, but because it's very indicative of how we look at the investing world.

In other words, we combine both fundamental analysis and technical analysis and we'll get into some more of that and then shameless plug here.

I did author a book a few years back called the Investment Lessons of 2020 how an Unprecedented Year Taught Us Everything About Investing.

And by the time we're done with this slideshow, you will probably not be surprised.

That book is largely about investor behavior, so let's move forward with that.

So when you think about the investment philosophy for us at parallel, we talk about how the long term benefits of compounding can often be interrupted by investors making behavioral mistakes.

So we strive to build our portfolios in a way that help reduce those emotional decisions that we've seen so often over time.

We're not going to say we're going to completely eliminate it, but we're doing our best to try to reduce the likelihood of investors doing something that interrupts that compounding.

And speaking of interrupting compounding, David, we love all these different studies that come out over time that look at how investors do compared to the funds that they're in.

Different firms have done that.

Just here in the last couple of weeks, the really well regarded investment firm Morningstar did their annual survey and they looked at all of the mutual funds and all of the ETFs over the last 10 years and what they looked at was the total return of those funds, which was 8.2% per year.

And then they looked at the actual returns achieved by investors in those funds, which was only 7% per year.

So investors in those funds only achieved about 85% of the returns potential and that included index funds.

So it didn't matter if they were just in basic index funds.

If they are in actively managed funds, sector funds, fixed income, what have you, it all averaged out to they only achieved about 85%.

And they called this study Mind the Gap because there's always seems to be historically a big gap between what investors achieve and, and what the funds they were actually invested in really returned.

So Greg, what would cause that?

What are some of the behaviors that might cause me to get less than what my fund should have optimally provided to me?

Yeah, absolutely.

It's certainly a lot of it has to do with overtrading.

I think right now legalized sports gambling is really the rage and I think people are just in this trading gambling mindset, so you're seeing more of it than ever it feels.

But at the end of the day, the two things a lot has changed in my 25, 26 years in the industry.

A Lot has changed.

But the two things, David, that have not changed and probably will never change are fear and greed.

And that's ultimately what drives this difference in return.

So think about when the market is declining a bunch and people are getting scared and they're like, I can't handle this pain anymore, get me out.

And they sell.

When enough investors do, that's inevitably near a low.

And now the market rallies back and then they see stocks going higher and they're like, oh man, I'm missing out on this.

And they eventually get back in the greed side of it.

So it's the trading in and out and they're allowing their behavior to do this, create this gap.

So they're not even achieving the returns of the funds they're in.

Yeah, it's counterintuitive.

If I told you the gas station on near your house was selling gas for 50 cents a gallon, you'd probably go out and fill up your gas tank and you'd buy it while it's on sale.

But we do the opposite with securities, don't we?

Is we say that security or the market is down, so I need to get out.

But in reality, oftentimes that's the exact opposite of what we should be doing, at least for a long term approach.

Correct?

Yeah.

People always look at past returns and assume that's what's going to happen in the future.

Whether they look at some hot fund that did well and they're like, oh, I'll go into that now, that's probably near the top of it.

And conversely, they'll say, oh, look at these terrible returns in, I don't know, small caps.

There's just, let's say I'm not going to invest in those, then they're probably ready due for a new turn.

At that point, let's move on to our actual investment process.

So we could talk about how we implement all of this.

We use the acronym QRLT and you'll see what those stand for here.

So let's start with the Q and it's for quality.

This is particularly relevant for our portfolios that we invest in individual stocks.

Everything that we've looked at a lot of different studies.

Also from our own experience, high quality securities tend to have lower volatility.

So again, our process is trying to reduce behavioral mistakes.

And to do that you need to have some lower volatility instruments in your portfolio.

Portfolio, yes.

If the market is ripping higher in some crazy bull market, we may trail a little bit.

We're less concerned about that.

What we want to do is during those difficult periods where investors might bail out, if we can have a portfolio that's a little bit less volatile, maybe they're less apt to interrupt that compounding.

As we showed before.

And a lot of times the next question people ask is what is quality?

And that's a great question because there's a lot of different ways to measure it.

We don't try to do it ourselves.

We utilize two great third parties, Standard and Poor's, as well as Value Line.

And they've been looking at it for years.

And so we follow their exact measurements.

To know that we have to invest in quality doesn't mean that securities can't go down in price, of course.

It just means they're less volatile than that.

The really high beta type ones.

Sure.

Now devil's advocate Greg, does investing in quality securities maybe eliminate some of those home runs like some of that?

Hey, if you would have invested $10, you'd now have $20 million in a company.

Are we maybe missing out on some home runs?

I would say pretty rarely.

You know, we are fortunate to have a lot of really strong performers in our portfolios that we've held for a long time.

If you think about some of the big mega cap companies, I'm not going to name names here, but some of those big mega companies everybody's familiar with, they have incredible returns and they most definitely pass our quality metrics.

You're just talking about companies with poor financial statements that when things are good, things might look okay for them, but when the economy gets bad and the stock market gets bad, really reality of their financials hit and then they just can really get crushed during that time.

Awesome, thank you.

So onto the R, that stands for both rules based and risk management, which go hand in hand, we feel strongly that you need to have a disciplined rules based process to help reduce some of those emotional mistakes.

A lot of times people are just like, oh, what did they see on TV or what did they see on social media or what did their friend tell them about?

And okay, maybe that's fine for a small amount of play money, but not for your real money, not for your retirement money.

You need to have an actual discipline and a process in place.

And we're certainly not going to get into every little bit of our process here.

But one broad stroke that we do follow is what we call the core and satellite approach.

And what we do with this is we try to blend the best of buy and hold with some active management and risk management.

And so in any one of our Portfolios, whether it's one that invests mostly in ETFs or in individual stocks.

We have a number of core type holdings, call it roughly three quarters of the account are in these high quality blue chip type positions that we're going to hold for the long term.

Occasionally we'll trim them, occasionally we'll add to them.

Every once in a great while we'll sell them if we think we need to, but we like to hold those and then we supplement that with these satellite type positions where we think there's better growth potential.

Maybe there's a certain thematic potential that we see, but we know with those that greater potential sometimes comes a little bit higher risk and higher volatility, which of course we're trying to eliminate or reduce.

So that's where it ties in with our risk management strategy.

Basically what happens is when we purchase a security, we set a risk level and if the security drops below that, if it's one of our core holdings, our buy and hold positions, we'll do a new full review of that position, make sure our original thesis is okay and it's just a short term blip.

If it's one of our satellite positions and it hits that security or that risk level, we're just going to move on.

Assume that, hey, maybe we got this one wrong.

Maybe we'll look at it again later.

Either go to cash or go to our next idea.

There's no way you can avoid every little blip in the market.

5, 10, even the 20% ones are just.

That's the reality of investing.

But what we're trying to reduce is twice in my career we've seen market corrections, if you want to call them that, bear markets, let's call them of 50% plus.

Those are the types of things that are just not something that we want people to have to endure going forward.

Absolutely.

And it would be really hard as an individual investor.

Maybe not impossible, but it would be really hard to perform a new analysis when a security hits a certain level.

Number one, we're all busy, we have families.

And number two, I've had clients say, my granddaddy owned that stock, he gave it to me, he wouldn't want me to sell it.

Maybe your granddaddy wouldn't want you to hold the stock anymore because it's no longer a good holding.

So to get that emotion out and use that rules based I think is just crucially important.

Yeah, absolutely.

And something else that we incorporate, and I mentioned it off the top, how we look at both fundamental and technical analysis and this is very generalization, but you could kind of say we use the fundamentals as deciding what, what type of security we want to purchase.

And then we use the technical or as you see here on the screen, trend and sentiment analysis to decide more when we want to enter, when we want to exit, that sort of thing.

That's a little bit generalized, but it gives you an idea of how we utilize those two.

Excellent.

Quick question.

When's the last time you stopped to ask where is my money actually taking me?

If you're a business owner or high earner who's too busy to figure out if you're on the right path, we have created, created something just for you.

It's called the 10 Minute Wealth Vision Call a quick no pressure zoom where we'll talk about your biggest financial question and help you get one step closer to your ideal future.

No pitches, no fluff, just clarity, confidence and direction.

Grab your spot now@weeklywealthpodcast.com vision.

That's weeklywealthpodcast.com vision.

Your vision deserves 10 minutes.

So moving on to the L part of QRLT.

This stands for liquid and low cost.

The vast majority of the positions that we invest in have no commissions, only a couple of mutual funds that are in specialized areas do.

We always try to, where possible, use low cost ETFs or real quickly.

What is an ETF?

Just in case anybody on the call doesn't know.

Yeah, great invention.

About 30 so years ago.

Exchange traded fund.

Basically they're like a mutual fund, but much better.

They trade intraday instead of at the end of the day.

But most importantly, they're far more tax efficient than mutual funds.

A mutual fund can, even if you don't sell it at the end of the year, can distribute capital gains to you and hit you with a big tax bill.

Whereas an etf, the way they're structured, they distribute little to no taxable gains.

Perfect.

And so we want a liquid portfolio that you can get out of it anytime.

And low cost portfolio, those are simple things, but they often are overlooked by investment managers.

And compounding works both ways.

Right.

The compounding effects of high feed securities can certainly be a drag on a portfolio over decades.

Absolutely, absolutely.

Speaking of something that can have a drag on compounding, we'll finish here with t tax efficient.

There's different ways that we think our portfolios are tax efficient.

So first of all, when a client first comes into us, sometimes they have these kind of legacy positions that maybe they've owned elsewhere for years.

We can work with them to decide how we transition out of those, or maybe we don't.

We can hold them to the side if need be, to try to do it in a more tax efficient manner.

We definitely look for opportunities not only in the client's specific account, but across our portfolios broadly for what's called tax loss harvest opportunities.

You know, at any given time, there might be securities or parts of the market that are down, or maybe it's the whole market that's down and we'll take advantage of that sometimes to sell something at a loss and invest it elsewhere.

That way we have that loss to try to offset some other gains that we may be taking.

And then I think a really unrecognized or maybe unappreciated way that we try to be more tax efficient is back to our technical analysis beliefs.

We believe in holding your winners for the long term and kind of selling your losers.

So part of the risk management, you'll see us selling some stocks that maybe we haven't owned that long and they have a little bit of loss, so we're generating some loss there to use and that we hold our winners longer term.

The great retired portfolio manager Peter lynch used to talk about how he wants to hold his flowers and cut out his weeds.

Right.

And so that's the mindset here.

So different ways where we try to be tax efficient in our portfolios, I would say it's not so much part of our investment process, but since we're talking about ways that we try to reduce behavioral mistakes for investors, I would say partly what we're doing today and what we do in our regular monthly videos and our monthly papers and when David and our other advisors meet with clients, we're having discussions around behavior and emotions.

And we bring it up all the time.

Maybe people get tired of it at times, but it's important for people to recognize that it's a normal thing for to have emotions around your financial situation.

It's nothing to be ashamed of.

And we bring it up all the time so people are aware of it so that they're not just hearing it when they're really feeling that stress.

They're healing it, hearing it during all periods.

Yeah, I can give you one of my least.

I would call him one of my least emotional clients.

He called me in the beginning of April and what was happening back then, and he said, and you could hear the fear in his voice.

And he said, do I?

Do we need to be doing something differently?

Is this it?

Is this the end?

And we talked through Some things we talked through.

Some of your talking points of the graph goes up and down always.

And I even told him that I had per.

I had bought into the market a little bit that week.

And yeah, now he's back to where he was plus some.

And even the tariff situation in the beginning of April, that was a pretty steep dive.

But managing the emotion ended up saving him.

Yeah, that's great.

That's great.

Let's move on to our final slides here.

We'll finish off with a quote that's actually from myself.

I pulled it from my book here.

Cause I think it's relevant for what we're talking about.

Using a process that provides a smoother ride will help keep investors invested.

Otherwise, it doesn't matter what the market does, they will not achieve those returns.

And I think this ties directly back to that Morningstar chart that we showed earlier where investors literally, on average, are not achieving the returns of, say, the market or what they're invested in.

So people worry about, oh, am I beating the S and P, am I beating the Dow, what have you.

The reality is if, even if they were directly invested in those, more often than not, they're not even matching it because of the emotional side.

So that's our goal.

At the end of the day, you're not retiring healthily because you beat the S and P. You're doing it because you accumulated and saved and invested and didn't have emotional decisions around your finances allowing you to get to your financial goals.

Not, oh, in Q3 of 2024, did I beat the market or what have you.

It's did you achieve your end goals and that that's why you hire David and our firm.

Absolutely.

And I would add that investment management, while it's incredibly important and maybe one of the most interesting parts of your financial plan, it's not more important than the other plan.

So your insurance, your risk management, your estate planning.

I have a client, her husband had passed away.

He didn't list her as a beneficiary on his 401k.

So that just created a tremendous issue.

So the financial planning process involves tax plan.

It involves a lot.

And most of our behaviors will really have.

Will be the defining factor of where we end up financially.

Even are we spending too much money, things like that.

Financial planning is an incredibly important tool with investment management maybe being the most exciting portion of it, but certainly it's just a portion.

It's not the entire process.

I will have one other comment that I think sometimes people find helpful and if they follow the Advice, couple of things related.

Number one, if you're feeling stress about the market, there's a couple of things.

Number one, I would say I always give this advice.

Never watch financial news television.

They're there to entertain and scare you.

So you will never find it infotainment, you will never find it out of my office.

I shouldn't say that.

I have one very close friend who occasionally is on.

I will watch him, but usually only recorded so I can skip everything else.

Look at your account less often.

I even go so far as to tell people if they're really stressed.

Only look at it once a year when you meet with your advisor and they just look at me like I'm completely insane.

They're like once a year, I look at it once an hour.

But if you at least trend in the right direction, looking at it less, you'll.

You'll feel less stress.

And then the other thing I'll say is there's almost always something that can feel and look scary.

You referenced this past April with the tariffs.

There's almost always something, obviously the COVID period, you name it.

There's always something that can scare someone about investing.

But if you look at a really long term chart of the investing history and you were to put all of those incidents on them over time, most of them, people wouldn't even remember what that was about.

Oh, the European credit crisis, what is that?

You wouldn't even remember it, number one.

And number two, it would just look like a little blip on the chart.

So that's not to say that there aren't serious issues at times and the market can't have real problems at times.

Of course it can, but the vast majority of times it's just something that should generally be ignored by everybody except those in my seat, basically.

And I think the overall answer might be like process based.

And it's not an emotional thing, it's more of a process.

And then we talk about it within our team.

It's not just me.

And we have an investment team that we would talk about, hey, this is what we're looking at.

This is where we had this price level set.

Is this still relevant?

What's happening here?

What are we going to do with the money if we sell?

If it's one of our core positions and it triggers one of those risk levels, sometimes we'll actually be adding to the position.

We'll take advantage of that downswing saying, hey, this is one of our long term core holdings we actually want to add to the position here.

So it's not an automatic sell in that case.

In a lot of cases, we'll even take advantage of that downswing to add.

Hey, it's on sale, buy more of it sometimes if it's a good position.

Right?

Yeah.

And I mean, at the end of the day, we always encourage investors to try to dollar cost average and contribute amounts, whether it be monthly or quarterly or what have you.

That way you're not having to worry about the timing of the market and you're just regularly investing.

Some will be at high levels, some will be at low levels, but at the end of the day you'll get a good average price as opposed to trying to decide is this a good time to enter, a good time to get out and so forth.

Yeah, yeah.

And there are times that you and I will talk and I'm bringing on a new client and we might say, hey, they have a half million dollars, let's put one sixth of it in the market every month for six months.

That way we're not having to worry about are we getting in too early or too late.

And we do it again with the process.

So very thought out and it's, it's something that a lot of us maybe wouldn't do on our own.

Awesome again.

Www.weeklywealthpodcast.com Vision if you'd like to set a 10 minute appointment and just check out the podcast, you can look out weekly Wealth Podcast on Apple, on Spotify, on YouTube, or you can go to www.weeklywealthpodcast.com.

greg, as always, just really good insight.

To me it's comforting to, to know that there's a method to the madness in, in, in how you're handling my money honestly.

And there's, it's not just being made on a whim.

So that makes me comfortable personally.

Great.

Thanks for having me on, David.

So hope that you enjoyed this conversation with Greg Towner.

If you have ever thought to yourself, you know, I just don't have an investment process.

I don't know why I'm invested in what I'm in.

I'm not sure what I should be invested in.

Maybe you don't know if you're taking too much risk, maybe you don't know if you're not taking enough risk.

If you have any of those concerns, make sure to email me davidarallelfinancial.com and let's talk about it.

Let's see how these concepts, how these processes might be able to help you to sleep at night with your investments.

What we don't want is ever have our clients to have undue stress.

So davidarallelfinancial.com if you'd like to chat about it.

The information contained herein included but not limited to research.

Market valuations, calculations, estimates, and other materials obtained from Parallel Financial and other sources are believed to be reliable.

However, Parallel Financial does not warrant its accuracy or completeness.

These materials are provided for informational purposes only and should not be used for or construed as an offer to sell or a solicitation of an offer to buy any security.

Past performance is not indicative of any future results.