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Liberty YouTube Video – March 23, 2020

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Portfolio Manager Brett Girard walks through the importance of asset mix and how market fluctuations are part and parcel of investing.

[Text Intro: Liberty International Investment Management. The freedom to create your future.]

[Text on screen reads: Brett Girard CPA CA CFA – Portfolio Manager]

Brett Girard: Greetings. Thank you for taking the time to watch this video. My name is Brett Giarard and alongside David Driscoll and Annie Bertrand, we are the portfolio managers at Liberty International Investment Management. We’ve decided to use video as another means of keeping up communication with you going forward. Our goal is to let you know more about the steps that we are taking in your portfolio and answer any questions that you may have.

To that end, please feel free to email in any questions that you do have, and we can get them answered in a future video.

To start, a question we are being asked quite often lately—“What’s going on with the market and is this normal?” To answer that, let’s begin with a chart.

[Brett’s voice overlapping the last sentence says: So what you can see here is a pictorial representation that risk really does equal reward or vice versa.

[Chart on screen shows: Range of calendar-year returns from 1988 to 2018 with annualized return]

Brett continues: Starting on the far left-hand side in that navy blue column, what you’re looking at there is the volatility of a portfolio of 100% bonds over the last 30 years. And that being 1988 to 2018. So in the best year, that navy blue column of 100% bonds was up 22% and the worst year it was down about 5% and on average over the last 30 years the return per year was 6.8%.

Now contrast that with the far right-hand side—with the maroon column. This is a portfolio of 100% stocks, 0% bonds. Here what you can see is the best year was up 37.5%, the worst year was down 37%, and on average the return was 10%.

So comparing the navy blue to the maroon, which you can see is that there’s much more volatility on the maroon side of things, being almost 15% higher on the higher end and almost 33% lower on the lower end, but that translates annually into an average return of three percentage points more.

Now, three percentage points doesn’t sound like a lot, but over a time horizon of 10, 20, 30 years—it could mean double or triple the amount of money that you end up with, so it is very significant. Now, for most of our clients, they’re getting closer to retirement, thinking about retirement, maybe cu- just reaching retirement, or well into retirement. For people in this boat, it’s too challenging to be 100% equity because of the volatility thinking back to the time horizon.

It’s also, given current interest rates, too challenging to be at 100% bonds because quite frankly, the last 30 years have been better than what we’re seeing going forward, as interest rates have fallen.

So that said, most folks end up in that sort of yellow to orangey-red band in the middle, where we’re looking at portfolios that may be 60% bonds, 40% equity, which is sort of that mustard yellow color to the orange which is 50% bonds and 50% equity, to the red which is 60% equity and 40% bonds.

Now in these cases what you can see is you’re obviously not going to have the 10% return that the 100% equity portfolio does, but you also won’t have the 6.8% return that the fixed income has. So having a combination of equities and bonds is kind of the best of both worlds. We’ll get into it a little bit later, but there’s actually a third asset class that’s becoming increasingly important through this market volatility and that’s cash.

Now at this point, if you’ve looked at your portfolio for the year, you’re likely down. I know this is an uncomfortable feeling, but it’s actually quite normal. Think about your asset mix and the range of returns that we just walked through. You’re going to have some positive years and you’re going to have some negative years, but overall, over the long term, returns have been positive. Historically, markets rise only two out of every three years. Which means, implicitly they fall one out of every three years. 2020 is quickly shaping up to be a down year. Further, the chances of a recession are rising.

Now recessions, while uncomfortable, are also a necessary evil in the market during which a recalibration takes place. Again, looking at history, recessions tend to happen about once a decade. Although, when they do, they create great investment opportunities.

Current market action is no different. There are many opportunities being created because companies are in business to make money, not lose it. I’m sure for each and every one of you, in your current or former industries, there were or there have been ups and downs. That’s the business cycle and you got through it. The same goes for your portfolio. We’ve going to get through this.

As you- as we’ve no doubt discussed, whether in person, through newsletters, or in our TV appearances, we’re not market timers. We are long-term investors. Our intention is to invest in successful businesses and earn a piece of their annual profits through the form of dividends. As a result, we don’t need to be as fussed about stock prices. We really only care about the dividend growth that’s going to be part of the income that you’ll live on in retirement.

This is how it works. As the dividends grow over time, there’ll be more and more funds flowing in that can supplement the money that you need to retire. As a result, the capital that you’ve invested becomes less and less important to the drawings you have to make and really, at the end of the day, that capital becomes an estate planning issue.

To give you a perfect example of this, Warren Buffet back in 1988, put about a billion dollars into Coca-Cola. Since that time, the dividends that he’s received on Coca-Cola now amounts to about 700 million dollars a year. In other words, he has a 70% yield that cost on his initial investment. Now while he is concerned about the long-term viability of the company—in other words it needs to continue to selling-to sell Coke and other products so that he can receive his dividends—he’s not fussed by the stock price. Further, if he were to sell, he’d have a huge capital gain and then it would be tasked with finding a place to earn 70% on his original investment. Not easy today, not easy at any point in time.

So this overall is the plan. If you’ve sat down with David or myself or Annie, we’ve talked about this time and time again. We’re focused on dividend growth, we’re not focused on share price movement.

Meanwhile, with all that said, when the time is right, we will step back into the market with the cash that’s been sitting in your account. We’re going to buy more shares of the companies that we own and for most of you folks out there, that cash amounts to somewhere between 10 and 30% of the portfolio depending on when you started with us.

That’s more than enough to withstand this market volatility downward and it’s going to create big opportunities going forward. We’ll do this when the market capitulates. Our view is that somewhere between 2,000 and 2,200 on the S&P 500, although that is a moving target and could change from time to time.

If you have any questions, or just want to chat in general, David, myself, and Annie are here and available to talk. So please feel free to reach out at any point in time and we can have that conversation.

Thank you and stay safe.

*Screen reads:


David – david@libertyiim.com

Brett – brett@libertyiim.com

Annie – annie@libertyiim.com

[Text Outro: Liberty International Investment Management. The freedom to create your future.]