Doug Fabian:

Good morning, ladies and gentlemen. This is Doug Fabian, we’re going to start the webinar in two minutes. Thank you for joining us today. Welcome to our second Mercer Advisors Client Webinar of 2019. Our goal with these broadcasts is to inform and educate our clients about the progress of financial markets so far this year, but also to discuss meaningful topics to the achievement of your goals. We appreciate you taking time to join this event. My name is Doug Fabian, and I’ll be facilitating today’s program. I’m the Signs of Economic Freedom podcast host, and part of the client communications team here at Mercer Advisors.

Now, here are some tips to improving your experience on today’s call. There is a toolbar on your screen for those listening live. You can move the location of this toolbar, or even close it altogether if you desire. Some of the slides we will be sharing with you will have important information on the right side of the screen, so moving the toolbar to the left may be helpful. One of the most popular features on these calls is our Question and Answer session. If you’d like to submit a question, please submit via the function in your toolbar. It will send a message to us, and we’ll do our best to facilitate as many questions as possible during the Q&A portion of today’s presentation.

We do want to be respectful of your time. Our formal presentation will last approximately 40 minutes, leaving 20 minutes for Q&A. We will be sending a survey after the call, and would appreciate your comments and feedback, so we can improve these presentations in the future. Now joining me today is Don Calcagni, our Chief Investment Officer, and leader of our 14-member Investment Committee, and Laura Combs, Certified Financial Planner, Client Advisor, and a member of our investment team. Now, we take our job as fiduciaries seriously. We work in a highly regulated industry, and the purpose of this disclaimer is to say that we have taken great care to bring in data from reliable sources.

Now, we also want you to know that no part of this presentation should be considered personal investing advice. You should discuss any changes to your financial plans with your client advisor. Now, here is our agenda today. Three broad topics. First, we’re going to discuss the importance and power of your financial plan. Laura Combs will take us through a discussion about how your plan intersects with your investment strategy. Next, Don Calcagni will take us through a discussion of recent market action, and then he will update us on the data that reflects the health of the economy. After that, your questions will follow. So let’s get started. It’s my pleasure to introduce Laura Combs, and the Power of the Plan. Laura?

 

Laura Combs:

Thank you, Doug. It is a pleasure and privilege to be here today. And again, I want to welcome everyone joining this call, whether you’ve been a client of Mercer Advisors for a number of years, or this is your first time interacting with our organization, we are so glad that you’re here today. As Doug mentioned, I’m going to walk through the Power of the Plan. I am extremely passionate about the Power of the Plan, because I believe that a written financial plan has the ability to impact and change people’s lives. I believe this has the ability to impact and change your life, and today, I want to cover three ways that a written financial plan keeps your investment behavior in check, and gives your plan power.

The first thing I’m going to cover is a roadmap, and the second thing I’m going to talk about is how a plan drives your investments. And the last thing I will talk about today is how does a financial plan keep you on track for the future. I’m going to start with a roadmap, and first, I want to paint a picture. When I was 17 years old, I took my first cross-country road trip. And this was before the days of Google Maps, and Siri, and things guiding our way. This is when I had to get a atlas out, many of you know this, and you had to map out exactly where you were going to go, and how you were going to get there. And to me, when I started driving in Western Illinois, I needed to figure out how I was going to get to Minnesota, seven hours away.

And for you, the destination might be different. Santa Barbara, New York, for example. But the power of the plan is that it provides a roadmap for your future. And as you can see here, there’s a number of different components that make up this financial plan. I’m not going to go through all of them today, but I want to point out a key important issue. It is where are you today? Assess your net worth. How much do you have in assets? What are your liabilities? In order to understand where you might be going, it’s important to understand where you’re starting. For me, again, I was in Western Illinois, and if I didn’t chart my course out, I could have ended up who knows where. And so having that roadmap really gave me the direction that I needed.

The other piece is developing a budget, for example, or to put it a different way, maybe a spending plan, taking a look at what’s coming in, and what’s going out. On my road trip, I needed to know exactly how many tanks of gas I was going to need, and how much those were going to cost along the way, so I didn’t end up stranded on the side of the road in Northern Iowa, for example. So having those different pieces, really, having that roadmap helps you get to where you’re going to go. The second thing that I want to focus on is a financial plan has the power, and drives your investment portfolio. At Mercer Advisors, we believe that financial planning is a prerequisite for investing. That it truly does, that plan, that written plan, drives and determines your investment portfolio.

So if you focus in on this screen on the slide here, on that middle section. Where do you want to go? What is your retirement goal? This determines everything. Where you want to go dictates how you’re going to get there, how much you’re going to save, how much investment risk you need to take, and how long of a time horizon you’re working within. So the investment piece—before you invest a single dollar, it’s important to have that written financial plan, so that you have clarity about the destination, and how you’re going to get there. Again, in my case, are you going to be driving? Are you going to be going the speed limit? Or are you going to fly? Or is this a nice, scenic drive on the train through the countryside, for example? Having that financial plan gives power, and really drives your investment portfolio.

And the last thing, the third thing, I want to highlight for how to give your plan power and ensure that your investment behavior is in check, is making sure that your plan remains on track. Fast forwarding now to today with Google Maps and Siri saying, “Recalculating.” If I’ve made a wrong turn, my GPS is now saying, “Laura, you need to turn around. You missed your turn. At Mercer Advisors, we meet with our clients, and run a Monte Carlo simulation, which is a thousand different scenarios of that roadmap, of that financial plan, to determine if you, as the client, are still on track. And I had the opportunity in the fourth quarter of last year to talk with clients real-time, “Laura, I’m seeing what’s going on in the market. Can we update my plan? Can we run the scenarios to see if we need to course correct? If we need to take a detour.”

And we were able to real-time run this, because at Mercer, we plan for volatility. We build that into our investment financial plans, into our projections, to make sure that we account for potholes along the way, or detours, or speed bumps now and again. Don’s going to talk a lot about volatility in the market, what’s happened year-to-date, and there’s going to continue to be potholes or detours along the way. And so it’s important to make sure that you’re doing that checkup, that you have what is my ETA, what’s my arrival time, I need to know that in order to make sure that I’m going to remain on track for the future. And so having those regular meetings to make sure that your financial plan stays on track.

And what I want to leave you with today, as Don continues into his portion of the webinar today is if you don’t have a plan, I would encourage you to get one. Meet with a financial advisor, a client advisor, take a look at what’s important. What is your roadmap for the future? And if you have a written financial plan, make sure that you’re updating it on a regular basis, because a financial plan is a living, breathing document that needs to be updated on an ongoing basis to make sure that on your journey, on that trip, you continue to stay on track, and on course.

So I would encourage you throughout the call, as you have questions, please type those in, I look forward to answering those at the end of the call. So again, making sure that you give your plan power, developing that roadmap, having that plan drive your investments, and making sure that you’re on track, are three ways to give that plan power, and really help change your life. So Doug, I’m going to hand this back to you now for the next portion of the webinar.

 

Doug Fabian:

Thank you, Laura. A great refresher on the importance of your financial plan, and now we want to change gears, and talk about what’s going on in the financial markets. I know that’s why many of you are on the call today. It’s my pleasure to introduce our Chief Investment Officer, Don Calcagni, and Don’s going to take us through what’s going on in the financial markets. Don?

 

Don Calcagni:

Thank you, Doug. I appreciate the introduction, and Laura, great job, for always helping us to get reoriented, recalibrated, recalculating to make sure that we’re on track. So certainly, always appreciate that message. And so I wanted to just pick up where Laura left off here. For our listeners who are joining us today, if you actually look at your screen, Laura said something that was very important that I want to reinforce. And that is when you’re building a financial plan, you have to plan for volatility. Volatility is a fact, it will not go away in the future. We’ve had it in the past, and it’ll be with us until the end of times.

And if you look at your screen here, you’ll see these little floating red dots underneath these gray bars. And what we’re showing you here is the returns on the S&P 500 Index, specifically, the price return where we’re in dividends here for a moment. And the gray bar is the actual return in these calendar years that you see here along the bottom. We go back to 1980, and we take it up through year-to-date, 2019. This data is through the end of March. And those red dots represent the intra-year top to bottom decline. That’s the intra-year decline from the market high to the market bottom, during that particular calendar year.

And if we look back to last year which is this data point right here, this -20 and the -6. From top to bottom, from September 21st of last year when the market peaked, until December 24th, which is when the market hit its bottom, that was a top to bottom drop of 20%. We were technically in a bear market for the US equity market for about 10 minutes. That certainly all changed on December 26th then, and I’ll certainly touch on how we’ve done so far year-to-date here momentarily.

But I want to reinforce, volatility is a fact. Plan for it. We plan for it, we build that into your financial plan. That’s why we do that fancy Monte Carlo testing that Laura referenced. It’s critically important that you plan for volatility. If you’re not planning for volatility, frankly, you’re planning to fail. You have to plan for volatility, it’s a fact. So naturally, year-to-date, before I move on from this slide. Markets have rallied, markets have recovered. We’ve erased last year’s -6% loss, and now the market is on to new highs. Just yesterday, the market hit new all-time highs at the close. But even so far this year, we’ve seen a little of about a -2% top-to-bottom decline so far this year, that was back in January. But at the moment, the US equity markets are off to new highs. So point being, that financial plan can keep you focused, keep you focused on your destination. Rebalance, make sure you’re doing the right things, make sure you’re not missing your left or your right turn, and keep yourself on track.

You know, the reason we highlight this is because market volatility, if you’re not paying attention, if you don’t understand how it interacts with your financial plan, it’s very easy for that market volatility, for those potholes, to completely throw you off course. Now, and sadly, when we actually look at real-world data for investors, we actually see that investors are routinely knocked off track. And so what we’re actually looking at here, the average returns for the average investor in the United States over the last 20 years, has only returned about 2.3%. That by itself is a retirement crisis. Okay, put aside the decline of traditional pension plans, put aside concerns around Social Security funding, the fact is the average investor is constantly hitting potholes, and being derailed. And if they just bought and held the index, they’d actually earn about 7.7%, at least over the last 20 years.

I was sharing with Doug Fabian before today’s call, I just received the data that updates this for last year. Last year, the average do-it-yourself stock investor earned -9.42%. They underperformed the S&P 500 Index by over 5 percentage points. And so this is why it’s critically important that we’re paying attention to volatility. Make sure that your GPS is recalculating. Work with your advisor, make sure you’re on track. Volatility is a fact, like I said, it’s not going away.

So how did markets do last year? How are we doing so far year-to-date? A little bit of this is a rehashing of what I just highlighted. Year-to-date, including dividends, the S&P 500 Index, which is our benchmark for the US large-cap equity market positive almost 14%, 13.6% through the end of March. We’re up a little bit more here in the month of April, and as you can see, that more than erases last year’s -4.4% total return. Now, I just want to highlight something. I just showed you on a screen a moment ago that it was -6 last year, and you’re probably thinking, “Wait. How did we get from -6 to -4.4?” The difference is dividends, right? So remember, that other screen that I was showing you was just the price return of the S&P. This year is the total return, which takes into account dividends. Obviously, dividends would help, because that adds to our return.

And when we look globally, we see that we still have a little bit of work to do before we fully recover from last year’s losses, but we’re well on our way when we look at emerging markets and developed markets outside of the United States. So, so far year-to-date equity markets have actually given us very handsome returns, and we’ll touch on bonds here in a few moments. But before we do so, I wanted to also touch on factor-based returns. If you’ve been working with your advisor for a long time here at Mercer, or even for a short while, I’m sure you’ve heard a significant amount of verbiage around factor-based investing. And factor-based investing is scientifically oriented investing. Factors are those characteristics, in this case of stocks, that have been shown to be high, reliable predictors of future returns. And that’s important because what we care about is the future, not necessarily the past, right?

So what we’re showing you here is a bit of a mosaic, and the way to properly read this is we have our calendar year over here on the top. And this particular mosaic just begins in 2004, and we’re showing you 15 years worth of data. And within each column, you can see different factors, and here at the top, we have a multifactor strategy is diversified across factors. And the factors that we’re focused on are things like value, and small cap, and momentum, and minimum volatility, and dividends, and high quality. So what we’re doing is we’re ranking these different factors relative to the S&P 500 Index in each calendar year. Now, you’ll see that these things jump around a bit, there’s really not much of a pattern. There are patterns here, but nothing that I would really hang my hat on to say that you could trade on it definitively.

The one pattern that I would highlight, if you look at this closely, and if you actually do the math, you’ll see that multifactor strategies about 2/3 to maybe 70% of the time outperform the broad market, meaning the S&P 500 Index. And that’s really what we’re looking for. We’re looking for those strategies that have the highest likelihood of giving you the absolute best investment experience possible. How do we make sure, if you’re going from Western Illinois to Santa Barbara, California, how do we make sure that we get you there reliably? How do we make sure that it’s as smooth a ride as possible, with as few of potholes as possible? How do we do that from an investment perspective?

And so what I wanted to highlight, if you actually look at the data here, the multifactor portfolio outperformed the S&P 10 out of the last 15 years. So pretty good odds. And by the way, these odds, we see this throughout history, even if we go way back before 2004, we see the same pattern, right? That multifactor strategies outperform the S&P. Maybe not every time, certainly not every time. Last year, multifactor underperformed the S&P 500 Index. But over time. So not every time, but over time, we see these strategies persistently outperform, but again, over time. And so here we’re showing you the full 15-year data series. This is the annualized return for each of these different strategies, again, over this particular time period.

And then on the right-hand column here, we’re showing you the risk. This is really how bumpy the ride was, how many potholes did the strategy hit, right? And obviously, we always want risk to be as low as possible, but we don’t want it to be too low, because we want to make sure that we’re capturing the returns that you need to make progress towards your destination. And so we can see here over the last 15 years of multifactor strategy, outperformed the S&P by about 2 and a half, 2.6%, over that particular period of time. And then over here on the right, we have the risk. So a little bit more risk associated with a multifactor strategy over this particular period of time, but certainly, a fairly significant amount of outperformance. So factor strategies have done well over the last 15 years.

Last year, to be fair, a multifactor strategy did not. Certain factors certainly outperformed quite handsomely, but if you diversified across them, diversification last year was not your friend. But over time, it certainly is your friend, so I’d be very careful. Don’t throw diversification out the window, it is definitely your friend over time. And so far year-to-date, multifactor strategies are slightly underperforming the S&P, that actually started to change here over the last month, so we’ll see what the data looks like, Doug, this time next quarter when we do this call again, I think we’ll be reporting some different information. So we’ll see what happens.

And I wanted to highlight. So you might look at that prior slide and say, “Gee, Don. You have 2 and a half percent outperformance per year. That doesn’t really sound like a lot.” And so what I wanted to do, is I wanted to maybe show you, paint a broader picture for you, just going back to 2000. I often hear that, “Don, you know the world changed since 2000. All those theories are based on data from the 20th century, and, hey, it doesn’t really apply anymore.” And if we actually look since 2000 through the end of last year, we find that that’s not true at all. The world did not change. Multifactor strategies still significantly outperformed index-based strategies. Again, not every time, but certainly over time.

And so on the far right here, we can see the total cumulative return, the total return over this particular 19-year period, again, going back to 2000, we can see a very significant outperformance. So that 2% to 3%outperformance annually over time, if you actually sit down and do the arithmetic on that, that is a substantial increase in wealth over time. That is a significant outperformance when you compound that over time. And so when we look at this particular window of time, we see about a 3% per year average annual outperformance, and then we see the risk is pretty much about the same, slightly higher. Nothing that I would say that is materially worth really spending too much time on. So that outperformance is quite significant over time.

So given the fact that markets have recovered from the fourth quarters, what I’ll call a mini-bear market that literally lasted for a very short period of time, what do market valuations look like? I often hear this market is so overvalued, it’s full of hot air, and blah, blah, blah. You go to the far dark corners of the internet, and you can hear all kinds of doomsday scenarios. But if they actually sit down and do the math, which is certainly what we do here at Mercer, what we actually see is that the market, in terms of valuation, is trading right around its long-term 25-year average, when we look at earnings. Earnings are really what drive stock prices more than anything. When we actually look at earnings, when we look at what companies are trading at, again, we see that they’re right in the middle. This perforated line here that you see in the middle is the 25-year price-to-earnings ratio, that’s the 25-year average.

And you can see back in the late ’90s, when we all thought we were going to get rich investing in Netscape, eToys, and eBay, we can see that there was a big bubble back then, the market was trading at 25 times earnings. I would argue that certainly, that was a bubble. And then here was obviously awake when the whole world was gripped by the financial crisis. But we can see that where we’re at today, we’re spot-on average. It’s really hard, in my view, to make a compelling, quantitative case based on the financial data, that the market is somehow wildly overvalued. So I would encourage our listeners, really, I would discount those arguments until they can give you better data.

And when we actually look at the data, I’m sorry, we just don’t see the evidence that markets are wildly or grossly overvalued. So I do want to touch on bond returns. One of the things that has really fueled this market recovery from the fourth quarter, in my personal view, is the fact that the Federal Reserve has verbally communicated that they were going to either be slowing down or halting future interest rate hikes. And if we go back to some of the earlier webinars we’ve done in previous quarters, you’ll remember that one of the things we touched on that was really fueling volatility was this increase in interest rates. There was that, plus there was also the fact that the economy was and still is slowing a little bit. So as the economy slows, as earnings begin to go down, or future earnings growth, I should say, is going down, then markets tend to become more volatile.

But the sheer fact that the Federal Reserve, for whatever reason, certainly the President has been in the news pressuring the Central Bank to even cut rates. Putting aside all the politics that go with that, the fact that the Federal Reserve has slowed down, and communicated that they’re not going to be raising rates, they don’t have any plans to raise rates into the foreseeable future. That by itself has really fueled positive returns for bonds. And so if we’re looking at bond returns for 2019 year-to-date, you would focus on this column here that says USD, that stands for US dollar, you’ll see that the US bond market’s positive almost 3% through the end of March. So those are very handsome returns. Last year, bonds were virtually flat in the United States, largely because of those interest rate increases that we were experiencing throughout last year.

And when we look globally outside the US, we’re seeing positive bond returns outside of the United States, which is also a good sign for our bond investors, and for our more income-oriented investors. And when we look globally across some of the major economies, we see positive returns pretty much across the board, even in the United Kingdom, which I think is interesting given their political upheaval around Brexit and how are they going to disengage from the European Union, and what might that look like. We do see that UK bonds have actually performed quite handsomely so far, year-to-date.

I do just want to touch on the column on the far right-hand side here. This particular graphic, I think, is a little misleading, but I’ll highlight it anyway. Often here, Don, there’s so much debt today, corporations are issuing tons of debt, the federal government is massively in debt, and so I will agree that the US federal government is significantly in debt, and I do think as all citizens, as voters, we should be concerned about that debt, and we should hold our political leaders accountable for strategies to manage that debt. So but what I would highlight, and it’s maybe a little hard to see looking at this picture here, is the rate of growth in debt has actually tempered down. You’ll see this bump here during ’08, ’09, but you’ll see that’s actually slowed down a little bit.

These numbers overstate the problem. You would actually have to cut these in half to get a feel for, really, is this a problem or isn’t it a problem, because JP Morgan, when they put this chart together, they didn’t adjust it for GDP growth, which I think was an error. But the point being, debt should grow as the economy grows, that’s an important point. Economies require debt. All of you on the call wants to retire, all of you are going to want to buy bonds, so that you have some income, or to reduce risk in your portfolio. So economies require debt in order to grow. Consumers, investors, are looking to invest in debt, so it’s natural that we have more of it. So I think that’s an important point to keep in mind.

So I do want to just mention, we talked about interest rates, interest rates slowed down. Certainly that has fueled the market recovery. US economic growth has also slowed down a little bit here. So we have seen very handsome economic growth since, I’ll say, about 2015, 2016, but it has slowed down a little bit. And it’s that slowdown which is giving companies some pause with respect to forecasting their future earnings. Now, putting that aside for a moment, what we’re actually seeing is companies’ earnings are actually still quite good, and that’s why we’re seeing markets hit new highs, as recently as yesterday’s close. So that is important to understand.

When studying the economy, at least for me, the most important part to focus on is the biggest piece of the puzzle, which is the consumer. How are consumers doing? What does the financial health of the average American consumer look like? And so the two most important pieces to that puzzle are understanding how much debt is the average American household carrying? And what we see is that after the financial crisis, American households did a phenomenal job. And again, I’m speaking on average, right? We can all point to communities, or individuals that we know in our lives that are maybe struggling with serious debt, but when we actually look across the entire country is that American households seriously deleveraged after the financial crisis. That’s a fancy way of saying they paid down their debt in a pretty big way.

And today, the average American household is actually carrying less debt than at any point since prior to 1980. So American households have done a great job managing their balance sheets. And if we look at the chart right below that, what we see here is that household net worth has actually also hit an all-time high. And if we actually go back to the peak of where it was before the financial crisis, if we actually did the arithmetic on this, household net worth has grown about 4 percentage points annually since the third quarter of 2007. So significantly less than the rate of growth in financial markets, that’s largely attributed to what we discussed earlier, all the potholes derailing average do-it-yourself investors. But nevertheless, that doesn’t take away from the fact that households are actually taking really good shape relative to where they were historically.

So now to be fair, we probably can’t say the same about the state of the government’s balance sheet. US federal debt today stands at around $20 trillion, which I personally think is pretty significant, and like I said a few moments ago, we should all pay attention to that. But again, the consumer is the engine that drives the global economy, and by any objective measure, the consumer is in pretty good shape.

So I want to close on that point, and just close out with maybe four or five big takeaways, and then what we’ll do, Doug, is we’ll open it up for Q&A. Number one, not planning is planning to fail. Even though I’m Chief Investment Officer, for over 20 years I was a financial advisor. I’ve worked with hundreds of families across the country, and I believe fiercely in the power of planning. Not planning is planning to fail.

The second point I want to reiterate, the economy continues to grow. So while you may hear these doomsday scenarios, especially as we begin to enter the political season here, just keep in mind that the facts are the economy continues to grow. Earnings have slowed. I should say, earnings growth has slowed. Most analysts are projecting that earnings growth is actually going to pick up here in the second half of the year. So we’ll see what happens. But again, we are seeing companies post solid earnings growth, even though the economy’s slowing down a little bit. Valuations. Stocks are not overvalued on average, right? So when we look at the market as a whole, we don’t see evidence that the market is overvalued.

I do want to highlight something that I failed to mention a few moments ago. There are definitely stocks, and sectors of stocks, that are grossly overvalued. And I can think of technology companies, defense stocks, these are companies trading at 100 or 150 times future earnings. That’s a pretty significant valuation for those companies. I’m not saying they’re not worth it. I love companies like Netflix and Google, they’ve certainly changed my life, but I would highlight, you are paying a handsome premium to own those kinds of companies.

And then my final point is US households are in pretty good shape financially, but they do continue to grow their wealth at suboptimal levels, and that’s a tieback to that slide where we saw the average investor return. So in my view, financial planning is the key to success. If all US households had a financial plan, I think we would see better US household growth in their wealth. So help us spread the message. So Doug, with that, I’ll pass it over back to you.

 

Doug Fabian:

Great, Don. Thank you. We have a number of questions that are in the queue, we’re going to get to those in just a moment, just a reminder to the audience who is here with us live today. If you’d like to ask a question, it will send us a text messages via the question function in the toolbar. So please feel free to ask a question. So Don and Laura, let’s talk about the multifactor strategy in a little bit more detail. We had two questions from two different people who would like us to explain the elements of multifactor, and also how do we define it. So Don, let me go to you first, and ask you to just give a little bit more color around our factor investing strategy for some people who might be hearing it for the first time.

 

Don Calcagni:

Yeah, absolutely. Happy to add some color to this. And I would also encourage our listeners, call your advisor, meet with your advisor. Your advisor can spend a significant amount of time with you going deep and really getting into the weeds on what it means to be truly multifactor. So I’m going to give you a broad overview here, and hopefully, give you some meat, meat and potatoes.

So when we think of factors, we’re looking for those quantitative characteristics that are powerful, reliable predictors of future returns. So one of those, for example, is value, and there’s a lot of different ways to measure value. The way that we like to measure is something called book-to-market. So this is a ratio, you can get the information right off of publicly available financial statements. There’s no state secrets here. Book value is the book value of equity. You take that off of the firm’s balance sheet, you look at the firm’s stock price, multiply that by the number of shares that the company has issued. That gives you something called market capitalization. All you do is you take the market capitalization, and divide it by the book value of equity, and that gives you a ratio.

And when you’re measuring that, you want those companies that are, quote, deeper value. Those companies that are offering you a better value for what you’re purchasing in exchange. So that’s one measure of value. Another measure of value is the price-to-earnings ratio. We take the price, we divide it by the earnings, and it gives us a multiple. Maybe it’s 16 times earnings. A company trading at 12 times earnings would be said to be, quote, a better value than a company trading at 16 times earnings. A company like Netflix trading at a 100 times earnings, is a growth stock. Obviously, you’d want to underweight your position in Netflix, because it’s trading at such a premium.

So value is one measure, momentum is another. We can measure momentum in stock prices, you can measure momentum in real estate prices. All of us on the phone have seen this in our lifetimes, and multifactor strategy is diversified across things like value, momentum, quality. The way we measure quality is basically return-on-equity. Again, these are accounting ratios that nerds like me really get into, but it’s all publicly available information. Again, there’s no black box, there’s no state secret. So you’re diversifying across value companies, high momentum companies, companies that are high quality, also small cap companies. Smaller companies have higher returns historically than larger companies. Not all the time, not every time, but certainly, over time.

So that’s what we mean by multifactors. We’re diversifying across these different types of companies that have shown or exhibited these characteristics that are high predictors of future returns. So that’s what we mean when we say we take a scientific approach to investing, or an evidence-based approach to investing. That’s what we’re saying, is we’re diversifying across factors. Doug?

 

Doug Fabian:

Laura, anything you want to add in how you talk about factor investing to clients?

 

Laura Combs:

Sure, Doug. When I meet with clients, it’s really important, I think, to outline the different factors, and how we use those to build a portfolio, and the importance. And I think as a member of the Investment Committee, that comes into play, that we’ve done our research, we’ve reviewed all of these different factors in the market and like Don said, these are predictors. And what we want to always be looking at is how do we see how these are going to react in the future, and be able to incorporate those into the portfolios, to provide what we believe is the best possible investment solution for our clients based on their needs.

And again, I think when we look at all of those different pieces, as coming back originally from that financial plan, is that that’s where we’re going to build out which factors are appropriate, and how we allocate those. And like Don mentioned in that mosaic piece, or the jump chart, of how they’ve performed, it’s important to go back. And you’re not going to see them every year outperform, but over time, like Don highlighted, the multifactor having those different pieces has outperformed over time when we look at that large scale. So very important to incorporate that into the financial plan.

 

Doug Fabian:

Great. Thank you, Laura. Here’s a question we have from a listener today. We are now, arguably, in the longest-running bull market, though we did have a recent major correction, I hear some pundits saying that this can’t go on much longer. Has Mercer Advisors considered that? Don?

 

Don Calcagni:

Yeah. I think the truth is, I mean, we’re always paying attention to the market, every minute, every day. First off, I would always caution to keep the pundits in context, right? Their job is to sensationalize things, get you to click on their link, and everything else, and the media does the same thing, right? All the business news channels. So I would keep that in mind. This bull market, we’ve been predicting the end of this bull market since it began back in 2009. So I think it’s important to understand that this bull market is the most unloved bull market ever in human history. We’ve hated it. From the beginning, we’ve been predicting that it’s going to soon, very soon, pass away.

And the reality is we did see a bear market in Q4, based on how we measure these things. We saw a pretty significant correction in bear market in Q4. So we have seen these things already. It’s not like market volatility has gone away, and we’re now living in a new age of irrational exuberance, right? When I go to the supermarket, I don’t hear folks talking about day trading Netscape, or eBay, or anything like that. Certainly 20 years ago we did. So I’m not convinced that suddenly, the market’s ready to pop.

And again, that’s why I highlight the valuation. Just look at the map, look at the data. It’s a hard case to make. I know that’s not, maybe, what we want to hear psychologically, because this market has been so unloved for so long. And look, and we’ve said this in prior webinars, too, Doug, we know we’re going to have a bear market again in the future, right? So how do you plan for it? First off, you’ve got to have an emergency plan before you need it. That’s why we strongly encourage great financial planning. So I’m not going to predict if, when, how, this bull market comes to an end. I should say, I will predict that it will come to an end at some point. I think that’s a fact, right? Markets move in cycles. But neither myself or anybody else you’re ever going to talk to, or listen to, on television, on the internet, is going to be able to predict when with any degree of accuracy. Doug?

 

Doug Fabian:

Don, I want to make one additional observation. On the podcast this past week, I had the business analyst, Jill Schlesinger, for CBS News on. And we were talking about market cycles, and she made the observation that the longest bull market was the 1982 to 1999 bull market which lasted 17 years. That was interrupted by the ’87 stock market crash, which was a bear market of 33%, and it lasted for 90 days, from the high to the low, so it was a very quick bear market. But I thought that was interesting.

So when somebody comes and says that, “Hey, this bull market is going to come to an end,” we agree wholeheartedly that it’s going to come to an end someday, but trying to predict, and make an adjustment to your portfolio is a fool’s game, and that’s not how we go about managing money here at Mercer Advisors. We make sure we have your asset allocation correct, because more investors are missing out on returns, because of their previous predictions about what the market may do. And right now, all the indications are that the economy is performing better, and so we’re going to continue to stick to our strategies.

So moving on to the next question. I wanted to comment on the recent economic news about a slowdown. There was indications that we might be going into a recession. Can you share your thoughts, and how our investment teams are positioning our portfolios? And it goes back to my last point, but again, I wanted to be specific in answering a listener’s question. And how do we go about that, Don?

 

Don Calcagni:

Yeah. And I would say there’s two or three key things that you need to do as a client, as an investor, that we need to do as an advisory firm, to prepare our clients for the next recession. But first off, I want to reiterate. I can’t predict when the next recession will occur. I can assure you that we will have one at some point in the future. But markets are brutally efficient at quickly pricing in new economic information. And by the time you get home from work, fire up your laptop, or your iPad, and start reading about it, it’s way too late. Markets have already course-corrected, and have digested that information. So trying to trade on economic information is a fool’s errand.

And that’s why we see such really poor returns for so many average investors is because they get freaked out by the news media, or economic information, and they suddenly feel like they need to, quote, do something. And so we would encourage folks, that is completely the wrong way to react to economic or financial data. So what are the right ways to react to financial and economic data? Number one is have a plan, right? We’ve been harping on this since the beginning of the call, and it’s so critically important.

I mean, I’ve had the privilege in my career of working with some of the largest investors in the world, and I can assure you. They don’t invest a penny without first having a written document and plan in place, and when they do invest, they are looking at all of the different possible outcomes, recognizing that the investment is going to be volatile. Laura highlighted the Monte Carlo test. You should plan for volatility.

I was just at a conference in Canada, meeting with some of the largest investors in Canada, and before they invest a penny, they are analyzing the downside risk associated with those types of investments. We do that here at Mercer Advisors all the time. Your financial plan, when that’s done appropriately, is actually taking that into consideration. So plan for volatility, right? You know markets are going to be volatile, you know your investments are going to have downside risk, what do you do about it? You diversify globally. You don’t just own all stocks. You own stocks, you own bonds, right? You own other things. You diversify across those different factors.

That’s why our strategy is characterized as a multifactor strategy, by diversifying across different factors, and different asset classes, by diversifying across different countries, mathematically, you reduce the risk, you reduce the downside volatility in your portfolio. That’s just math. So those are the things we do to make sure that our advisors, that our clients are prepared for the next recession. What we are never going to do, and you’ll hear me say this right here, right now, is suddenly go into your account, and just start actively trading it based on a hunch, or some new economic news that we have, because that would be a breach of our fiduciary duty. That is not in your best interest. And again, we have lots of data to support that.

So what we do do, is we do rebalance our portfolios routinely, systematically. We encourage all of our clients. Meet with your advisor. Make sure you’re still in the right asset allocation. This goes back to the plan. If you know where you are today, if you know where you want to go, then from there you can solve, determine what the optimal asset allocation is for you. But more wealth is lost due to people trying to predict the future than anything else. And so I would certainly caution our listeners against trying to make adjustments in their investment strategy based on what some guru on television is saying, or based on economic data, or something like that. So, Doug?

 

Doug Fabian:

Question here on the national debt, Don. How may the national debt affect the stock market going forward? So your comments on that.

 

Don Calcagni:

Yeah. So my personal view, and I will disclose, I love that topic, it’s a topic that I pay extremely close attention to. But I will share that there are many economists, many of my professors from business school, who disagree with me on this, and so there’s a very healthy debate over how serious the federal debt is. My personal view is that it is serious, and it’s something we should pay attention to. So my view is that the federal government is the largest single borrower on Planet Earth.

And theoretically, there’s only so much money that’s available to be borrowed, and so as they borrow more of it, there’s less of it available for businesses and consumers to borrow. So it’s a bit fixed at any given point in time. That’s my economic philosophy. So as the debt rises, my concern is that’s going to put pressure on long-term interest rates. And if and when that happens, that’s going to make it harder for companies to grow, and if it’s harder for companies to grow, that hurts our economy, right?

So as we enter the political season, the one thing I would just highlight is keep in mind that business is what really fuels the US economy, right, because they’re selling things to consumers. We need healthy businesses to hire our children, to grow, to give us the benefits that we desire. So my concern is a rising federal debt will make it harder for companies and consumers to borrow. And it’s not that they won’t be able to borrow, it’s that the interest rate that they have to pay to borrow will be higher than what it would have been otherwise if our government had not borrowed so much in the market. So to me, that’s the impact, because it makes it harder for businesses to grow. It’s not impossible for them to grow, but it just makes it harder for them to grow. Companies that can’t borrow capital can’t build new factories, or so on and so forth. So to me, that’s the connection.

And again, to be fair to my naysayers, there’s other folks on the other side that say no. The US government can print its way out of debt, and to a lay person, that sounds horrible. It’s probably not that bad. We actually printed our way out of the financial crisis. We printed 4 and a half trillion dollars to fight the financial crisis. And to be candid, we see virtually no inflation. So I do want to pay some respect to the argument that says I’m wrong. I actually think they have a very good, compelling case that the government could print its way out of debt. That still makes me a little uncomfortable for certain reasons. So I hope that answers the question, Doug. I hope that paints a little bit of a picture.

 

Doug Fabian:

Thank you, Don. And Don, there’s a theme that’s running through a number of questions here, and I believe that this ties to the length of the bull market, it ties to people’s desire to want to sell high and buy low, and the question is this. Shouldn’t we be raising cash to take advantage of future buying opportunities when markets dip? I want you to go back over, Don, the importance of the strategy of rebalancing, and perhaps you can look back on the great year of 2017, and what we did in early 2018, and the same thing that we did in early 2019, in terms of rebalancing, because that’s exactly what we’re doing.

 

Don Calcagni:

Sure. Yeah. Rebalancing, if you actually understand, at least the way we rebalance at Mercer Advisors—and to be fair, I love those questions because those are the questions we ask ourselves—what should we be doing in light of where markets are today? And rebalancing actually ensures that you’re buying low and selling high. And so I’ll just give you a couple real world examples. We actually rebalanced our portfolios in late January 2018. I think it was right around January 30th is when we sold a whole bunch of stocks, millions of dollars of stock, and purchased bonds.

And it was several days later that we had what they are now calling the volatility flash crash. I know that our memories are short, but if you go back and look, February of last year was highly volatile. And we saw a couple of options-based funds and ETFs basically implode. Thankfully, we don’t invest in any of that stuff, really, at Mercer, so that really didn’t impact us, but we saw big market selloff in February. But that’s why we rebalanced. We had a big run-up in 2017, the stock parts of our models were overweight relative to where we really want them to be, so we sell stocks, we buy bonds, right?

So that was a real world case study. In November of last fall, during what was, arguably, a pretty volatile market, we did the opposite, right? We looked at our models and we said, “Look, our stocks are now underweight relative to where we want them to be, because we had a pretty steep selloff in stocks.” So what do we do? We sell millions in dollars of bonds, and this is across 50,000 accounts. We’re selling bonds, and we’re actually buying stocks. And those purchases now are positive quite handsomely.

And to be fair, it’s not like we were clairvoyant. I wasn’t predicting the market. I don’t know what the market’s going to do 10 minutes from now, or next week, or next year. But what we do know is systematically rebalancing our portfolio. Begin with a plan. As the portfolios breathes, and there’s changes, stocks grow, or stocks decline, you need to rebalance. And when you do that, that actually adds significant value to your long-term returns, and it also reduces risk, right? If you go back to the January rebalance that we did in 2018, that was a risk-reducing rebalancing, right? Because we sold a bunch of stocks, and we were buying short-term bonds.

And the opposite was true in November. If you actually look at that closely, hey, stocks were underpriced, right? So we were buying stocks. So that’s the rebalancing exercise, and it’s when you disengage from having a systematic approach, and you introduce human bias into the exercise, that you actually start to get really bad returns, right? Because humans just are not very good at sort of separating our emotions from the market. But systematic rebalancing is a very powerful way to manage risk, and enhance returns in your portfolio.

 

Doug Fabian:

A couple more questions. Laura, this one’s for you. The client is asking that they’ve seen numerous articles on the importance of maintaining an emergency fund. Some say three months, others say six months. Should this be in cash? And if so, what are the best places to park these emergency funds? Laura?

 

Laura Combs:

This is a great question, Doug, and I think the best place to park an emergency fund is somewhere where you can get it extremely quickly, in the event of an emergency. So for example, for some people, that might be just a checking account at their bank. Another person might have a savings account, or money market account.

But to me, the key to an emergency fund is the ease of liquidity. How quickly can you get that money out? And I would say to your point, too, or your question, Doug, on how much, that’s going to be a really personal question, depending on what each individual or family is comfortable with. And so that’s part of that financial planning process is determining is it one month? Is it three months? Is it 12 months? That you might need to set aside based on your current circumstances. That’s all part of what we’ll walk through. But I think something that you can get it out within 24 hours, be able to have your hands on that cash, and I would keep it very liquid in cash or money market for an emergency. Great question.

 

Doug Fabian:

Thank you, Laura. Well, ladies and gentlemen, that concludes our question and answer portion. A couple of things to leave you with. Number one, we will be posting this webinar online in the Insights section at merceradvisors.com. I have had a couple of people who have asked me about getting a copy of the presentation itself. We would want you to contact your advisor, Don will be delivering a PDF of this presentation to all advisors, and you can get it from your personal advisor here at Mercer Advisors, to get a copy of this presentation if you would like. So make sure you check out merceradvisors.com. And there are some additional resources out at Mercer Advisors. We have the Signs of Economic Freedom podcast. We have over 60 podcasts that are now posted on all kinds of subjects, and so I would refer you to the podcast section, Signs of Economic Freedom, there at merceradvisors.com.

And then lastly, I want to mention that we have some events coming up. Don Calcagni is continuing his national tour of Town Halls, if you have an opportunity, taking a look at some of the cities that are on the screen, to be able to see Don live. These are great events. We really enjoy getting face-to-face time with our clients. We certainly will be continuing our quarterly webinars in the future, and we do these after the close of the quarter when we get the data, so our next one will be in July, we’ll do another one in October. But please come out to these events.

So ladies and gentlemen, we want to thank you for your time today, it’s been great to spend this time with you, and we look forward to our next webinar. This is Doug Fabian, and for the Mercer team, thank you very much for joining us today.

 

 

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The information provided in this presentation is intended to educate and is for information purposes only. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an Investment Adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. This presentation is not a substitute for a client-specific suitability analysis conducted by you and your advisors. You and your advisor must determine the suitability of a particular investment based on the characteristics and features of the investment and relevant information provided by you, including, but not limited to, your existing portfolio, investment objectives, risk profile, and liquidity needs. Investments mentioned in this document may not be suitable for all investors. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.Investments are subject to market risk, including the possible loss of the money you invest. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control. Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning documentation preparation and other legal advice is provided through its affiliation with Advanced Services Law Group, Inc. The content is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

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