Why Pensions Underperform and What You Need To Know For Markets This Week

0:00Welcome back to 15 minutes of finance. My name is Brandon, I'm a CPA and I'm going to help you keep more of your money. My name is James and in the next 15 minutes I'm going to get you excited about investing. Let's do it. Alright, alright, alright, we are back at it again. We got another episode of 15 minutes of finance and boy, we got a lot of rumors, we got a lot of news, we got a lot of cliff jump and mountain climb and all types of things with the market. What is actually going on? Guys, we have a term of the day today. We don't have a quote, we don't have some jamesism. We have a term of the day and I was thinking about this because we have a couple of nonprofits that we work with, churches, 501 C3s, etc. Managing their assets and like, what does that look like? In any time I go into a, let's say it was like a unit, well,

1:00I'll just give you a sample. So say it's a university endowment fund. Okay. And they hire someone like me to come in and basically either give them a second opinion, update their investment policy statements, something called IPS or pick the managers, right? Pick the funds, pick out how the endowment in general, the money that is given is allocated. And usually these funds guys, almost universally I've seen are way over diversified, massively over diversified. We're talking 50 to 100 different things, credit default swaths, private credit, private debt, real estate, real estate investment trusts, DSTs. What else? There's private equity. We got hedge funds, we got all types of stuff. And the reason that these funds don't really do well is because of all that diversification. There's way too many wheels on the vehicle going in different directions when really all you want is a steady

2:05upward trajectory. And that is called absolute return. So I'm going to read that for you, this definition here. What is absolute return? Absolute return measures, the gain or loss of an asset. Oh, excuse me, absolute return measures, the gain or loss and asset achieves over a specific period, focusing solely on its performance without reference to a benchmark. Unlike relative return, which compares results to other assets or indices, absolute return evaluates the assets own value change. This approach is widely used in hedge funds and other non traditional strategies that aim to generate positive returns regardless of overall market conditions. Now, this is important because really all you're trying to do is in every whether the market is up 20 or the market's down 50, you want to be plus one or plus point one technically, you want to be positive. That's what absolute return on a investment performance basis means. Now, I will tell you a lot of the hedge funds that I've, excuse me,

3:05a lot of the endowments that I've seen or munifuns, municipal funds, city funds, they all do horribly, horribly, they perform bad when the market does well and they perform bad when the market does poorly. And the reason for that is as they are all over the place, all there's 50 to 100 different investment vehicles in their fund. Okay. So whenever I review these these policy statements and I'm making manager recommendation, I'm on I'm in a room with a board of, I don't know, I mean, whenever I did it for whenever I had this conversation with a city in Arizona, whom who's shout-out being named, but they're fun, their retirement funds have done horrible over the last 50 years, by the way, horrible. Some of you listeners live in this city. They PhDs, mathematicians, like not Nobel Prize winners, but like very high up, mathematician, PhD in finance, masters in finance, very educated people on the topic, but on an application side of

4:15things they are about as green as it gets. And I'm in this room with them and I'm asking them, I'm like, well, why do we got credit default swaps in a 6% allocation? What are we doing? Why are you getting a negative 4% in a year? The market is doing 20. And like the overall answer is, well, we don't want to lose money or we don't want to be overexposed or we don't want to be at the mercy of what the market does. But the problem that occurs, they could have just put it into a 5% treasury, 30% year treasury and gotten absolute return. Okay. But instead, they're paying massive fees on all of these investment products, two managers to people like me to re-up their investment policy statement, to check the managers anyways, to see if they're on track with what they're supposed to be getting. And then on top of that, a lot of these people give themselves bonuses and years that these pensions and funds do, they do horrible. And I was just thinking about

5:16how much simpler it would be, where if we got all these hands out of the pocket and we just tried to make it as simple as possible, all these pension funds wouldn't be having such a bad wrap. Right. Pensions universally are, or well, they're kind of coming back, but in the last 10, 15 years, everyone has been looking at these pensions, being like, you guys haven't done well at all. What is the point of hiring all these managers? And the issue is that they're seeking absolute return and they're not able to even get it, which is crazy to me. It's a total, it is a 180 of what you think it should be. Anyways, that is absolute return. A major issue in the pension and down at nonprofit sector. Fun fact for you guys, in case you wanted a little drama behind the scene of what's going on. Okay, let's get to the news today. We had a lot going on this week. I got a lot of opinions, but also nothing that's certain. I don't have confidence in any of my opinions this week. And the reason for that is, is two weeks ago, I would have told you, I thought

6:20rates were going to stay the same. And now I'm like, wow, man, that kind of do they have to raise rates? And like, that's good for stocks in the short term, bad for them in the long term. What is it? What are we even doing? All of this economic variability and volatility, it is messing with the overall potential of markets. And it's a good thing. And the reason it's a good thing is because that means there's opportunity. There's opportunity. Remember, anything that takes away from a stock or an indexes share value price, so to speak, that's not actually inherent to the company underneath doing poorly or doing well is almost exclusively a buying opportunity. Okay, remember that because it's outside factors. All right, let's read the news. Stocks surge Friday finishing the week lower after a closely watched inflation reading. Mashed expectations and oils fell. Sorry, I typed

7:20reading twice. I'm doing a lot of things, right? Mashed expectations and oil prices fell. The blue chip Dow Jones industrial average tech focused NASDAQ and Benschmark S&P 500 finished up a respective 1% 1% and 0.9% with the Dow adding more than 500 points. As the indexes broke four session losing streaks, the S&P's communication services consumer directionary and information technology sectors led the advances with HULIP Packard enterprises HPE and Dell Technologies DLL, logging double digit jumps, the Dow and S&P 500 and NASDAQ finished down a respective 1.6.8 and 0.7 for the fourth session for the four session trading week before the opening bell Friday the CPI reading for August, the final major economic indicator before the fed's two day policy meeting next week indicated that August's consumer prices rose 3.4% year over year matching economists expectations and the July figure. Core CPI which stripped out volatility food and energy prices increased 2.4% down from 2.5% last reading and matching estimates. The CPI rose

8:270.4% month over month also matching expectations while Core CPI rose 0.3% hotter than the 0.2% traders now see an 87% likelihood that the fed will raise rates next week up from 69% before the data landed. According to the CME Group's FedWatch tool, the 10-year treasury yield which serves as a benchmark for a wide range of interest rates including those for mortgages, corporate bonds and other loans was above 4.97% up more than one basis point from Thursday's close. Overnight the yield hit 4.98 it's highest in today level since crossing 5% in October 2023. There's no guarantee that the fed will hike rates next week but it's hard to see how the central bank can justify leaving rates unhold. Chris Zacharelli, chief investment officer for North light asset management said in written commentary what is more interesting as whether the stock market shakes off the threat of higher interest rates and continues to rally in the face of rising oil prices. Higher short term rates and even higher long term rates. Oil prices pulled back Friday but remain elevated with seemingly no imminent end to US iron fighting and a fully re-opensated

9:31form of moves. US benchmark West Texas Intermediate prices declined 1.8% to 100-spot 60. And Brent crude futures the international benchmark fell 2.5% to just below 105. All of the magnificent 7 mega cap stocks but Nvidia finished higher Friday the Round Hill Magnificent 7 ETF ticker M.A.G.S closed up 1% Memory and Chip stocks rose after following Thursday with the Round Hill Memory ETF ticker DRAM and the broader eye share semiconductor SOXX up nearly 1% and 2% respectively. Okay well let me talk about Bitcoin Bitcoin was trading at 77,400 up slightly over the past 24 hours and the US dollar index which tracks the value of the greenback against a basket of foreign currencies ticked higher to 99.11 and gold futures slipped 0.4% to 4,390. Okay what do I think about all this stuff? Honestly again I don't really think

10:32anything I don't think anything about it. We have we have midterms coming up the current administration needs the market to do well so there is a little bit of qualitative reasoning to think that the market will at least hover if not surpass all time highs and then on the other side of things I mean inflation is it's a problem and I don't care what anybody says it's a problem prices are getting more expensive I went to get a pizza the other day goes against my diet shouldn't be doing that but I wanted a pizza I went I would try a new place called pizza guys so I'm gonna throw pizza guys under the bus large pizza one pizza no dips just pizza pepper only pie 31 dollars and I remember whenever I was a kid 14 years old 14 years old in the summer I found 20 bucks around the house found and I would buy a large stuff cross pepperoni pizza from

11:32pizza hot for nine dollars or maybe it was 11 bucks but I I don't he said it was it was way less it was a third of the price of what I had to go that had it delivered to me and what it would have cost for me to go pick up a pizza guys now so it's a real issue and everybody is going to feel it and what I mean by everybody is going to feel it is that the bottom 80% of people are going to complain and make it miserable and start buying things on credit or excuse me continue to buy things on credit which is therefore going to increase the credit issue that we already face multi many trillions in credit card debt then once that once those things start to default banks and issuers were will stop issuing credit so now lending will be on hold and if that happens they have to lower rates but it will be to lower rates to encourage banks from offering loans excuse me I felt the sneeze coming on if that happens that's going to be bad

12:34for everybody that's going to be very very bad you want interest rates to drop strictly because things get more expensive not because the debt you well you want people to stop buying things because they're expensive but because credit card companies have been so eager to increase limits and be willing to give everybody anybody and anybody alone here what's going to happen is now whenever they should have stopped buying things they're saying oh well we have an extra 3000 on our credit card let's just keep living the way we're living and figure it out later well once that gets reached now there just will be no money to be loaned out they'll just stop doing it because people are going to go in the default they're going to they're going to realize that hey there's no more money now to pay to pay these credit cards we'll just now we'll stop and so you're like it's like taking something to the max and then taking it to like 120% and once you get to 120% it affects the rich it affects the poor it affects the businesses it affects everything and that is what I'm waiting for

13:39right so I still don't think we're there I still think there's going to be people aren't necessarily changing their lifestyles right now that's already hard enough to save money but they're still saying I'm going to live I'm going to go out to eat I'm going to order Uber Eats I'm going to get a car on on a loan they're they're doing all these things still it's still happening when that hits its peak or close to its peak that is when I would say you want to have cash on hand and we're close it could be 18 months or now could be 24 months or now maybe this AI system is way better than we think it is and there's not really a gap because the AI services create so much margin for these companies that they're still able to all the banks will make money off of that side of the loans off of off of their their corporate interest and then they'll like well we'll keep we want to keep we want to keep this keep the party vibe going so we'll increase limits again and we'll we'll consider expanding uh the individual side of the credit issue unlikely I think we're going to have a boom with this

14:45AI spend and either during after or within the next 24 months we're going to see a massive massive mandatory mandatory increase in rates because they want people to stop borrowing money and then once that happens then they're going to rapidly drop rates and once they rapidly drop rates the same thing is going to happen it's just going to happen slower okay just like in 2008 when they were offering mortgage-back securities to people who they shouldn't have been doing that or they they shouldn't have been pooling all of these terrible mortgages they shouldn't have been offering mortgages to people who couldn't afford them and how now it's taken about 20 15 to 20 years since 2008 uh for this stuff to catch up now it's just going to happen again and that's what's beautiful about the economic cycle is history does not repeat but it does rhyme and it is very trackable excuse me so for your investments right what what is what does any of this mean it

15:47means for me I like taking profits probably not going to do it this year I'm probably looking in the next year I really want to see what this AI I really want to see more companies than Airbnb or Chipotle or um it's not Chipotle I don't know why I said Chipotle they are absolutely not doing well Nvidia volunteer these companies with extra excellent margins that's happening because of this AI data infrastructure buildout I want to see I want to see staples I want to see bring her international I want to see AT&T I want to see infrastructure companies consumer food companies really benefit from from this margin compression that we're going to see or excuse me this improving of margins from the man I what's going on with me uh I want to see it affect the rest of the of the market here and see what happens and when that happens

16:48then it's going to be an absolute flood into them it's going to be insane it's going to be insane so you have to decide as a as an investor do you want to take your profits because we've had crazy profits over the last four or five years or do you want to play the game knowing that in five 10 15 years any market crash that doesn't have to do with the underlying fundamentals of a company of a company successor failures is temporary you have to make those decisions for yourself and I have to make those decisions for our clients and so I am probably my path is probably going to be anything from here on out above 10 percent I might take 5 percent off the top now it'll obviously it depends on if they're an attachable account or qualified account or you know or whatnot there's going to be a whole bunch of considerations but taking profit and moving to cash and then say there's another 5 10 percent drop and you put that money back in you really only have to do that over the hist over over someone's life once or twice I mean seriously once or twice like think about 2001

17:50okay if you sold in 2000 because you said I think this internet stuff is it's it's overblown it's over expensive or it's overpriced I made a bunch of money I'll just take out and hold on cash and then a year after 2001 dot com crash happened you said okay I'm ready to get back in just that process of waiting would have made you millions of dollars now so you really only have to do that kind of people call it timing the market but it's really not timing the market it's controlling your emotions okay it's being in control of your emotions and not being a gambler being a gambler is one of the ish the most difficult things it beat not being one is very very difficult so being able to say hey I'm just gonna take five or 10 percent I made a lot of money here I mean it's what is the saying um two in the hand one in the hand is worth more than two in the bush that's just a very very true statement and if one or two times in your investing life you can keep one in the hand and maybe I'm saying that wrong but you get what I'm saying if you can do that it's going to be

18:56massive massive massive for your overall net worth portfolio wealth building whatever it is all right guys that is it I'm over my time I hope you learned something today invest early invest often see you next week