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  • Joe Cardello

The Wisdom to Know the Difference

May 19, 2022


Anxiety: As all our clients (hopefully) appreciate, we spend a good deal of time understanding their risk tolerance. For us, that means a lot more than ticking boxes on a survey. We want to understand you as a person, your standard of living, what is important to you, and what makes you anxious.

Anxiety can stoke fear, and although the feeling is a genuine human response and survival instinct, it is rarely a reason to make a decision in a moment of panic when your survival is not truly in jeopardy.

Social Media / News vicious cycle: The more you crave stories about abortion, guns, war, atrocity, politics, inflation, recession, etc., the more you will be fed! You are what you eat, and in today’s social media driven world, companies know what you eat, and they make money by reinforcing your fear (feeding you more of the same stuff)!

My advice: watch cat videos or funny dog videos if you must be on social media.

How does your life improve by focusing on “current events” fed by social media? How do you improve the lives of others by increasing your own anxiety and outrage?

My guess is that it will not improve ANY aspect of your life.

But, some people say to me: “Joe, how can you stick your head in the sand and ignore the problems of the world?” To which I answer, the problems have always been there, and they will always be there. Do the best you can with what is within your control. You must preserve your energy to focus on what matters.

The most difficult part of my job in managing portfolios is having to absorb all the stimuli and read all the news to understand how facts and evidence is changing. For me, it is part of my job. However, I meditate to allow me to use the information, formulate a plan, and let it go. There is nothing new under the sun; hence I try hard not to become attached to the information; I use it to understand what is driving the psychology of politics and markets and put plans into action.

A good saying to use for religious and non-religious alike:

Grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.

What can you control?

  • Assess your situation: goals, risks, desires, interests, etc.

  • Understand the environment and biases.

  • Develop a plan to achieve goals and deal with uncertainty.

  • Adjust actions when the evidence changes.

  • Feel your emotions and let them go. They are just feelings.

What we are thinking:

  • Uncertainty is still high (particularly on China and Russia).

  • Although the rate of inflation is going to slow, it will likely remain high.

  • The Fed will likely keep hiking interest rates.

  • The government is unlikely to provide new stimulus.

  • Risk of slower growth and possibly a recession.

  • Corporate margins will likely compress.

How much of the above is reflected in equity prices?

  • It is unclear because there is so much uncertainty, but as you know many companies are trading at significantly lower prices than they were at the start of 2022.

  • The question is whether current prices are low enough to justify increasing equity exposure.

  • There are some companies with attractive free cash flow trading at significantly lower prices.

Are interest rates high enough?

  • We have been very cautious on fixed income exposure in the past because you were not getting compensated for the risk of inflation and the Fed raising rates.

  • Now that rates are much higher; is it enough? That will depend on:

o How quickly growth slows. o At what level the Fed stops raising rates.

o Corporations’ ability to service debt.

The US Dollar has increased in value considerably this year, will it continue?

  • US interest rate increases pushed up the value of the dollar versus most world currencies.

  • As investors reduce risk, they convert to cash, causing more dollar buying.

  • Does this provide attractive entry points for Gold, international companies, and fixed income? That will depend on:

o Where interest rates go in the USA relative to the rest of the world.

o At what level the Fed stops raising rates.

What are we doing? We started 2022 playing defense by reducing our equity exposure.

We have reduced equity exposure slightly in the past two weeks:

  • Although sentiment indicators are negative, we are hearing many investment advisors and individual investors say: “buy the dip” and “the market always comes back.” That approach is not really a strategy; it is more of an observation of recent history. When interest rates are higher, volatility of riskier assets tends to be higher, and where you invest can matter a great deal to your overall returns. Even though it may be true over the long term, if prices continue to fall, I suspect many people with that approach might sell when they should be buying. We need the ability to buy when others will be selling. Hence, we are still on defense due to the uncertainty above.

  • Even though we are defensive, we are long term bullish on the US and global economy. We hope this will give us more opportunity to invest in assets that will allow us to capitalize on changing conditions and protect purchasing power of portfolios over the long term.

How we think we should do this? We generally stayed away from growth companies without earnings and long duration fixed income because a rising rate environment creates enormous challenges. This is because long duration assets will now be competing with earning a fixed rate of interest with more certainty and lower risk. To simplify, if long term growth of my equity portfolio is roughly 7%, but now I can earn 7% with lower volatility (lower risk) than equities, I am going to reduce my exposure to equities.

As interest rates rise, that provides a certainty of cash flow, and that is attractive to anyone as long as it covers your purchasing power loss to inflation. This is why we suggested to you to purchase I-bonds at over 9%. You are buying US Treasury securities where your principal is protected, and you are getting a US Government guarantee of over 9%. The US Government limits you to purchasing $10k per person.

Given these limits, we are here trying to help you achieve your goals by:

  • Keeping some tactical cash available for opportunities that seem likely to arise.

  • Looking for companies that we believe can produce free cash flow, which are protected from margin compression, and that are trading at attractive prices for that cash flow.

  • Increasing fixed income investments that are now offering more attractive rates of return.

  • Continuing to allocate to sectors we believe provide inflation protection long term.

  • Diversify your portfolio across asset classes, within asset classes, across geography and over time.

What can you do to achieve your wealth goals in the future?

  • Focus on your talents and get someone to pay you for them.

  • Save a large portion of your earnings.

  • Invest the savings and let diversification, time, and compound interest work for you.

If you are retired, what can you do to achieve your goals?

  • Focus on how you want to spend your time and forecast what this will cost.

  • Have an investment plan in place for enough income/growth in your assets to cover your spending through diversification and compound interest.

  • Ensure this portfolio will last throughout your lifetime.


Lastly, if you have anxiety about the valuation declines in your portfolio or any other life issue, my advice is to ask the following?

  • Are you doing your best with your talents and abilities?

  • Are you keeping yourself balanced and healthy?

  • Will you be well served with a reactionary decision driven by emotion, or will you be better off with a plan?

  • If you are looking at your portfolio and/or social media, why are you looking? What will you do with this information?

  • Are you focusing your time and attention on what really matters to you in the long run?

  • Are you taking the time to look around at the beauty of springtime?

How lucky we all are!


Thank you, Joe Joseph Cardello, Principal August Wealth Advisors, LLC 51 Riverside Avenue, First Floor Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477

jcardello@augustwealthadvisors.com

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