Q&A: Frequent Portfolio Concerns

Q&A: Frequent Portfolio Concerns

Phillip Neuhart, Director of Market and Economic Research

T. Penn Nugent, CFP©, Director of Portfolio Strategy - Personal

Amy: Hi, I'm Amy Thomas, a Strategist here at First Citizens Bank. On April 5th, 2023, our Director of Market and Economic Research, Phil Neuhart, sat down with Penn Nugent, Director of Personal Portfolio Strategy, to talk about some of the more frequent concerns we're hearing from clients. By the way, the information you're about to hear are the views and opinions of First Citizens Bank and should be considered for educational purposes only.

Phil: So Penn, thank you so much for joining us today. We wanted to take this time, really you know, an interesting time in the market to hear what your team is hearing at the client level. What are people saying in the marketplace? So we, look, we had a really volatile 2022. And so far this year, we've seen a bumpy ride. Stocks are up, but whether you look at fixed-income or equity markets, certainly quite a bit of volatility, something Brent and I have talked about. When you think about a Fed that's hiking, you think about downward earnings revisions, now, concerns within the banking sector. That drives volatility. What are you hearing from clients relative to that volatility?

Penn: Yeah, well, thanks for having me. Phil, the team that I work with works with our personal clients, as you know, across the footprint. And we hear great questions all the time. But specifically, when we have a lot of volatility like we've had over the last 18 months, we get a fair amount of them where there's concern. And so we spend a lot of time reminding people and going back to the foundation of what we've done in the planning—planning for their financial goals, their objectives, understanding the risk and the time horizons. Because normally that was done in a time when the noise and the volatility wasn't in the space. Right? And so we're able to have real conversations and then show them and remind them that, hey, what's happening in the market today we, we actually planned for. We tested against it. And we said to you at that time, "This may happen, but we're going to be okay." And so that's how we start those conversations. We also go into more around our process and reminding them about that, we have a strategic allocation that's designed for these types of things and that we're making these tactical moves as needed given what the Capital Management Group is projecting and seeing in the future. So I think it's a very healthy reminder to go back and kind of just get back to our core foundation with our clients.

Phil: Absolutely, so if we bring it down to sort of a real client-type example in an extreme circumstance, a client—you know—at the depths last year, the lows or even this year says, "Look, I'm watching the news, I'm concerned about headlines. I might be down, but I really just want to go to cash. I want to exit the market." And what does your team say when they hear that sort of concern from clients?

Penn: It's a conversation we have sometimes. The fortunate reality is we don't have it a lot because we're trying very hard to make sure people are prepared for these types of moments. But we remind them of just, we use reality. We use, we use examples like the S&P 500 right now, today. If you think about the S&P last year, it was down about 20 percent. If you were in the third quarter of last year, you were down in the teens and you were thinking this, this is not going well. I might want to go to cash, or I might want to limit my exposure, but that would have been the exact wrong time to do it because in fact, we now know that the fourth quarter was positive. And we know that the year-to-date numbers on the S&P for 2023 are high single digits, not just in the S&P but in most asset classes. And so when you think about more of the longer-term exposure, which is what we are planning for, the annualized return for the S&P over the last 3 years is high teens. It's almost 20 percent. That includes a pandemic. That includes a 2022 where we were down almost 20 percent and yet the longer-term client, the longer-term exposure and investing, has done quite fine, quite well. And everyone's achieving a financial plan if you're getting high-teens returns. No one has a plan that requires that. So we're in a good spot if we can help people get away from the short-term distractions and convey a lot of the messaging that you and Brent do in your monthly webinars and whatnot. We try to stay very focused on long term—what our expectations are and why our portfolios will be successful through volatile times like they are today, as well as the easier times that we hopefully expect in the future.

Phil: So what I'm hearing is, look, stocks are volatile. It's the nature of the beast that, that's been the case historically and into the future. But really, it's not about looking at the last 3 or 12 months. It's thinking longer term, having a plan and sticking to that plan.

Penn: Absolutely, that's exactly right.

Phil: You know, something that's changed in the marketplace really since early last year is yield. There is now yield in the fixed-income market. What's interesting is if you look through the end of 2021, the stock market returned over 16 percent in that prior decade. Right, that's way above the long-term average. Even if market really has good return the next 10 years, unlikely necessarily to repeat that. At the same time, we are getting some yield. So now when you think about the balance between stocks and bonds in a portfolio, fixed income is more competitive than where we were when the 10-year treasury was yielding half a percent in 2020. What are you hearing from clients in terms of interest in fixed income? And think about that balance between portfolios now that we're in a world where you were actually compensated for owning fixed income.

Penn: One of the things that we're hearing from clients that is completely different, as you've indicated, in a yield environment that we're in today versus where we were, is that, "Hey, I've got two different things I'm thinking about. One, I'm thinking about what aspect of my fixed-income portfolio is now actually generating return, and what can we do about that? That is one, might I want to change the way that's allocated because I can actually get more yield and maybe potentially take less risk. Two, maybe before I was a little more overweight equities and because I was trying to compensate for something, which I believe fixed income was not going to be able to return for me, which now it can." And so a lot of interesting dynamic questions around that. But even more maybe germane to what's going on even this year, is now that we have higher yielding alternative investments for someone like, say, that had money in a cash checking account or a money market account, what are the things that we can do with that money and try to keep up with inflation? And so we do have great solutions for folks where we are talking to them about, "Hey, I, you know, I've just sold a business and I have cash on hand, and I need it here for maybe 3 years. I don't want to expose it to equity markets, but are there things I can do to get yield?" And the answer is, yes. There's a lot of stuff now that we can talk about where we couldn't before.

Phil: Really, what I'm hearing is. But, TINA, there was an alternative from stocks, right. Other than stocks, I should say, and then now, there is some interest and some opportunity within fixed income, which is good to see, particularly where you talk about lower risk assets to finally get some return in a lower risk asset.

Penn: Absolutely, and what's been, always been, you know, if you think about inflation and the impact that has on assets where you aren't able to commit to the risk, I don't need to put those in equities. I can't afford that exposure. Now, we do have things that we can generate some yield in a very safe environment and give you the opportunity to at least try to maintain some of that purchasing power.

Well, Phil, thanks for letting me be here and talk about a couple of the questions that we're hearing that are so common from our clients and I really appreciate the opportunity.

Phil: Thank you for your time and thank you for joining us.

Q&A: Frequent Portfolio Concerns Outro slide

T. Penn Nugent, CFP© | SVP, Director of Portfolio Strategy - Personal

Wealth Management | First Citizens Bank

FCB Mail Code: FCC-116 | 4300 Six Forks Road | Raleigh, NC 27609

penn.nugent@firstcitizens.com | 919-716-2445

Phillip Neuhart | SVP, Director of Market and Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

phillip.neuhart@firstcitizens.com | 919-716-2403

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