Chad Taylor:

Hello. My name is Chad Taylor, Managing Partner with MDT Financial Advisors here in Houston, Texas. Today I have Candace McCormack, Financial Advisor here in the office with me as well. We wanted to quickly go over a chart that we saw that we kind of found interesting today. Candace.

Candace McCormack:

All right. Good afternoon everyone. Thank you for hopping on.

Today the chart that we're going to share with you is called the Diversification Dilemma. If you've met with your advisor or talked about your portfolio, I'm sure you've heard the word diversification. What that means typically when we're talking about a portfolio is how are we diversified between equities and fixed income? For today’s conversation we wanted to define Asset Allocation and Diversification.  Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio.

The example we're going to show you today is about a 60% equity, 40% fixed income portfolio. What the diversification dilemma that we're talking about today is what happens when bond prices fall and stock prices fall at the same time?

Normally in a balanced portfolio, we hope to reduce volatility by having exposure to fixed income and provide some risk-adjusted returns based on your allocation and how aggressive you are. But what we're looking at here, the chart you see, is the performance annualized returns of a 60/40 portfolio. What you see here is that over the last 95 years, stocks have been down 32 of those 95 years. So 32 out of 95 years, stocks have been down. Bonds have been down 14 of those years. But of the 32 years that stocks were down, bonds were only down during five of those same years. So there have been five years over the last 95 years in which stocks and bonds have been down, and that's the dilemma that we're seeing right now.

2022; bond prices are down, stock prices are down. We've had some poor performance. One of the biggest indicators of what's going on is how high inflation has gotten and the response by the Fed of raising rate rates so quickly at such a high number compared to historically how that's been done.

Chad, I'll pass it back to you.

Chad Taylor:

Thanks Candace. In my career, I haven't seen anything like it. Really, no one has. In 2008, you saw something similar. If you remember from that chart, there was a pretty rough drawdown on those, but it was very quick versus we've been dealing with this all year long, and this is probably, and the chart shows, the worst time since 1932. So no one's really experienced anything like this.

What will happen going forward? I think the Fed's meeting right now, but tomorrow they announce their rate hike. Probably going to raise rates again tomorrow. Then they have one more meeting before the end of the year. And they're still trying to combat inflation with what they're doing on rates.

As we always talk, what do you do? In some cases, making changes make sense. In some cases, not making changes makes sense. It's specific to every client. So if you have questions, if you are getting nervous, let's sit down and talk about it. If you haven't done your strategy and review meeting, let's do that. Let's do that sooner rather than later. Even if we have done it recently, let's do it again.

I appreciate Candace you hopping on with me today. If you have any questions, let us know. I hope you have a great day. Thank you.

Candace McCormack:

Thank you everyone.