Broken Pie Chart

For years you've been told that to get better risk adjusted returns you should diversify with some percentage in stocks and some in bonds. Yet when you look at the inflation adjusted annualized returns, is the idea of a 60/40 portfolio to manage downside risk more of a myth? In this interesting conversation Derek Moore and Jay Pestrichelli discuss why bonds may not offer much of a real return given where rates are. Plus, they delve into whether a 60/40 portfolio offers better risk adjusted returns using classic measures like a Sharpe Ratio. Also, is gold still a modern hedge in portfolios? Stay tuned for Part II coming soon.

• • Exploring historical real returns on a classic 60/40 stock and bond portfolio.
• • How real returns after inflation are determined and whether historical bond returns offer much growth
• • Has gold been an effective hedge of downside moves and inflation given its periods of negative real returns?
• • Historical risk adjusted returns measured by Sharpe Ratios
• • If a portfolio of stocks and bonds is so good, why does it have theoretically subpar Sharpe Ratios?
• • What are TIPS (Treasury Inflation Protected Securities) and how do they hedge inflation?
• • Real versus Nominal returns for stocks and bonds
• • Why investors need to not only keep up with inflation but exceed it to grow purchasing power
• • How using options to define downside risk may be a more optimal hedge
• • Introduction to the concept of Buying and Hedging a market with a defined downside floor.

Mentioned in this Episode:

Contact Derek Moore www.razorwealth.com

The Hedgers Opportunity by Jay Pestrichelli https://www.investmentnews.com/article/20190401/BLOG09/190409991/the-hedgers-opportunity

Historical Gold Prices https://fred.stlouisfed.org/series/GOLDAMGBD228NLBM#0

How do Treasury Inflation Protected Securities TIPS work? https://www.thebalance.com/how-do-tips-work-417128

The yield curve has inverted. Well it did at certain points last December already. Now that the 3-month Treasury Bill yield went above 10-year yields, historically what does that mean? Has the yield curve inversion predicted every recession and if so how long in advance? Plus, calculated annualized returns doesn't need to be that complicated right? Learn the differences in annualizing using simple averages versus geometric compounded averages. Finally, how do you calculate a real inflation adjusted return?

• • Yield Curve Inversion: 3-month Treasuries yields higher than 10-year yields?
• • How long historically has yield curve inverted prior to recessions?
• • Difference between Fed Funds rate, Discount Rate, and IOER or Interest on Excess Reserves
• • What are real returns versus nominal returns
• • Why is it potentially bad for short term bond rates to be above long-term rates?
• • Why do people think yield curve inversions are bad?
• • How to calculate simple average of annual investment returns
• • How to calculate real inflation adjusted investment returns?
• • Geometric annualized returns calculation and use

Mentioned in this Episode:

Federal Reserve Bank of Cleveland Yield Curve article https://www.clevelandfed.org/our-research/indicators-and-data/yield-curve-and-gdp-growth.aspx

Podcast Explaining What Yield Curve Inversion Means https://www.iheart.com/podcast/269-broken-pie-chart-29878781/episode/what-is-the-yield-curve-inversion-29880275/

You'll often hear things like "The US Dollar is losing purchasing power". But what exactly does it mean when the dollar loses value? In this episode Derek Moore will explain how to calculate dollar purchasing power over time and how to adjust for inflation the costs of good and services. Plus, why inflation is so hurtful to investors.

• • How does inflation affect retirement investors?
• • How do you inflation adjust something?
• • Why a dollar in 1800 is only worth a little less than 7 cents today
• • What are real returns versus nominal returns
• • What was hyperinflation in Zimbabwe and Weimar Germany?
• • Average annual inflation over several time periods.
• • What is the CPI or Consumer Price Index basket of goods indicator?
• • Formula to inflation adjust current year dollars to a previous year
• • How to explain the loss of purchasing power in the dollar
• • Inflation adjusted costs of goods and services 1976 to 2016
• • Inflation adjusted cost of New York Yankees box seats in 1976

Mentioned in this Episode:

Federal Reserve Bank of Minneapolis estimated inflation from 1800 to 2018 https://www.minneapolisfed.org/community/financial-and-economic-education/cpi-calculator-information/consumer-price-index-1800

CNBC article comparing various costs from 1976 to today with purchasing power https://www.cnbc.com/2018/04/17/how-much-more-expensive-life-is-today-than-it-was-in-1960.html

Federal Reserve Bank of Minneapolis inflation calculator (bottom right of page) https://www.minneapolisfed.org/

Have you ever watched CNBC or Bloomberg and wondered what commentators are talking about with earnings and valuations on individual stocks? Derek Moore explains common financial metrics and ratios to help listeners become informed and how to interpret things like PE Ratios, Earnings, EBITDA, and more. Plus, hear what back testing is and pros and cons of it.

Key Takeaways:

• • What is the difference between top line and bottom line in an earnings report?
• • How to calculate what a company's market cap is?
• • What makes up the PE Ratio and how to calculate it?
• • Where to look to see how much debt a company has and its net interest rate on debt?
• • Dividend Discount Model versus Free Cash Flow Valuation
• • What is free cash flow of a stock?
• • Dividend payout ratios versus retention or plowback ratios on reinvested growth
• • What is EBITDA and what is amortization and depreciation?
• • What is backtesting investment strategies?
• • Pros and cons of backtesting

Mentioned in this Episode:

See stock earnings financials and ratios www.marketwatch.com

Podcast comparing hedging portfolios to efficient frontier portfolios https://www.stitcher.com/podcast/broken-pie-chart/e/58410386

In this episode Derek Moore explains the one benefit most investors overlook as a very important benefit of using a hedged equity strategy. The benefit of reinvesting avoided losses or hedging profits to pick up more shares while markets are lower.

Key Takeaways:

• • If you lose this much, how much is needed to get back to breakeven level?
• • Benefits of using a hedged equity strategy
• • How hedged equity can take out some guesswork on timing the market.
• • Explaining how monetizing hedging profits or avoided losses can buy more shares at market lows.
• • Expected returns depending on annual market return.
• • How avoided losses or hedging profits can bee reinvested at lower levels
• • What are the historical occurrences of market returns between certain ranges?
• • How reinvesting hedging profits potentially allows for more upside capture in market rebounds.

Mentioned in this Episode:

Jeremy Seigel "Stocks for the Long Run" book https://amzn.to/2GVctSC

Robert Shiller "Irrational Exuberance" https://amzn.to/2BNQGJf

Broken Pie Chart Book by Derek Moore https://amzn.to/2COXRAS

Podcast on hedging for protection https://razorwealth.com/why-investors-need-a-protective-hedged-equity-strategy/

In this episode Derek Moore discusses situations where investors might own a concentrated position in one stock or more with low cost basis. These present difficulties as selling would incur tax consequences however owning non-diversified positions pose significant single stock downside risk.

Key Takeaways:

• • What is a concentrated stock position?
• • What are the risks of single stock holdings versus diversified portfolios?
• • Tax consequences of trying to diversify low cost basis positions.
• • Explaining options to hedge the downside and build protection on individual positions.
• • Ways to hedge portfolios using beta weighting to design downside protection.
• • How avoided losses or hedging profits can bee reinvested at lower levels
• • How hedging profits can enable investors to diversify into other strategies.

Mentioned in this Episode:

Broken Pie Chart Book by Derek Moore https://amzn.to/2COXRAS

Podcast on How Diversification Can Fail When You Need It Most https://razorwealth.com/does-diversification-alone-reduce-systematic-stock-market-risk/

Podcast on hedging for protection https://razorwealth.com/why-investors-need-a-protective-hedged-equity-strategy/

In this episode Derek Moore discusses what Modern Portfolio Theory (MPT) and Efficient Frontier Investing means and how traditional investment risk rely heavily on standard deviation and variance to determine where a portfolio fits into a risk metric. Plus, Derek comments on how positive upside returns can actually increase traditionally used investment ratios like Sharpe.

Key Takeaways:

• • What is Modern Portfolio Theory
• • What is an Efficient Frontier Portfolio?
• • How is investment portfolio standard deviation calculated?
• • Easy ways to understand standard deviation using simple three-day temperature example
• • Explain what a risk adjusted return means in relationship to portfolio returns and volatility
• • Problems with traditional portfolio design especially given low bond yields
• • Why being long markets while being hedged may be more optimal for investors near retirement?
• • How Sharpe Ratio may get worse after strong upside market move.
• • Alternatives such as post-modern portfolio theory only considering downside deviation.

Mentioned in this Episode:

Broken Pie Chart Book by Derek Moore https://amzn.to/2COXRAS

Target Date Funds https://razorwealth.com/podcast-target-date-investment-funds-good-bad-or-just-misunderstood/

Modern Portfolio Theory (MPT) + Efficient Frontier https://www.investopedia.com/terms/e/efficientfrontier.asp

In this episode Derek Moore discusses the various ways the Federal Reserve through its FOMC committee utilizes interest rates, buying or selling bonds, and the banks reserve ratios to increase or decrease the money supply. Plus, when pundits on CNBC, Blooomberg, or Fox Business talk about probabilities of future rate decisions, how do they come up with those and where to find them.

Key Takeaways:

• • What are Fed Funds Futures?
• • How are Fed Funds Futures utilized to determine probabilities of future months interest rate decisions?
• • What is the difference between the Fed Funds Rate, Discount Rate, and IOER or Interest on Excess Reserves?
• • What is the Federal Reserve's Dot Plot and where to find this so-called Dot Plot?
• • Where to find current probabilities of the Fed raising or lowering interest rates by month
• • Why are interest rates important to the economy and stock prices?
• • Who makes up the FOMC or Federal Open Market Committee
• • How often are FOMC meetings held?
• • What is Interest on Excess Reserves (IOER)

Mentioned in this Episode:

CME Fed Funds Watcher Probability Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

FOMC Dot Plot Graph https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Tracking Changes to Federal Reserve Fed Funds Probabilities https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Effective Fed Funds Rate % Chart From Federal Reserve Bank of St. Louis or FRED https://fred.stlouisfed.org/series/DFF#0

FOMC Meeting Calendar https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

In this episode Derek Moore is joined by Jay Pestrichelli, Founder of ZEGA Financial and author of Buy and Hedge: The 5 Iron Rules For Investing Over the Long Term, to discuss how if a bear market materializes clients using a hedged equity strategy have already planed for it and have defined downside floors in portfolios. While not predicting themselves what markets will do, Jay and Derek discuss the features and benefits of limiting downside, participating in the majority of the upside, while having the ability to reinvest at much lower levels should the market selloff materialize.

Key Takeaways:

• • How investors using a hedged equity strategy are prepared for a bear market should it materialize
• • What is a hedged equity downside limiting strategy?
• • What is the difference between an investment strategy that has a downside buffer versus a downside floor?
• • How the risk profile is swapping equity risk and volatility for fixed income (bond) risk
• • Why people with hedged equity strategies might want the market to continue down
• • How a good hedged equity strategy avoids losses and has ability to reinvest those avoided losses in more shares
• • How hedged equity strategies give investors piece of mind and sometimes called the "sleep at night portfolio"
• • The difference between holding short duration bonds to maturity versus longer maturity dated vehicles
• • Hedging not only the equity portion but hedging the hedges when it comes to high yield
• • Comments around recessions and how sometimes the crowd is wrong when everyone says there is going to be a recession
• • How using hedged equity strategies like "Buy and Hedge" can reduce fear about investing at the wrong time in markets.
• • How the fixed income portion of the portfolio has been performing in 2018

Mentioned in this Episode:

Article by Jay Pestrichelli "This selloff is what you prepared for" http://zegafinancial.com/2018/12/18/this-sell-off-is-what-you-prepared-for/

Article by Derek Moore "Buy and Hedge Fixed Income Update" http://zegafinancial.com/2018/12/14/buy-and-hedge-retirement-fixed-income-update/

Broken Pie Chart Book by Derek Moore https://amzn.to/2MibTSk

Welcome to the Broken Pie Chart Podcast Episode 15. In this episode Derek Moore discusses the often-misunderstood target date funds prevalent in many workers 401k accounts and whether they are a good or bad idea especially given their drawdowns during the 2008 financial crisis.

Key Takeaways:

• • What are target date funds?
• • How did target date funds do during the 2008 market?
• • What was performance so different between some target date funds during financial crisis?
• • What is the purpose of target date funds in retirement accounts?
• • How target date funds are really just age-based asset allocations adjusted as a person ages.
• • What are the drawbacks of target dated funds?
• • Why are target date funds so misunderstood?
• • How do target date funds compare with college saving accounts and 529 plans?
• • How target date funds do not take into account outside assets when making allocations
• • Understand why target date funds may not allow for more personalized advice
• • Did Congress really hold hearings about target date funds post the Great Recession?
• • What is the target date glide path and asset allocation adjustment schedule?
• • Target Date funds do not have embedded downside protection
• • What are alternatives to target date funds?
• • What was the target date surprise?

Mentioned in this Episode:

Broken Pie Chart Book by Derek Moore https://amzn.to/2MibTSk

Report From Committee on Aging Congressional on Target Date Funds

https://www.govinfo.gov/content/pkg/CPRT-111SPRT53067/html/CPRT-111SPRT53067.htm