Partners Kate Campbell King, CFP® and Brian Kozel, CFP® sat down to discuss the current state of the financial markets, the difference between trading and investing, and the power of donor-advised funds. Listen to their discussion to find out more, or read the transcript of their conversation below.



Recording Transcript


Thank you for joining us for the North Berkeley Investment Partners’ fourth-quarter market update. I’m Brian Kozel, partner and lead advisor at our firm and I’m joined today by one of our founding partners and current chief investment officer Kate Campbell King. Today we will recap the markets, share our perspective, and review some of the questions that we’ve heard from clients over the past quarter.

If you’d like to have a conversation about your specific portfolio please contact your advisor and we look forward to talking with you. And with that, I’ll turn it over to Kate to get us started.

Trading vs. Investing

Thanks Brian.

You know the primary thing that I thought we should talk about today is something I’ve observed in the news recently. And that is that the media when they report on the market, when they report on the economy, report on what’s going on, their focus is really on trading rather than investing. They talk about how a particular stock is behaving on a particular day – might be because they’re reporting earnings or there’s been some other news about the company – and they talk about a good time to buy or is this a good time to sell. They’ll talk about currency markets or China trade war all with an eye to what should you be doing, what should you be trading.

You know for us we’re not interested in responding to short-term news cycles. We know there’s a lot of noise in the price of stocks. And you know if you’re going to be active with stock trading it’s not likely to be very beneficial for your portfolios. Actually on that point, we were just talking about a 2011 study that was done on exactly that, on how much value do you create by being more active in the markets.

There’s actually a study done on these sorts of behavioral patterns and resulting performance by two professors, Dr. Brad Barber from UC Davis and Dr. Terry O’Dean from our very own UC Berkeley. They looked over a five-year period and the conclusion was that the 20% of traders that were most active were outperformed by more than seven points per year by the 20% of traders that were least active which gives more credence to the slow money buy-and-hold approach.

That is how we think about investing and I bet the difference in seven percentage points was that significant because the active traders were actually negative. So yeah interesting. In terms of the way that we structure portfolios we work with managers in some cases who are replicating an index that’s very diversified where we want exposure to a broad group of companies very low turnover and in other instances where we do have an active manager but they’re not active traders they’re active investment managers and I think that’s really a crucial piece of the way we put that portfolio together.

The way that we handle repositioning it really is through rebalancing. What rebalancing does is when the markets have gotten very high or a particular area of the market or asset has gotten to be very highly priced we sell a little bit of it. We’re an incremental seller at the margins and we use those proceeds to buy a little bit of something that hasn’t done as well and is at a lower price. Over time that adds up to more significant growth and it gives you less volatility along the way.

I’d like to re-emphasize what you just said. I think it’s really important around the concept of rebalancing as a key way that we manage portfolios. Use it as a systematic way that we can buy low and sell high rather than get caught up in the short term media news cycles – what a stock or a market has done in the last six hours or six minutes rather were rebalancing to our target, to a strategy that we agreed with our clients as what we want for the long-term. When we get a little bit above that we can get trim the portfolio back. When risks have entered the market and the portfolios decline a little bit we continue to recenter to that long-term goal.

Yeah, that’s right and when people get excited about something, when the stock has gone up in price or a market has gone up, they want to buy and when it’s gone down, they are worried and they want to sell. So they buy high and sell low. And rebalancing does the exact opposite – much healthier for the portfolio. Speaking of health, what about the health of the market.

Market Commentary

Well as this is a mid-quarter call at exactly mid-quarter on November 15th the U.S. stock markets – both the S&P 500, the Dow, and the Nasdaq all hit new all-time highs. This was widely reported in the media. Celebrated as the growth in this market has been, robust but we also understand that that has not necessarily always been the case. We only need to look back to last year, 2018, where each of the various asset classes that we follow all had negative returns on the year with the only exception being US bonds which were flat at exactly zero on the year.

So it’s actually quite a stark change to flip to this year where we’ve had quite strong returns. The S&P 500 being up 26.7%, international stocks as measured by the EAFE adding another 18.2 % on the year. The bond market as I mentioned with a zero percent return in 2018 has come back to return eight percent this year.

And the last piece that I’ll call attention to is real estate which continues to be a diversified part of our portfolio to having a slightly negative year last year has shifted with lowering interest rates to return a little bit more than 26 percent this year adding to the overall growth of portfolios and leading the way along with US stocks.

There are a couple of themes that were paying attention to that are driving a lot of this change in the market. The first is the ongoing negotiations between the US and China and how that impacts our growth here, growth in China, and really growth around the globe. Right now the market is optimistic that a deal will get done and has been pricing that in but no deal has yet been signed. We continue to pay attention on that front.

The second piece is interest rates. After raising interest rates more than seven times over the past two years before 2019, the Fed has reversed course and lowered interest rates a few times this year – three to be exact. That has helped bonds but also has significantly driven the return that we’ve seen in real estate in the portfolios, another reason that we keep the portfolio is diversified to take advantage of these types of opportunities.

And then the last piece that I’ll touch on is geopolitics. It seems to be everywhere as we look in media and conversation. We don’t make portfolio decisions necessarily based on any specific outcomes whether that’s the U.S. elections coming up next year, unrest in Hong Kong, the ongoing Brexit dance between conservatives and labor that we will maybe see a resolution to at some point. The market could certainly be shocked from this area but at the end of the day is not pricing in any significant concern at the moment and our portfolios remain diversified and resilient.

So on those three themes. We think the portfolios are well-positioned and continue to see and benefit from the growth that we’ve had in the stock market this year as a recovery from last.

When to Sell

So knowing that the market is at all-time highs especially with the backdrop of a gradually slowing economy in response to which the Fed has lowered interest rates. Another issue arises for us as we think about the management of portfolios and that is when do you sell. If your overall investment strategy is to buy quality investments and to hold them rather than jumping in and out of the market the key decision you face is when do you sell.

And in general if you’ve got a high-quality investment, it might be a single stock or a mutual fund, and it’s got significant appreciation on which you would pay taxes were you to sell we always want to be very careful about that. If a stock is at an all-time high however and particularly if it’s been trading significantly above its historical trend line of growth it can be a good time to sell. That brings to mind actually a timely opportunity.

Donor Advised Funds

As we approach your end many clients have been pinging us about tax planning and also planning for charitable donations. And in today’s market we have the possibility of an ideal combination of circumstances which is a highly-priced asset – perhaps an individual stock – a desire always to reduce taxes and the desire to do some year-end charitable giving.

So the opportunity is that we can take that low basis stock or other asset and donate it to a donor advised fund. Oftentimes particularly with an individual stock it may be something that a client has held for a long time. Maybe something they inherited. It may have a significant component of family legacy to it, where in addition to not wanting to pay taxes people don’t feel comfortable letting go of something that really is a part of their family.

So the opportunity here is to to avoid those taxes and to retain the family legacy opportunity or the family legacy component. If you move that stock into a donor advised fund you get a tax deduction, you avoid paying tax on the gain, and you create a pool that remains available to you and your family over time for forgiving in whatever way is appropriate in your family. So depending on how much you sell and how much you donate the entire transaction can end up being tax neutral and then you have a pool of proceeds from the sale as well as a pool of charitable funds for the future.

It’s a good point, Kate and I will simply add on that we have also seen an opportunity to do this with clients who have shares of stock through their employer, whether their stock options or a restricted stock units that they were granted as part of compensation or even as we’ve talked about strong growth in portfolios and markets this year a highly appreciated portion of your core portfolio can have tax benefits and the same donating strategy to a donor-advised fund.

If any of our listeners out there are interested in one of these strategies please do be in touch thanks for listening and have a wonderful holiday.