Terry Gerton I thought I’d pick up where we left off in our last conversation. We were talking about FOMO, the fear of missing out, and FOGI, the fear of getting in, when it comes to investing. There’s some interesting reports out right now that might support both of those positions simultaneously. So what’s an investor to do? How do you make sense of all of this?
Thiago Glieger Yeah, it’s really tough, Terry. There’s a headline that recently caught everyone’s eye that was a very popular firm that everyone knows, Vanguard, explaining that retirees are considering to hold only 30% in stocks, right? This was a recommendation from a really big firm. And then the same week or shortly right after, Bank of America comes out saying that the S&P could surge another 50% over a couple of years. And so this is exactly what you’re talking about. You’ve got, on the one hand, pulling you towards being aggressive, and on the other hand, scaring you out of the markets.
Terry Gerton So if you’re an investor, how do you make sense of those? What do you need to understand?
Thiago Glieger Yeah, let’s dig into what’s really going on, Terry. I think as an investor, the really important thing is to understand, what is the message behind what a financial institution is giving you. Why are they saying the message that they have? And so let’s talk about Vanguard first. The idea from Vanguard telling people to consider being more conservative is, really, it’s not unmerited per se. If you look at how far stocks have grown over the last 10-15 years, it’s grown a lot. The S&P has doubled, almost tripled, depending on how far back you look. And so with this really strong run, how much more growth is there, right? It’s really, really hard to think that you can keep growing forever. There’s going to be a pullback at some point. And so they look at something called valuations, which is, what is the fundamental value of a stock price based on the expected future earnings that that company is going to make? So when we look at the economy, people aren’t spending as much. Inflation is really high. Tariffs are starting to become a problem and show the cracks. And so this makes companies less profitable as they continue moving forward. The models that they use in trying to figure out, hey, what is a stock price actually expected to be? It’s not showing that it’s going to be as strong as the next 10 years compared to the 10 years that we just had. So they’re saying to investors, hey look, if you’re going to take more risk in stocks, why don’t you consider doing bonds instead? Because we’ve pretty much squeezed out all their juice that there is left.
Terry Gerton And then when you look at bonds, the interest rates are pretty high and the national debt seems like it’s going to drive the interest rate on bonds higher, right?
Thiago Glieger For the first time in a very long time, Terry, we look at bonds and we smile, because we’re getting close to 5% interest on an extremely safe investment like U.S. Treasuries. And so if stocks are not going to pay as much as they have been on an annualized outlook, why take that huge amount of risk in stocks when you can earn maybe just a little bit less, not quite as well, but you have substantially less risk? And so Vanguard’s talking to retirees here, right? Saying, hey, look. Over the next 10 years, you don’t have that kind of time to allow the portfolio to regrow if things get really crazy. So consider looking at bonds more heavily, simply because you’re not missing out on that much more.
Terry Gerton How does Bank of America have that in such a very different worldview or market view?
Thiago Glieger This is where it’s really difficult to try and contrast a lot of these analysts, because they look at different things. And, you know, Vanguard is not just necessarily anti-stock as they are looking at just being pro-balance. And same thing with Bank of America. They’re not saying that the market is going to crash here. They’re looking at the actual environment themselves and saying, what are the catalysts for growth? We have this explosion in artificial intelligence over the last couple of years. It seems like it came out of nowhere, and companies like NVIDIA have just gone to the moon as a result of it. You have corporate profits, which, despite the slowdown in people spending money, these companies are still making money. They’re still very, very profitable. The Federal Reserve is talking about possible rate cuts, so that creates some easing in the markets and supports continued market growth. And so overall, the economy still has some foundational strength here. And that’s what Bank of America is looking at. They’re looking at that and saying, yes, there’s a lot of growth that has happened, but that doesn’t mean that they can’t continue to grow. And the S&P is staged to be able to have yet another 50% increase for a couple of years.
Terry Gerton I’m speaking with Thiago Glieger. He’s a principal at RMG Advisors of Rockville, Maryland. So Thiago, we’ve talked in the past about whiplash investing, moving from one perspective to the other and rearranging everything. How could federal employees right now avoid reacting emotionally to these headlines and figuring out what their wise investment is?
Thiago Glieger I really like that term, whiplash investing. The question I think, Terry, should be, it’s not who is right, but rather what is the right strategy for me. When you’re gearing up towards retirement, then you really don’t have that much time to be wrong or to suffer the consequences of too much volatility inside the portfolio. You can’t pivot the TSP back and forth between aggressive, conservative, aggressive, conservative. And so that’s where Vanguard’s view really becomes important. Protecting that income that you’ve already built, the base amount in your portfolio, that’s more important than squeezing every last little drop out of stocks. Now, on the other side, if you still have 10, 15, 20 years before retirement, you’re not going to use that money, then Bank of America’s view has some merit here. Because if you miss out on only 10 of the best days in any given growth period in the markets, you missed out on more than 50% of the growth that the time period had to offer. So you can’t be in and out. You have to be in the whole time. So if you’ve got that time and that volatility, which, if you remember, we call volatility the price that we pay for the opportunity of long-term growth as an investor, right? If you can pay that price of volatility, not have to worry about it long term, then Bank of America’s view is really important. Both of these forecasts are probably going to be right at some point. And that’s what makes it really hard. It’s not that one is wrong and one is right. It’s just that there’s a different season for each perspective from the analyst.
Terry Gerton So if you’re a federal employee thinking about your TSP, are the lifecycle funds the way to go? Are they adapting to these different perspectives in a way that leaves the individual investor to just sit back and watch?
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Thiago Glieger I really like the lifecycle funds, Terry, because it removes the biggest problem that we counter as investors. And that is, sometimes our emotions get the best of us, and we get out at the wrong time or we get in at the wrong time. And the lifecycle funds are going to have an algorithm that basically readjusts the five core funds, C, S, I, F and G, between becoming more conservative the closer it gets to the date, right? And that aligns with what we just talked about, which is you want to, as you get closer to needing the money, protect the money and be more conservative. And so it’s not going to change so much in terms of, oh, the economy is doing this, or this is happening in the world, so we’re going to adjust that. It’s going to be more time-based, but that is so much better than trying to rely on your gut feeling, or just trying to contrast two analyst positions.
Terry Gerton As folks are looking at the market, what are you looking at to kind of see whether Bank of America or Vanguard’s perspective has preeminence in the near term?
Thiago Glieger For us, we like to look at consumer spending. If people aren’t spending money at the stores, online, then companies are not going to be as profitable. And the expectation of future profits is what drives the stock price today. And so that’s the biggest thing that we should watch out for is, how much are people spending? Are they still traveling? Are they still eating out? Or are they just cooking at home a lot more lately?
Terry Gerton So the next quarter may be very informative.
Thiago Glieger Absolutely.
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