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    Fresh Invest x Money with Katie: What to Know About Fixed-Income Investing

    enSeptember 22, 2023

    Podcast Summary

    • Understanding Fixed Income Investments: A Buffer and Diversification ToolFixed income investments, like bonds and CDs, provide a steady income stream, act as a buffer during market volatility, and offer higher returns than a few years ago. They're an essential part of a well-diversified portfolio.

      Fixed income investments, such as bonds and CDs, are playing an increasingly important role in today's financial environment due to their ability to provide a steady income stream and serve as a buffer during tough market conditions. With higher rates of return compared to a few years ago, bonds offer investors a valuable tool for diversification and risk management. Richard Carter, Vice President of Fixed Income in Fidelity's Personal Investing Division, explained that bonds function like loans, with investors lending money to borrowers and receiving regular payments in return. Katie Gaddy Tossand, founder of Money with Katie, emphasized the importance of considering fixed income as part of an investor's portfolio and not just focusing on equities. Overall, income investing can help protect finances and encourage growth during downturns, making it a wise strategy for all types of investors.

    • Managing risk and financial goals with fixed income instrumentsFixed income instruments, like bonds, offer retirement savings, market volatility protection, and a steady income stream for older investors. Younger investors can use them for downside risk protection and diversification.

      Fixed income instruments, such as bonds, play a crucial role in addressing two common concerns among investors: retirement savings and market volatility. For younger investors, like those in their twenties, the volatility of stocks might not be a major concern due to their long investment horizon. However, bonds can serve as downside risk protection and provide a steady income stream. For older investors or those closer to retirement, the certainty of income from bonds can help alleviate concerns about having enough money for retirement. Additionally, the contractual obligation of bonds to pay back the principal at maturity can provide psychological comfort during market downturns and reduce anxiety over daily price swings. Overall, fixed income instruments can be an essential component of a well-diversified investment portfolio, helping investors manage risk and work towards their financial goals.

    • Deferred fixed annuities vs Bonds: Choosing the Right ToolDeferred fixed annuities offer tax deferral and potential growth with a guaranteed rate of return, while bonds provide stability and predictable income, with varying levels of risk and reward depending on the issuer.

      Both deferred fixed annuities and bonds serve as important tools for investors, each offering unique benefits. Deferred fixed annuities provide a guaranteed rate of return and tax deferral, acting like a bond with the added advantage of potential growth over the term without immediate taxation. However, investors must consider the financial strength of the insurance company providing the annuity and be aware of potential penalties for early withdrawal. Regarding bonds, it's essential to remember that not all bonds are equal in risk and return. Treasury bonds, agency bonds, municipal bonds, and corporate bonds all have varying levels of risk and potential rewards. Investors should assess the issuer's creditworthiness within each category to make informed decisions. In the current financial environment, bonds can serve as a crucial component of a diversified investment portfolio, offering stability and predictable income.

    • Bonds: Yield as a Measuring Stick for RiskWhen evaluating bonds, yield indicates both return and risk. Higher yields may signal potential risks, not just better returns.

      When considering bonds as an investment, it's essential to understand that yield acts as a measure of risk, not just return. Bonds are essentially loans given to governments or corporations in return for regular interest payments and the return of the principal at maturity. If investors have doubts about a bond's ability to meet its contractual obligations, they may sell, causing the price to drop and the yield to rise. Therefore, a higher yield doesn't always mean a better investment. Instead, it could indicate potential risks. It's crucial to consider the yield of treasury bonds and other bonds differently and take the time to understand the complexities of the fixed income markets. When lending money through bonds, the investor is expecting regular interest payments and the return of the principal. CDs, or certificate of deposits, are another investment instrument where an investor deposits a specified amount of money for a fixed period in return for regular interest payments and the return of the principal at maturity. Understanding the basics of bonds and CDs can help investors make informed decisions and manage risks in their investment portfolios.

    • Investing in CDs: A Simple and Insured Fixed Income OptionCDs are a low-risk investment that offer a fixed rate of return, insured by the FDIC up to $250,000 per account. They can serve as a hedge against inflation and can be laddered for flexibility.

      Certificates of Deposit (CDs) function similarly to bonds, as they involve lending money to a bank in exchange for a fixed rate of return. The key difference is that CDs are often insured by the FDIC up to $250,000 per account, making them a simpler and potentially safer type of investment. CDs can be purchased directly from banks or through investment companies like Fidelity, with maturities ranging from a few months to several years and minimum investments typically starting at $1,000. Last year, Fidelity introduced fractional CDs with a minimum investment of $100. In the current inflationary environment, CDs and other fixed income instruments can serve as a hedge against inflation. For instance, a 5% yield on a CD is currently higher than the current inflation rate of around 3%. However, the real value of the return can be eroded by inflation, which is why some investors employ a strategy called laddering. Laddering involves spreading investments across bonds or CDs with different maturities, allowing maturities to occur at regular intervals and providing flexibility to reinvest or spend the maturing funds. Overall, CDs can offer a stable, insured return and can be an effective tool for managing inflation risk.

    • TIPS: Inflation-adjusted bonds with rising principalEducate yourself on fixed income investing and consider your investment goals when choosing TIPS

      Treasury Inflation-Protected Securities (TIPS) are a type of fixed income investment where the principal adjusts to inflation. This means that as inflation rises, the principal amount also increases, resulting in higher dollar-wise coupon payments over time. TIPS typically have longer terms, ranging from 5 to 30 years. While the cash flow remains consistent, the bond's valuation can be influenced by broader market conditions. For those new to fixed income investing, Richard recommends starting by getting educated. He suggests utilizing resources like Fidelity's educational offerings and learning centers, as well as researching potential investments and monitoring their performance. Katie, on the other hand, advises considering the end goal when entering the fixed income market. By understanding your investment philosophy and timeline, you can make informed decisions about the best investment path for your financial objectives.

    • Exploring Fixed Income Opportunities through BondsTo build a stable foundation for wealth amid market volatility and inflation concerns, consider exploring fixed income opportunities through bonds. Gain knowledge by reading and learning, and gain experience through small investments.

      To deepen your understanding of bonds as an investment asset class, it's essential to educate yourself further on the topic. Both the guests on the podcast, Richard and Katie, emphasized the importance of reading and learning about bonds to make informed decisions. Additionally, gaining some experience with bonds through investing a small amount can serve as motivation to learn more. While bonds may not have been the most exciting topic in the past, the discussion between the guests made it engaging and informative. For those looking to establish a stable foundation for their wealth amid market volatility and inflation concerns, exploring fixed income opportunities through bonds can be a valuable step. Tune in next week to learn more about living off your investments, planning for retirement, and generating passive income. Remember, the information provided is for educational purposes only and should not be considered investment advice. Always consult a financial or tax advisor for personalized recommendations.

    • FDIC insurance covers up to $250,000 for deposits, but not market losses or secondary market CDsFDIC insurance protects up to $250,000 per depositor per account category, but it doesn't cover market losses or CDs bought on the secondary market at a premium.

      FDIC insurance covers up to $250,000 per depositor per account category for deposits held at the issuing institution, but it does not protect against market losses. CDs purchased on the secondary market at a premium are also not eligible for FDIC insurance. It's important to note that the displayed rates of return on Fidelity's CDs and model ladders are not guaranteed, and the funds yield may be affected by inflation adjustments. CDs may also have features like step rates, call provisions, and issuer credit risk, which can impact returns and the decision to sell before maturity. Fidelity does not make judgments on the creditworthiness of issuing institutions, and the bond market is subject to interest rate, inflation, liquidity, call, and credit risks. Always remember that investing involves risks, and it's essential to understand the terms and conditions of your investments before making a decision.

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    Show Notes/Transcript:
     

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    Welcome back

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     listeners. This is your host Tom romano, and thank you

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     for joining us for part two of our 2022 year

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     in perspective. Once again, we're joined by Casey Dillon

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     to give us some insights on the markets and

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     how they affected investors throughout the course

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     of the previous year. Thanks for joining us again. Casey talked us

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     a little bit. How did the markets react right? I mean we saw both

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     equities and fixed income have negative

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     performance for the year. And what

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     are we seeing from rates of

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     return from the US as well as abroad?

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    Yeah, well the the sharp increase

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     in rates reverberated across

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     markets everything from stocks to

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     bonds to real estate to commodities.

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    And in what we observed was

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     sort of some interesting things

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     again threads that

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    We'd seen coming into 2022 for instance. The

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     the growth of tech stocks

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     becoming a huge portion of

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     the sort of the the US market,

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     right? So if you you think about the Fang stocks Facebook

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     Apple Amazon Netflix, Google

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    They accounted for almost 25% of

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     the market cap of the US.

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    Coming into 2022 and they were

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     the sort of those growth oriented tech stocks were the drivers

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     of the tremendous returns

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     that the market had given kind of the past five years.

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    Or even ten and and to the

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     point that there were a lot of folks who looked at that and said,

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     hey, look are we out over our skis here this feels

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     very much. Like we're entering into kind

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     of frothy Tech bubble territory

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     and there were sort of the Hallmark things

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     trappings of

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     that that were that felt very familiar to

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     those of us who lived through the first tech bubble. So you saw things

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     like the mean stocks right with games stop

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     and Best Buy and sort of, you know day trading.

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    To to the overuse of Leverage on these

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     and a lot of that was kind of being driven by

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     this idea that you know coming out of the pandemic these

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     growth stocks. This was the story. These were the story

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     stocks that people were gravitating to so so what happens people

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     buy them up they to the point where the valuation

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     no longer makes sense. If you

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     take a step back and say well what am I buying right at

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     the end of the day?

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    Investing is about purchasing future cash flows. And

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     so you arrive at a price today based on

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     some assessment of what you think those future cash flows

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     are and what you're willing to pay for those.

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    If you get to a point where you're paying so much today for

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     you know, this idea of

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     heightened future cash flows at some

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     point you enter into a world where?

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    To to even substantiate the price you're willing

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     to pay today. You have to have Perfection on those future casuals

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     going forward and the world doesn't work that way right? You

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     have a situation where Russia invades Ukraine, you have

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     a situation where you have, you know pandemics and Avian flues

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     and things like that. So the world is just in that

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     need a place where you can predict Perfection

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     for cash flows for things like yeah, Facebook

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     Apple Amazon, and in fact what we see

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    The the case for Perfection fell off the cliff in 2022

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     because the the earnings for

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     those companies started to turn around and go the other way and that

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     caused Market participants to rethink the

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     valuations that they were giving them and what

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     we observed was the Fang stocks lost

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     collectively over three trillion dollars in market

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     cap over the course of the year. So that that

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     was a homos 25% of the total market cap lost in

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     the US was attributable to those handful of stocks

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     right those those Fang stocks that you allude to. I mean

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     at some point they were you know, collectively very

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     large percentage of common us benchmarks

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     like like the S&P 500, right they've been

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     inflated and so when there is that correction, you're gonna

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     feel it across the the industry across the all

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     the markets rather. So I think that makes a lot of

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     sense a lot of our investors are evidence-based investors,

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     you know, Casey you and I share the same investment philosophy

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     of buying hold.

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    Long-term taking a factor approach to investment management.

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    What how did factor-based investors or

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     evidence-based investors fair in 2022?

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     Yeah, so if you think about what what

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     are you doing? If you're a factor investor? Well yours, you're

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     lazing in on specific characteristics of

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     risk to invest in and those

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     character those risk factors those characteristics of

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     risk that that you have

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     been identified by way of academic research to have a

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     premium or return

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     associated with that that characteristics of risk.

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     So you're trying to figure it

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     out and say okay, you know, the the tech stocks

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     is great example, the thing stocks if things become exceedingly

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     expensive. Well, what does that

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     do? Then to the cheaper stocks the stocks that aren't the

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     thing stocks, right? How are they priced relative

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     to these these growthier stocks?

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    What historically we've observed is that

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     there is a premium associated with valuation. Meaning

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     the cheaper stocks tend to outperform the

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     more expensive stocks over time.

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    And so you enter into a world where the Fang stocks are

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     ripping the cover off the ball and they're kind of the expensive growth stocks and

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     by comparison, the the cheaper value

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     stocks just aren't keeping up with that on the upswing and

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     you got to a point where the

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     market was collectively the one of

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     the most expensive markets in history. Meaning that

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     the

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    thighs and weight of those Bank stocks across

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     the market

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    and how expensive they become

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    lifted the whole market up

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    But the spread between the growth stocks and

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     the value stocks became as wide as we've

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     seen really since the tech bubble right going back to

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     that that the the value stocks were

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     just so unloved and so beaten down my price relative to

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     the tech stocks. So if you're

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     a value investor rolling into a year like

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     2022 when the the Fang

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     stock bubble sort of starts to become deflated and

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     those prices start to to come

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     back to the mean if

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     you will.

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    One consequent of that is is that on a relative

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     basis those cheaper value stocks start to perform better. Even

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     if the market is going down as a whole the value

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     stocks tend to hold up better because it's the

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     top end of the market the expensive end. That's moving more.

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    And so we we saw that and in 2022 value

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     stocks actually did quite well, they did exceedingly well

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     relative to grow stocks large

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     cap value outperform large cap growth handily

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     for 2022. And

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     so if you're a value a factor investor with

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     a tilt towards value that was really helping your portfolio in

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     2022. We also saw factors like

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     low volatility or

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     associated with lower volatility stocks

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     doing well across the

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     board minimum volatility globally and

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     also here in the United States. So those stocks that tend

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     to be less volatile than the market in general.

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    There's a return premium associated with that and of course

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     in a year that highly volatile like 2022 those less

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     volatile stocks had a premium associated with

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     them relative to everything else. And if you're a factor investor who

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     has a tilt towards minimum volatility you you reap the

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     reward on that but it is as we sort of

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     break out of kind of globally or looking at the US things like

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     small cap stocks and Emerging Markets continue to do quite well.

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     So if you had a tilt towards size in your

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     Factor tilt that that paid off

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     for you on a more broadly Diversified basis.

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    And so you you started to see that these these

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     Factor tilts in at

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     a time when normally you would think a look

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     if it's a risk off environment. Well Factor, it is

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     a risk anyway, right? So you might

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     expect for the factor exposures to

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     be down it and to a degree you're

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     right, but they're also relative to the other things that

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     they're trading against and in that case they held up

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     much better than the market in general.

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    And so a broadly based a broad

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     Diversified broadly Diversified Factor portfolio

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     tended to do better on both a relative

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     and absolute basis than the market in general

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     did and certainly more so than the Contra points

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     of that things like growth or more volatile stocks or you

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     know, large cabs. So so being a factor investor

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     really was beneficial in

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     many regards in 2022.

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    Yeah, we've seen that in the performance of a number of

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     portfolios that that you and I have talked about over the

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     years that you know, a diversified portfolio factors in

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     2022 albeit was

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     still in the red at the end of the year, but not nearly as as bad

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     as some of those market like portfolios

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     or benchmarks that we've seen. I do

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     want to hang on the value conversation a little bit. Right?

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     We you know value as a factor you and

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     I share the the belief that investors should have exposure

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     to value in their portfolios. And I know

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     over the years Casey you and I have had shared a cocktail

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     discussing. What was the underperformance of

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     value for a number of years. We saw the rise

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     of the things which we discussed earlier and for

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     Value investors. I think that they were

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     someone Vindicated in 2020 to but for

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     those are out there listening, you know with this outperformance

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     of value. Is there still room for Value to

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     continue to outperform in 2023?

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    You know, I love the quote history rare

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     rarely repeats itself, but it often Rhymes because

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     I think that that's incredibly true

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     across markets in particular and I

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     heard an a quote that I think shed some light on that and it's

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     not that history repeats itself. It's that people

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     repeat themself, right? And so if you think about markets are

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     made up of people making purchasing and

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     selling decisions across the board it it's it

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     should be no surprise that in a similar

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     type of dynamic or environment.

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    People might Chase things like large cab growth

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     tech stocks, right? And so if you look back to

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     a time that was very similar to that during the tech bubble where

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     you saw again Tech socks become very expensive and

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     value stocks kind of be left to languish

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     on the sidelines for

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     some time when the tech Bubble Burst, right all of

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     those growthy tech stocks valuation plummeted

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     and value stocks had a tremendous run for several

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     years.

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    Well, where are we now?

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    The we see these these Fang stocks the the air going

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     out of them value having a nice run.

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    So you might think is the run over. Well, if you

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     look at the sort of globally the value spreads.

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    So again cheap versus expensive we are still in

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     the 90 plus percentile

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     meaning it still one of the most expensive markets,

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     right? So if we look at the, you

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     know, nine out of 10 markets have been cheaper than

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     the market that we're in currently even after 2022's price

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     decline. So that tells you that value

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     stocks, even though they had a tremendous year

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     in 2022. The potential is there

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     for them to continue to experience this

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     reversion to the mean of these expensive stocks

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     coming back down and value could have

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     a run akin to what we observed post

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     the tech bubble in the early 2000 when value

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     was really dominant for a

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     good three years in the marketplace. Now,

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     I'm not suggesting that that it will exactly repeat itself.

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     But you see the dynamic there in the case

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     to be made for hey, it looks like there's still some fuel for

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     this fire.

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    And it would not be surprising to continue to

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     see value run relative to the the

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     more expensive stocks.

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    Certainly, and you know, I think it's

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     important for our listeners to know we're by no means suggesting people

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     should speculate between growth and value. We think that you

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     know factors specifically value are our

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     long-term Endeavors and investors who maintain that

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     exposure tend to do better over time

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     is what I'm hearing you say and I

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     and I lived through the tech bubble as you did

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     and you know, those those years after where value did outperform

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     they were still poor years, right 2000

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     2001 weren't positive years in

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     the market. And do you have any comments on you

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     know value kind of shining during those downturns when

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     we say values out performing. It doesn't necessarily I mean values positive, right?

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     I think this is this the the Crux

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     of why it's difficult to be a value investor because

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     I mean sexually value investing

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     is not hard to get your head around by cheap stuff

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     and hold it right like that's not hard from sort

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     of a conceptual.

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    Went to get the hard part is actually doing it

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     and being able to be patient through those

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     periods when it doesn't look like

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     it's working because those are those come right you

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     you have those periods where the the tech bubble

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     occurs where the Fang stocks are ripping the cover off the

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     ball for five years in a row and your value stocks are languishing.

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    Most investors the vast majority of investors cannot

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     sit still through that.

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    that's why value investing well easy to to

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     sort of implement is hard

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     to maintain and yet right what

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     why do why do folks like you and I gravitate to

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     Value as an important element of

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     kind of a broad-based factor portfolio because

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     the data going back over time

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     suggests that if you can be patient

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     through those periods when values not working the

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     payoff for you when it comes in times

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     like after the tech bubble when it comes when it

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     comes in times like 2022 the payoff for

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     you for being patient through that period

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    And maintaining that that value exposure is

    296
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     significant enough such that

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     over the total holding period you you

    298
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     end up ahead of where you might otherwise have been

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     had you just had kind of Market level performance right?

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     Just just broad beta.

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    And so at the end of the day, you know, the question is, how

    302
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     do I out? How do I outperform the market? Well, one way to

    303
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     help perform. The market over time is to tilt towards

    304
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     these characteristics of risk, which have shown over

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     time to outperform the market and values

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     one of those now what I

    307
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     would say Tom is that it's incredibly difficult to just

    308
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     be a value investor and that's all you do.

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    Which is why it's so beneficial to have a

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     blend of factor exposures to have other things

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     working when things like value for instance

    312
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     aren't so a good example of that is momentum, right? So

    313
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     it momentum and value are really nice

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     pairing to put together in a portfolio because they're

    315
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     negatively correlated meaning when when values down

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     momentum tends to be up and vice versa.

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     So if the value investor if it's incredibly difficult

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     to sit through those periods when value is not doing well with momentum

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     exposures you end up

    320
    00:15:59.200 --> 00:16:01.100
     having things in your portfolio.

    321
    00:16:02.200 --> 00:16:05.400
    Which are picking up what's working and so in the case of the past five

    322
    00:16:05.400 --> 00:16:07.700
     years a broad-based?

    323
    00:16:08.400 --> 00:16:12.100
    Factor multi-factor portfolio would have value stocks

    324
    00:16:11.100 --> 00:16:15.100
     in it, but it would also have some exposure

    325
    00:16:14.100 --> 00:16:17.200
     to the fangs because those are

    326
    00:16:17.200 --> 00:16:20.400
     representing kind of the momentum in the market until you have exposure to

    327
    00:16:20.400 --> 00:16:23.700
     that and and that becomes an easier portfolio for

    328
    00:16:23.700 --> 00:16:27.300
     most people to consume and sit through and the

    329
    00:16:27.300 --> 00:16:30.100
     real magic here is the longer you

    330
    00:16:30.100 --> 00:16:33.900
     can hold on to any of these Factor exposures. The more

    331
    00:16:33.900 --> 00:16:36.700
     you have an expectation that you're going to have performance that's

    332
    00:16:36.700 --> 00:16:37.200
     above Market.

    333
    00:16:37.900 --> 00:16:40.300
    And and the real challenge for everybody is

    334
    00:16:40.300 --> 00:16:43.500
     to sit still long enough to reap

    335
    00:16:43.500 --> 00:16:46.200
     the reward of putting that Capital to risk. So you just trying to

    336
    00:16:46.200 --> 00:16:49.700
     build a portfolio that people can actually stay in

    337
    00:16:49.700 --> 00:16:53.000
     through these Market turmoil these ups

    338
    00:16:52.300 --> 00:16:56.000
     and downs because if they can sit still there, you

    339
    00:16:55.400 --> 00:16:58.700
     know it a bears make

    340
    00:16:58.700 --> 00:17:01.100
     money Bulls make money pigs get slaughtered. Right? What does that mean?

    341
    00:17:01.100 --> 00:17:04.400
     Look regardless of what your philosophy is, if you

    342
    00:17:04.400 --> 00:17:07.200
     maintain that philosophy eventually the market

    343
    00:17:07.200 --> 00:17:10.400
     will come around and rotate to you and pay you off for it. If you

    344
    00:17:10.400 --> 00:17:13.000
     keep jumping from philosophy to philosophy trying to

    345
    00:17:13.400 --> 00:17:16.200
     chase whatever is in front of you and get those returns. That's when

    346
    00:17:16.200 --> 00:17:19.000
     you get slaughtered. That's when the cost of

    347
    00:17:20.300 --> 00:17:23.700
    Trading in and out eats up your returns that

    348
    00:17:23.700 --> 00:17:26.200
     that's when you're catching a falling knife. That's when

    349
    00:17:26.200 --> 00:17:29.200
     all of these things that you hear why you might want to

    350
    00:17:29.200 --> 00:17:32.300
     not want to be a growth investor or a value investor or

    351
    00:17:32.300 --> 00:17:35.100
     right? All of those things can be true. If you're

    352
    00:17:35.100 --> 00:17:38.800
     trying to find those things because the timing is is has

    353
    00:17:38.800 --> 00:17:41.900
     been proven to be elusive if not impossible. So

    354
    00:17:41.900 --> 00:17:44.000
     picking a philosophy and sticking with

    355
    00:17:44.200 --> 00:17:48.100
     it as shown consistently over time to to be the way to go and we

    356
    00:17:47.100 --> 00:17:51.700
     happen to believe in the philosophy of what's been

    357
    00:17:51.700 --> 00:17:54.100
     shown from the academic research to be these

    358
    00:17:54.100 --> 00:17:57.200
     characteristics of risk that pay off over time certainly and so

    359
    00:17:57.200 --> 00:18:01.300
     in a nutshell, it's time in the market versus

    360
    00:18:00.300 --> 00:18:03.600
     timing. The market is the best course of

    361
    00:18:03.600 --> 00:18:06.600
     action. I want to hit upon something

    362
    00:18:06.600 --> 00:18:09.900
     that you're alluding to and that platitude or

    363
    00:18:09.900 --> 00:18:12.700
     it sounds like a platitude to most investors, especially

    364
    00:18:12.700 --> 00:18:15.400
     when the markets down right telling them. I'm

    365
    00:18:15.400 --> 00:18:18.300
     in the market not timing the market that doesn't mean much to somebody

    366
    00:18:18.300 --> 00:18:19.700
     who's like am I gonna be able to retire?

    367
    00:18:20.200 --> 00:18:23.500
    Right, but you have to understand where that platitude

    368
    00:18:23.500 --> 00:18:26.200
     comes from right where where that rule of thumb comes

    369
    00:18:26.200 --> 00:18:30.600
     from any and it is informed by

    370
    00:18:30.600 --> 00:18:34.400
     decades upon Decades of observations

    371
    00:18:33.400 --> 00:18:36.400
     of how markets behave

    372
    00:18:36.400 --> 00:18:39.600
     and where returns to markets come from. Yeah. That's an excellent

    373
    00:18:39.600 --> 00:18:42.100
     point. You were alluding to

    374
    00:18:42.100 --> 00:18:45.000
     diversification Factor diversification but diversification as a whole

    375
    00:18:45.300 --> 00:18:48.300
     and there's one thing I'd like you to comment on, you

    376
    00:18:48.300 --> 00:18:51.300
     know, I've been hearing in Reading in popular press and

    377
    00:18:51.300 --> 00:18:54.100
     in the various industry trade Rags that you know

    378
    00:18:54.100 --> 00:18:57.700
     diversification didn't work in in 2022. My

    379
    00:18:57.700 --> 00:19:00.200
     thought on that is that I think it's a misunderstanding of

    380
    00:19:00.200 --> 00:19:03.100
     how diversification actually works and I'd love to hear your

    381
    00:19:03.100 --> 00:19:06.100
     thoughts on that. Yeah. So you sort of

    382
    00:19:06.100 --> 00:19:09.400
     come back to well. What are your expectations? I went

    383
    00:19:09.400 --> 00:19:12.600
     when when you hear someone like you or

    384
    00:19:12.600 --> 00:19:16.400
     I say, hey a broadly Diversified portfolio is

    385
    00:19:15.400 --> 00:19:18.900
     is the starting point for most

    386
    00:19:18.900 --> 00:19:19.800
     investors like

    387
    00:19:20.200 --> 00:19:23.500
    Everybody should have if you're going to invest you should do it in a

    388
    00:19:23.500 --> 00:19:26.400
     fashion that allows you to take advantage of broad-based diversification.

    389
    00:19:27.300 --> 00:19:30.800
    If your expectation when you hear that is, oh, okay. I'll

    390
    00:19:30.800 --> 00:19:33.200
     never lose money. Well, no that that's not what we're saying,

    391
    00:19:33.200 --> 00:19:36.500
     right? The the point of broad-based diversification

    392
    00:19:36.500 --> 00:19:39.800
     is you're taking off some of the idiosyncratic risk

    393
    00:19:39.800 --> 00:19:42.200
     of any one kind of investment meaning.

    394
    00:19:43.400 --> 00:19:47.000
    All I want to invest the only thing I know about is expensive wine

    395
    00:19:46.600 --> 00:19:49.200
     French wine, right? That's the only thing I know about that.

    396
    00:19:49.200 --> 00:19:50.200
     The only thing I want to invest in

    397
    00:19:50.900 --> 00:19:53.400
    So if that's my investment philosophy the risk

    398
    00:19:53.400 --> 00:19:57.500
     that I have is that the the wine

    399
    00:19:56.500 --> 00:19:59.800
     market goes away people, you know,

    400
    00:19:59.800 --> 00:20:02.100
     they're tasting preferences. They no longer want

    401
    00:20:02.100 --> 00:20:05.200
     to drink expensive wines. We see

    402
    00:20:05.200 --> 00:20:08.600
     a shift in the in the wine market where French wines are are no

    403
    00:20:08.600 --> 00:20:11.700
     longer as highly valued as California wines, for

    404
    00:20:11.700 --> 00:20:14.100
     instance. And if I've invested in

    405
    00:20:14.100 --> 00:20:17.400
     a bunch of French wines, just the shift in the market now, I have

    406
    00:20:17.400 --> 00:20:20.700
     a dramatic impact in my portfolio and or

    407
    00:20:20.700 --> 00:20:23.400
     you know fires in

    408
    00:20:23.400 --> 00:20:26.700
     California and drought in France and

    409
    00:20:26.700 --> 00:20:29.400
     suddenly the wine market has absolutely no

    410
    00:20:29.400 --> 00:20:32.600
     Supply. And so the

    411
    00:20:32.600 --> 00:20:35.300
     price of what you're holding goes up dramatically, but then

    412
    00:20:35.300 --> 00:20:38.500
     when it's gone, it's gone, right and then what do you invest in? So

    413
    00:20:38.500 --> 00:20:41.300
     so the the risk of investing in any one

    414
    00:20:41.300 --> 00:20:45.600
     thing you may know that thing inside and out but it's idiosyncratic

    415
    00:20:44.600 --> 00:20:47.200
     to that thing. You're

    416
    00:20:47.200 --> 00:20:47.900
     investing in like wine.

    417
    00:20:48.900 --> 00:20:51.700
    So, you know the idea is with

    418
    00:20:51.700 --> 00:20:54.400
     diversification. Yeah, okay invest in wine, but while

    419
    00:20:54.400 --> 00:20:57.900
     you're doing that can we find some other things to invest in that are

    420
    00:20:57.900 --> 00:21:00.600
     going to behave differently than Wine does

    421
    00:21:00.600 --> 00:21:01.100
     because

    422
    00:21:02.200 --> 00:21:05.400
    If the risks come to bear for wine, you don't get wiped out.

    423
    00:21:06.100 --> 00:21:09.400
    Right. So we want to invest you know in a fashion

    424
    00:21:09.400 --> 00:21:12.300
     that allows us to sort of achieve these long-term goals without getting

    425
    00:21:12.300 --> 00:21:15.300
     wiped out along the way. So instead of investing in

    426
    00:21:15.300 --> 00:21:18.100
     wine. Maybe we invest in, you know,

    427
    00:21:18.100 --> 00:21:21.100
     small cap stocks in the United States and those are

    428
    00:21:21.100 --> 00:21:23.200
     gonna look and behave very differently than the wine market.

    429
    00:21:23.600 --> 00:21:27.100
    And maybe we invest in Emerging Market

    430
    00:21:26.100 --> 00:21:29.200
     debt because we know that that's gonna

    431
    00:21:29.200 --> 00:21:32.700
     behave differently than Securities and wine

    432
    00:21:32.700 --> 00:21:35.200
     and maybe we invest in treasuries and

    433
    00:21:35.200 --> 00:21:38.200
     maybe right. So as you start to go down that path you look at

    434
    00:21:38.200 --> 00:21:42.100
     all of the different things you can lay around that are going to behave differently

    435
    00:21:41.100 --> 00:21:44.500
     from the other things that you're holding. That's not

    436
    00:21:44.500 --> 00:21:48.700
     to say that when a systematic level

    437
    00:21:48.700 --> 00:21:51.600
     risk comes along like a pandemic or

    438
    00:21:51.600 --> 00:21:54.500
     Rising interest rates that all of those things aren't

    439
    00:21:54.500 --> 00:21:58.100
     going to be impacted by them. They will be right your your

    440
    00:21:57.100 --> 00:22:00.800
     wine your small counts dogs. You're you're

    441
    00:22:00.800 --> 00:22:03.200
     treasuries, right? You're you're emerging market

    442
    00:22:03.200 --> 00:22:06.400
     that all of those things are gonna be impacted if there are

    443
    00:22:06.400 --> 00:22:09.300
     issues that are roiling markets across the

    444
    00:22:09.300 --> 00:22:12.600
     board. And and so if you're expectation going

    445
    00:22:12.600 --> 00:22:15.300
     into a broadly based Diversified portfolio as I'll

    446
    00:22:15.300 --> 00:22:16.700
     never lose money, or it'll never go down.

    447
    00:22:17.100 --> 00:22:20.200
    That's the wrong. I would like to disabuse you of that notion.

    448
    00:22:21.200 --> 00:22:24.400
    What you should expect is if any one or two of these things

    449
    00:22:24.400 --> 00:22:27.200
     are impacted by a risk specific to it.

    450
    00:22:27.200 --> 00:22:30.500
     I'm not going to be wiped out and that's why I would have a

    451
    00:22:30.500 --> 00:22:33.500
     broadly based portfolio Diversified portfolio. Now,

    452
    00:22:33.500 --> 00:22:36.000
     I will say that if a part of your

    453
    00:22:36.800 --> 00:22:39.800
     diversification are things like Factor exposures. Well, you

    454
    00:22:39.800 --> 00:22:42.400
     you end up often doing

    455
    00:22:42.400 --> 00:22:45.200
     better than the market even if the markets down

    456
    00:22:45.200 --> 00:22:48.200
     and your portfolio is down you end up doing a

    457
    00:22:48.200 --> 00:22:50.100
     bit better than the market did in general.

    458
    00:22:51.100 --> 00:22:54.500
    And if you look at like a sick just a generic 60 40 portfolio.

    459
    00:22:55.400 --> 00:22:57.700
    It was one of the worst years on record for.

    460
    00:22:59.100 --> 00:23:00.600
    1640 board folios

    461
    00:23:01.400 --> 00:23:04.200
    because stocks and bonds both went down

    462
    00:23:04.200 --> 00:23:08.600
     dramatically in fact bonds had a historically bad year led

    463
    00:23:07.600 --> 00:23:10.300
     by treasuries which had the

    464
    00:23:10.300 --> 00:23:13.300
     worst year since the you know in 200 and

    465
    00:23:13.300 --> 00:23:16.300
     something years, right? So a 60 40

    466
    00:23:16.300 --> 00:23:20.500
     a broad base 640 portfolio being down is unusual.

    467
    00:23:19.500 --> 00:23:22.300
     It's Unique to have

    468
    00:23:22.300 --> 00:23:25.300
     that experience, but it's also

    469
    00:23:25.300 --> 00:23:29.100
     not unexpected given the the

    470
    00:23:28.100 --> 00:23:31.100
     Catalyst for why all of those

    471
    00:23:31.100 --> 00:23:31.900
     things were down.

    472
    00:23:32.900 --> 00:23:35.800
    That doesn't mean you abandon that that

    473
    00:23:35.800 --> 00:23:38.300
     investing discipline. It just means that

    474
    00:23:38.300 --> 00:23:43.000
     you should expect there are going to be times when broad-based

    475
    00:23:41.400 --> 00:23:44.100
     diversification isn't going to

    476
    00:23:44.100 --> 00:23:48.800
     be the thing that saves you from experiencing a

    477
    00:23:48.800 --> 00:23:49.500
     downmark.

    478
    00:23:50.300 --> 00:23:53.300
    So it sounds like there's like two two things that you're bringing

    479
    00:23:53.300 --> 00:23:56.800
     up here, right diversification certainly provides you with some

    480
    00:23:56.800 --> 00:23:59.700
     protection from concentrated stock concentrated

    481
    00:23:59.700 --> 00:24:02.300
     industry or even sector right? Like you bring

    482
    00:24:02.300 --> 00:24:06.000
     up wine a great way to sort of

    483
    00:24:06.400 --> 00:24:10.300
     balance that out by maintaining diversification. But however diversification is

    484
    00:24:10.300 --> 00:24:13.600
     not going to necessarily protect you from the natural ebb and

    485
    00:24:13.600 --> 00:24:16.400
     flows of the market, right? Those are gonna continue to happen

    486
    00:24:16.400 --> 00:24:19.400
     but the market risk and I

    487
    00:24:19.400 --> 00:24:23.000
     think you would agree is that that's what rewards investors for deploying

    488
    00:24:22.100 --> 00:24:25.200
     their Capital into the market. Why would I invest

    489
    00:24:25.200 --> 00:24:28.500
     broadly in you know, the S&P 500 well because

    490
    00:24:28.500 --> 00:24:31.300
     there's risk associated broadly with the SD, but and

    491
    00:24:31.300 --> 00:24:34.700
     I should be paid for doing so you're absolutely spot on right? Yeah. Why

    492
    00:24:34.700 --> 00:24:37.200
     are we investing in anything because there's risk associated with

    493
    00:24:37.200 --> 00:24:40.200
     it and that risk generates return, right? Yeah risk and return our

    494
    00:24:40.200 --> 00:24:43.600
     absolutely Inseparable and I think it's it behooves investor

    495
    00:24:43.600 --> 00:24:46.200
     to keep that investors to keep that sort of Mantra in

    496
    00:24:46.200 --> 00:24:49.200
     mind so Casey, thank you so much for

    497
    00:24:49.200 --> 00:24:50.100
     your comments. I do have

    498
    00:24:50.400 --> 00:24:53.500
    Last question for you, you know, we covered the current events

    499
    00:24:53.500 --> 00:24:57.100
     how that affected the markets, you know investors are

    500
    00:24:56.100 --> 00:24:59.400
     listeners are looking at the retirement

    501
    00:24:59.400 --> 00:25:02.500
     accounts. They're seeing a lot of red. What advice

    502
    00:25:02.500 --> 00:25:05.300
     would you give investors? What should

    503
    00:25:05.300 --> 00:25:08.100
     they do going into 2023? What are some of the things investors could be

    504
    00:25:08.100 --> 00:25:11.800
     doing now? Well, you know, my my knee jerk

    505
    00:25:11.800 --> 00:25:14.200
     response to that is nothing right. So if you're

    506
    00:25:14.200 --> 00:25:18.000
     if you're a discipline investor maintain that discipline, right?

    507
    00:25:17.300 --> 00:25:20.600
     There's no question 2022 was challenging year

    508
    00:25:20.600 --> 00:25:23.300
     for investors. And there is likely,

    509
    00:25:23.300 --> 00:25:26.500
     you know, these issues that we've been talking about they're not resolved.

    510
    00:25:26.900 --> 00:25:29.800
    Right and in and in fact, there will be other things

    511
    00:25:29.800 --> 00:25:32.300
     that will Royal the markets layered on

    512
    00:25:32.300 --> 00:25:35.400
     top of these like for instance a fight over

    513
    00:25:35.400 --> 00:25:36.300
     the debt ceiling, right?

    514
    00:25:37.300 --> 00:25:40.700
    So there's likely more turbulence ahead. However, right the

    515
    00:25:40.700 --> 00:25:44.200
     the best option for the long-term investor is

    516
    00:25:43.200 --> 00:25:46.300
     to find a philosophy that

    517
    00:25:46.300 --> 00:25:49.500
     makes sense for them build a portfolio around that and

    518
    00:25:49.500 --> 00:25:53.100
     then maintain the course maintain

    519
    00:25:52.100 --> 00:25:54.200
     the discipline.

    520
    00:25:55.800 --> 00:25:58.300
    Through up markets down markets, you know turbulence in

    521
    00:25:58.300 --> 00:26:02.000
     the headlines the it's the discipline of maintaining

    522
    00:26:01.200 --> 00:26:04.800
     that philosophy over time that is provides the

    523
    00:26:04.800 --> 00:26:07.600
     reward for long-term investors and their steadfast

    524
    00:26:07.600 --> 00:26:08.000
     patients.

    525
    00:26:08.800 --> 00:26:12.700
    Through these short-term Market movements or macroeconomic

    526
    00:26:11.700 --> 00:26:14.300
     events are the things

    527
    00:26:14.300 --> 00:26:18.000
     that are going to generate returns for them over the next Century, right? That's

    528
    00:26:17.500 --> 00:26:20.900
     it just is what it is. It's what it has been for

    529
    00:26:20.900 --> 00:26:23.600
     those investors who are looking at 2023 here are

    530
    00:26:23.600 --> 00:26:26.400
     some statistics. Hopefully that will Empower you to maintain

    531
    00:26:26.400 --> 00:26:30.800
     the course over the sort of the past Century

    532
    00:26:29.800 --> 00:26:32.600
     the US has endured 15

    533
    00:26:32.600 --> 00:26:33.600
     recessions.

    534
    00:26:34.500 --> 00:26:37.700
    In 11 of the 15 or 73% in

    535
    00:26:37.700 --> 00:26:37.800
     time.

    536
    00:26:38.400 --> 00:26:41.500
    Returns on stocks were positive two years after the

    537
    00:26:41.500 --> 00:26:42.300
     recession began.

    538
    00:26:43.200 --> 00:26:46.900
    With an annualized average Market return 7.8% So

    539
    00:26:46.900 --> 00:26:49.800
     if you're concern going into 2023 is always

    540
    00:26:49.800 --> 00:26:52.100
     it gonna tip into recession. Should we be concerned with

    541
    00:26:52.100 --> 00:26:55.700
     what the FED is doing? Are they gonna go too far? My answer to you

    542
    00:26:55.700 --> 00:26:59.100
     would be look recessions are not new with the

    543
    00:26:58.100 --> 00:27:00.300
     we've experienced them.

    544
    00:27:01.500 --> 00:27:04.300
    Over time in fact more frequently than

    545
    00:27:04.300 --> 00:27:07.200
     you would think and yet in a vast majority of those

    546
    00:27:07.200 --> 00:27:10.100
     recessions. If you just have the patience to ride through

    547
    00:27:10.100 --> 00:27:13.400
     it you're rewarded on the back end of that to to

    548
    00:27:13.400 --> 00:27:16.300
     the tune of sort of a healthy average annual Market return of

    549
    00:27:16.300 --> 00:27:16.800
     almost 8%

    550
    00:27:17.200 --> 00:27:20.500
    So going into 2023 expect volatility

    551
    00:27:20.500 --> 00:27:23.300
     expect there to be things playing out in the headlines. Do not

    552
    00:27:23.300 --> 00:27:27.000
     let that pull you away from the long-term

    553
    00:27:26.600 --> 00:27:29.800
     discipline and know that the the

    554
    00:27:29.800 --> 00:27:33.200
     rationale for why you're investing over

    555
    00:27:32.200 --> 00:27:36.400
     the long term is sound and

    556
    00:27:35.400 --> 00:27:38.400
     you have expectation that this too

    557
    00:27:38.400 --> 00:27:40.500
     shall pass and I'll be rewarded for that patients.

    558
    00:27:41.300 --> 00:27:44.500
    Yeah, absolutely discipline and patience tends to be the biggest Catalyst

    559
    00:27:44.500 --> 00:27:47.600
     for rewards for investors over the long term and going

    560
    00:27:47.600 --> 00:27:51.000
     into 2023, you know investors who might be uneasy

    561
    00:27:50.500 --> 00:27:54.000
     unable to sleep at night concerned about their portfolios.

    562
    00:27:53.300 --> 00:27:56.500
     They should go meet with their financial advisor.

    563
    00:27:56.500 --> 00:27:59.500
     Make sure that their current asset allocation is aligned with

    564
    00:27:59.500 --> 00:28:02.200
     their financial plan and their long-term goals

    565
    00:28:02.200 --> 00:28:06.100
     and objectives and you know, I think staying

    566
    00:28:05.100 --> 00:28:09.300
     the course and remaining disciplined makes the

    567
    00:28:08.300 --> 00:28:11.700
     most sense but making

    568
    00:28:11.700 --> 00:28:14.500
     sure that your portfolio is aligned with what you want to achieve with.

    569
    00:28:14.500 --> 00:28:17.500
     Your hard-earned capital is something investors could

    570
    00:28:17.500 --> 00:28:20.600
     be doing into 2023 and then expect your

    571
    00:28:20.600 --> 00:28:23.300
     advisor say everything's gonna be fine unless there's

    572
    00:28:23.300 --> 00:28:27.200
     some sort of life-changing event that happens with the

    573
    00:28:26.200 --> 00:28:29.700
     investor not necessarily the markets

    574
    00:28:29.700 --> 00:28:32.100
     Casey. Thank you so much for your insights today.

    575
    00:28:32.100 --> 00:28:35.100
     It's always a pleasure. We love talking to you and

    576
    00:28:35.100 --> 00:28:38.000
     we look to have you back over the next

    577
    00:28:38.200 --> 00:28:40.700
     couple of podcasts and I want to thank all of our listeners out there.

    578
    00:28:41.100 --> 00:28:45.500
    Joining us today. Please feel free to access other

    579
    00:28:45.500 --> 00:28:49.500
     podcasts that we have done and they

    580
    00:28:48.500 --> 00:28:51.300
     can be accessed anywhere you get your

    581
    00:28:51.300 --> 00:28:54.500
     podcast. So thanks everyone and we will see you

    582
    00:28:54.500 --> 00:28:57.900
     next time symmetry Partners LLC is an

    583
    00:28:57.900 --> 00:29:00.500
     investment advisor firm registered with the Securities

    584
    00:29:00.500 --> 00:29:03.500
     and Exchange Commission The Firm only transacts business

    585
    00:29:03.500 --> 00:29:06.400
     in states where it is properly registered or

    586
    00:29:06.400 --> 00:29:09.900
     excluded or Exempted from registration requirements

    587
    00:29:09.900 --> 00:29:12.700
     registration of an investment advisor

    588
    00:29:12.700 --> 00:29:15.200
     does not imply any specific level of skill or

    589
    00:29:15.200 --> 00:29:18.200
     training and does not constitute an endorsement of

    590
    00:29:18.200 --> 00:29:21.200
     the firm by the commission. No one should assume that

    591
    00:29:21.200 --> 00:29:24.900
     future performance of any specific investment investment strategy

    592
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     product or non-investment related

    593
    00:29:27.800 --> 00:29:30.600
     content made reference to directly or indirectly in

    594
    00:29:30.600 --> 00:29:32.700
     this material will be profitable.

    595
    00:29:33.700 --> 00:29:36.200
    As with any investment strategy there is the

    596
    00:29:36.200 --> 00:29:39.800
     possibility of profitability as well as loss due

    597
    00:29:39.800 --> 00:29:42.500
     to various factors including changing market

    598
    00:29:42.500 --> 00:29:44.900
     conditions and/or applicable laws.

    599
    00:29:45.600 --> 00:29:48.800
    The content may not be reflective of current opinions

    600
    00:29:48.800 --> 00:29:51.900
     or positions. Please note the material

    601
    00:29:51.900 --> 00:29:54.300
     is provided for educational and background use

    602
    00:29:54.300 --> 00:29:57.800
     only moreover. You should not assume that any discussion or

    603
    00:29:57.800 --> 00:30:01.100
     information contained in this material Services the

    604
    00:30:00.100 --> 00:30:03.500
     receipt of or as a substitute for

    605
    00:30:03.500 --> 00:30:05.900
     personalized investment advice.