Click below to listen to Episode 140 – Diversification 101: Part 3 – Building Models






Diversification 101: Part 3 – Building Models

Listen to the last of our 3 part series on Diversification.

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You’ve made it to the end of our three part series on Diversification! We’ve already talked about charts and sectors, and in this episode Bob and Shawn discuss putting everything together to build a properly diversified investment model. There’s a lot that goes into being properly diversified, and it is not something that just happens over a day or two of learning. It takes time, education, and lots and LOTS of research.

If a properly diversified investment portfolio is truly something that you are wanting to achieve as a do-it-yourself investor, then these episodes are a great place to start. However, this is just the tip of the iceberg when it comes to everything that goes into diversification within investments. Are you ready to get started on your own or find a fiduciary based financial advisor to help you along the way? This episode may just help you come to a decision.

HOSTED BY: Bob Barber, CWS^®, CKA^®
CO-HOST: Shawn Peters

Mentioned In This Episode













Christian Financial Advisors



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Bob Barber, CWS^®, CKA^®



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Shawn Peters



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Website


Bible Verses In This Episode






ECCLESIASTES 11:2

Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.

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EPISODE TRANSCRIPT

Intro:

Welcome to Christian Financial Perspectives, where you’re invited to gain insight, wisdom, and knowledge about how Christians integrate their faith, life, and finances with a biblical worldview. Here’s your Christian Financial Advisors’ host, Bob Barber and his co-host, Shawn Peters.

Shawn:

Welcome to another episode of Christian Financial Perspectives. We’re so glad you joined us today. We’re gonna be covering part three of our diversification series, and if you like this video or in general, if you like videos on financial topics from a Christian worldview, then we would love it if you would hit that subscribe button. It costs a total of $0 to do that, so we’d really appreciate your support in that way. And of course, as always, you can like the video and share it with other people. So Bob, let’s get into part three today.

Bob:

Part three of diversification, Shawn. So we have really given a good education, today’s gonna be the last part of it. If you haven’t heard the first two parts, we’re gonna recap that a little bit and I would invite you…

Shawn:

Those will be linked on screen as well.

Bob:

Okay, good. Go back and watch them because what we’re really teaching you is how we diversify here. But if you are do-it-yourselfer or you wanna do it yourself and you wanna spend a couple years learning this, then you could do that.

Shawn:

Yeah, that’s right.

Bob:

And so the first part that we went over a couple weeks ago was the equity and fixed income style charts. And we’re putting that up for you to take a look at, and this describes when you’re going to diversify and build a portfolio that the equity style chart is all the different styles of stocks that have to do with large cap value, blend, growth. You can see mid-value blend growth, and small-value blend growth. And it has to do with the size of the companies. The large companies are your very well-known names like the Walmarts of the world, the Exxons, the big boys.

Shawn:

That’s right. The 10 billion plus.

Bob:

10 billion.

Shawn:

It’s crazy to think that now the large cap is 10 billion plus.

Bob:

When I started, like I said in the last two programs, it was about 2 to 3 billion. So, it’s really in increased a lot. And then we went into the fixed income style charts and how that all works. And it’s very, very important. This is the foundation for building a diversified portfolio is understanding where the stocks fit within all of these styles, along with international and emerging markets and domestic markets. So there’s a lot to learn here.

Shawn:

Exactly. This is just to indicate how picking the, a bunch of random different companies, for example, is not really diversification because you need to make sure you know where those different positions fall. So if you end up picking all value large cap, well, you’re not really diversified very much, even if you have a bunch of different holdings.

Bob:

The different styles will do well in different markets. Right now. the value style is working much better than the growth style as interest rates have gone up 450% in the last year. Cause they started at 0%. Now, they’re at 4.5%. not much more to go though. I will say that. It’s a good thing. They’re expecting only about another 1/2 to 3/4 of a point of interest rate rise. When you look at the percentages, that’s only a 15% more to go to get to that point. So that’s a good point.

Shawn:

It’ll be interesting to see how a lot of your very growth focused positions companies will handle the next few years with all these changes that we’ve had in interest rates and just the economy as a whole. We’ve seen tons of the larger tech companies laying off people, which is really sad. They brought on a lot of people, but now they’re laying off a bunch of people. And I just wonder if we’re gonna see more of that where the growth focused companies are gonna have to really scale back, and you’re gonna see more of the value focused going forward.

Bob:

Yeah. And the value focus normally has a lot less debt or no debt at all. So that was the first week, that was two weeks ago. And then last week we covered all the different sectors. And we went into the industries of each sector. So you have 12 different sectors. If you look on your screen, you’ll see that.

Shawn:

And I’ll go ahead and just read them off really quick.

Bob:

Yeah, go for it.

Shawn:

We’ve got healthcare, communication services, technology, consumer discretionary, consumer staples, energy, financial, industrials, materials, utility, real estate, and physical assets.

Bob:

And there’s all these industries within each sector. So you gotta understand how all these sectors work and the industries within each one, whether you’re going to overweight or underweight in those different sectors, and how that’s going to fit into that equity style chart.

Shawn:

Okay. And then of course, depending on your own investment policy or your own investment philosophy depends on are you typically going for something that’s hot or are you going for something like here at our firm, we always use what’s called a contrarian theory. So, if we see one of these sectors or one of the industries within a sector is just really beaten down, is down 50% for the year —

Bob:

Been way over sold.

Shawn:

Yeah. We’re looking at that as that’s probably a good buy. If something is up 20, 30, 40%, well, we’ll wait for that to go on sale.

Bob:

Even though so many will say, well that’s a trend and follow it.

Shawn:

But how much longer is that trend gonna go?

Bob:

So my style, if you were to think about my style, and we always say it it around here, I’m kind of old, but my style is a Warren Buffet style. I like to buy when everybody else is selling. And I like to sell when everybody else is buying. So that’s just the way I do things.

Shawn:

And it depends on how, for those of you watching, depends on your particular investment philosophy, but you should have that. You should know in addition to this, like, how are you going to manage this? How are you gonna invest in this? For example, you can always check out our website and we’ll put the length in description, but we have our own investment philosophy that we follow.

Bob:

We’ve talked about that right here on the podcast and YouTube channel the seven criteria that we use for investing. So today what we’re going to cover is building models. It’s taking all of this, these sectors and using the equity style chart, fix income style chart and building the models that go with that. And we’re gonna try to go through this very quickly, because it could take an hour, we could definitely spend an hour on this. We’re not; we’re gonna spend just minutes on each one. But we take the models, use these sectors and style charts, and we’re just gonna talk about five main models. There’s more models in this. But we’re gonna talk about the five main models and what we do here at Christian Financial Advisors. And we have these five main models. They start with ultra-conservative, then we have conservative, then moderate or balance, then growth, and aggressive growth. So Shawn go into how we build that first ultraconservative portfolio.

Shawn:

Yeah. So the first one, the ultra-conservative, is what would be considered a 100% fixed income model or portfolio, depending on your particular nomenclature you’d like to use. So for this one, it has the least amount of volatility, and we use the fixed income style chart plus some investments outside of the boxes, like maybe CDs, money markets, possibly some dividend paying stocks like the real estate sector, but just a very small percentage. Whatever it is, even if it’s not technically considered fixed income, it is something that would be very value focused and large cap, so it’s really no growth expected. It’s just paying dividends. So again, the focus on this is producing consistent income. This is not for growth.

Bob:

And it’s going to be your least volatile type of portfolio.

Shawn:

But there’s still volatility. Obviously, I mean, even in 2022, every market was down.

Bob:

Well, 2022 was so unique because we were taking interest rates from zero, like I said, up over 450%.

Shawn:

Exactly. But keep in mind, obviously fixed income was not hit nearly as hard as the overall equity market.

Bob:

Not, not near.

Shawn:

So this would still hold true that there is the least amount of volatility. But it doesn’t mean it’s immune to any kind of volatility.

Bob:

So, then you take one step up and what that means is you’re just having less fixed income. So this is typically going to hang out in the 80% fixed income arena.

Shawn:

Well we say 80/20.

Bob:

Yeah, the 80/20 and then the 20% equities. Now these equities that we’ve been doing in a conservative are going to be more of your conservative equities as well. So, they’re gonna be more of your large cap value, your dividend paying stocks. Where when we get up to the fifth portfolio we’re gonna speak of, aggressive growth, that’s not gonna have near as much large cap. It’s gonna have more mid-cap and small cap in it and emerging markets.

Shawn:

And conservative, you could have some large mid-cap blend, but you’re not gonna have a whole lot of mid-cap and definitely not small cap. At least that wouldn’t be recommended.

Bob:

So we call this our conservative portfolio. So we had ultra-conservative, then conservative, then we break right into the middle. This is actually our number one portfolio that we have here. I would say probably across America, it’s probably, that’s where most people have their money. And that would be in a moderate or a balanced portfolio. And it’s really focusing on a 50/50 mix.

Shawn:

Yeah. It could be a 50/50. I know for us here, a lot of times we will be at like a 60/40 on the, well, I guess just the whole truth, how we’ve doing this. So fixed income then equity, this would be a 40/60 usually, but it could be a 50/50 and obviously just kind of depends on your particular style of management that you’re following or if you are working with a larger company. But for us, it’s usually 40% fixed income, 60% equity. And because we are also a tactical management firm, sometimes we will adjust those numbers down if the market just seems overheated.

Bob:

Well, like last year, we felt like the market was way overheated. We’re talking in 2021. 2021. Because now this is 2023, so it wasn’t last year, it was the year before that. We went from a 60-65% exposure – it had gotten to 65 because our growth part of the portfolio got so hot. And everything was going up so much, we pulled that all the way down to 30-35, so we took it way, way down on the equities. That’s not normal, though. Normally, you’re gonna be 50-60% equities and 40-50% fixed income in a balanced, moderate portfolio. And you’ll see this across the board if you go start looking around at the different asset allocation in the different big firms.

Shawn:

We did that again, just a very, very short term like over a few months at most because then, as we started to see, some of the positions that we had either previously been in or were looking at moving more into, one of ’em was one of the funds that we used for healthcare. Healthcare was way down for the position that we would normally buy into, and so we moved more back into that position. And then kind of throughout the year, especially in the first six months of the year, we were deploying more and more of that cash that we had pulled back back into those equities, which just a form of dollar cost averaging. Again, using contrarian theory for us, we, here at the firm, we wanted to look for those opportunities of things that were on sale, if you will.

Bob:

And so it was a good move. It’s been a very, very good move.

Shawn:

And it doesn’t always show up as as a huge benefit. So, if you are using this tactic yourself at home or you’re interested in how we do it here, it won’t necessarily be a huge difference in that first 12 months, I would say. But it’s one of those where over the next two or three years, you start to kind of notice a difference between if you had just held onto everything versus if you did tactically kind of move in after the markets have gone up, move back in as it goes down, that’s when you start to notice that difference from that cost basis.

Bob:

So next, we get up to what we refer to as our growth portfolio and the growth portfolio still has some fixed income in it. But now instead of that being like it was in conservative where it was 80% fixed income, now it’s turned all the way down to 20% fixed income and maybe even a little less than that. And the equity portion can be up to 80% in the equity portion. And this is more going to be towards the growth side of the equation, too. You get back to the equity style chart and you take a look at that and that’s gonna be on the growth side, not on the value side. Now, you can still reach into value and we were doing that this last year, and we are still there right now in our growth,

Shawn:

But it is going to be more small and mid-cap as far as the valuation side. and then obviously depending on the need, it’s gonna be more growth could have some value or blended in.

Bob:

And if you remember back in October of 2021 in our growth where we were 80-85%, we pulled that back to 60%. So, we pulled back a lot on that. And now we’ve moved back into those, we’ll see the major benefit of that will be when the markets rebound. And history shows us, the markets have always rebounded. Will they always rebound? We can’t make the statement that they always will.

Shawn:

But history has shown that they, so far, have always rebounded.

Bob:

100% of the time.

Shawn:

I mean, in my opinion, Bob, if the markets don’t rebound, there’s probably much bigger concerns anyway that I don’t know who’s gonna really care about the markets anyway.

Bob:

Exactly. And there’s cycles and we’ve mentioned this many times in Ecclesiastes, there’s a time for everything. There’s not always gonna be good times, and there’s not always gonna be bad times. So when you’re in bad times, think about the good times because they’re gonna come around. When you’re in good times, you need to prepare for the bad times. And then this brings us to our last portfolio, which is…

Shawn:

Yeah. So the last one for our firm here, it’s usually around the 0% on the fixed income, but it could be up to 10% fixed income. And then the equity side of it is based on those numbers, you know anywhere from 90% to 100%. I would say the average is usually about 98%.

Bob:

That’s correct.

Shawn:

We do usually hold back just a little bit for cash. And this would be considered aggressive growth. So these are, again, this is almost 100% equity and it’s obviously gonna be a lot more small and mid-cap. It’s very growth focused. There may be some positions or sectors in there in the aggressive that we might not use in some of our other models just because, again, they are more aggressive.

Bob:

They’re a lot more volatile, and you gotta be able to handle extreme volatility when it comes to the aggressive growth style because you are, like you said, you’re nearly all equities and stocks. They fluctuate much more than a fixed income. So these are our five main models and we’re gonna talk about how we use them.

Shawn:

One thing I wanted to highlight, too, Bob, to keep in mind these five different models that we highlighted, they also all have a average expected investment time horizon associated with them. So for that volatility to make sense, there also needs to be an assumption that, like for aggressive, I’ll start there with aggressive, if you don’t have at least 10 years, maybe even 12, but at least 10 years that you’re gonna put the money in aggressive and not touch it at all and not panic and withdraw the money, then you have no business investing in that aggressive of a fund or model. And then it kind of goes down from there where, I mean, even ultraconservative is if you don’t have at least two to three years —

Bob:

That’s correct.

Shawn:

Then put in a CD. Put it in a high yield savings account. Like there’s no reason to even invest it in even something like ultra conservative.

Bob:

Which we do here. We do CDs. We have what we call our non-managed CD or we can buy treasuries with that. We don’t charge a management fee, it’s just a onetime fee to move into that.

Shawn:

Unless you’re doing it on your own.

Bob:

And it’s a very, very low fee. I will tell you right now, for $1000,000 CD it’s $300. For a $50,000 CD, it’s $150. So it’s basically 30 basis points one time once we buy that for you, and we can actually buy the same CD you can get at your local bank, we can get you a lot better rate. That’s kind of a weird deal.

Shawn:

That’s the main thing just to keep in mind is not just what those percentages are and the asset mix, but also keep in mind that the more aggressive you go, the longer in years, not months, but the longer in years you need to be willing to leave it invested. Otherwise that volatility, if you time it wrong, could really hurt you in the long run.

Bob:

It could. It could. And we have other models that are outside of this, like a real estate model or healthcare model or energy model. It’s all the different sectors. You could have models within there. So as you can see, this is very complex. It’s all about overweighting and underweighting between all the different parts, and we use all these same methodologies between fixed and equities. And the main thing, once you learn how to do all this is you gotta understand where do all these models fit for you and your long-term goals, your short-term goals. Some of our clients, they’ll use all five of these models. Some will use just two or three. It all depends on what your short-term and long-term goals are and how all that fits. This is the most important part, how it all fits within a comprehensive interactive financial plan.

Shawn:

That’s right. Because choosing which one of these models to go into when, like you said Bob, whether it’s 1, 2, 5 of them, really comes down to the question of are you nowhere near retirement? Are you getting close to retirement? Are you in retirement? If you’re in retirement, what are your actual income needs that you need to cover your expenses for retirement now that you’re not working anymore. And so, if you look at that and you figure out those numbers, then you get to the question of, okay, great, well if I need, let’s say I need $60,000 a year in today’s dollars. Okay, well if I need $60,000 a year and I have $800,000, okay, how much of that should I put into something that’s more conservative, like the ultra-conservative account,

Bob:

I’m gonna say about five years.

Shawn:

Yeah. About five years ago.

Bob:

So you need to have $300,000 in around ultra-conservative or conservative, and then beyond that, you can get over into that area.

Shawn:

Exactly. Exactly. And then the idea with that is of course we do this for our clients, but the idea being that you have your less volatile account with five years worth of capital for those income needs, so that way the rest of your portfolio can stay invested longer with a little more growth focused, because even if it just averaged 0% in your ultra-conservative, well in that case, you’ve still got five years before you might have to potentially touch the more growth focused account.

Bob:

And we call that…

Shawn:

And that’s a real simple example.

Bob:

I call that outlasting a bear market. That’s the bottom line is you can outlast a bear market when you have enough outside of the markets to take you through that bear market. Bear markets normally last 13 months. Which, by the way, it kind of says our bear market officially started in ’22 around June. A bear market is where it’s down 20% or more, correction is between 10-20%. So where it was down 20% or more, it started in June, average is about 13 months. If we do that average, we’re looking at June to July of this year that we would be coming out of that market. And the good thing is too, like I said, a lot of this has been cost from the fed lowering interest rates from 0% to 4.5%. They’re expected to go, in February 1st is the next time, they’re expected to announce another 0.25% and maybe another 0.25% or 0.5% on top of that. So the fed’s basically done, they only have 15% more to go, which is a good thing. So they’ve raised them 450%, it’s taken the market down 20%. So if you raise ’em another 15%, how much more down is that gonna take the market?

Shawn:

Right, exactly.

Bob:

Okay. With all this being said, in today’s part three, you’ve got part two and part one, you can definitely, you could do this yourself if you’re willing to devote years to it and learning how to do this and know how all this goes together with a comprehensive financial plan. Or, you can hire a fiduciary fee-based financial advisor like we are. Another thing that we didn’t even mention, I forgot, we want to make sure to do this, is we put all this, also, through our Biblically responsible, values, morally based screens before we put the holdings into the portfolios, and then we gotta put it through all the financial fundamentals, which is extremely important too. We got so cought up in all the different models, I forgot to mention that, which is the most important part.

Shawn:

Yeah. All of this and then great, here’s our top 30 picks for the 10 that we’re trying to isolate down to. And then we’ll screen through all of those and say, okay, which one of these actually pass our faith-based screens for Biblically responsible investing? And then we can finally narrow down our choices.

Bob:

Yeah. Financially, is it gonna make it? What are the PE ratios? How’s the company, how much debt is in the company? et cetera. What are the analysts saying about it? So, that concludes this three-part series. I hope this has been very helpful to you. It’s always good for me just to talk it out. I realize how much we do and how many years of experience has gone behind this. And Shawn, it really hit me as I was coming to the conclusion of this. You see these TV commercials that just show somebody doing this on their lunchtime with an app and these companies, these brokerage companies advertising online investing, and that is insanity to me when you look at what goes into this. You don’t just, you can’t just do this over lunchtime. If you have the time you wanna commit, you need to commit 20 or 30 hours a week to this, to learning this for many years, and then you could be ready to do it yourself.

Shawn:

Well, I’d almost argue, Bob, that if it really was that easy for people to be successful consistently over years, not just, oh, somebody’s been trading for a few months or something like that, but for a couple decades, how many hundreds of billions of dollars under management do you think we would have right now if we could just do it that easily?

Bob:

Yeah, that’s right. Most definitely.

Shawn:

So I think the idea there is that, yeah, sure, maybe it works for a little while, but it’s not gonna really work for a long term strategy. It actually, believe it or not, takes work and knowledge and diligence and a plan to be successful with this.

Bob:

Just like the mechanic now. I mean, I can’t work on my own car. It’s too complicated. So I’ll look at all that. So if you would like help from a fiduciary fee-based Christian advisor, we’d love to help you. You can contact us during business hours at (830) 609-6986. You can also text that number if you’d like to, or you can find us on the web www.christianfinancialadvisors.com.

Shawn:

Thank you so much for joining us on this episode. God bless and have a wonderful day.

Outro:

We invite you to listen to all of our past episodes, covering many financial topics from a Christian perspective. To make sure you don’t miss any of Bob’s upcoming episodes. You can subscribe to Christian Financial Perspectives on iTunes, Google Podcasts, Spotify, Stitcher, or Amazon Music to learn more about integrating your faith with your finances. Visit Christianfinancialadvisors.com or call (830) 609-6986.

Disclosures:

Investment advisory services offered through Christian Investment Advisors, Inc DBA Christian Financial Advisors also known as Christian Financial Advisors Management Group, a registered investment advisor. Comments from today’s show for informational purposes only, and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the host Bob Barber and his guests. Bob does not provide tax advice and encourages you to seek guidance from a tax professional. While Christian Investment Advisors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.