Latest / Money Matters with Greg / Episode 157: Don't Put All Your Fish in One Basket: The MPT Playbook

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Episode 157: Don't Put All Your Fish in One Basket: The MPT Playbook · Money Matters with Greg

• 0:07
  Speaker 1: Good morning and welcome to Money Matters with Greg.
• 0:10
  Speaker 1: It's Greg Farrell, ceo and owner of Farrell Wealth.
• 0:15
  Speaker 1: It's a wealth management firm here in Valparaiso, indiana, and serving clients in over 22 states well, up to 22 states nationwide on the wealth management side and we talk here on Money Matters with Greg about money to help you out with your money and add some value to your life.
• 0:33
  Speaker 1: Here for what this is episode 158, I believe, and excited to be here podcasting wherever you pod and then also wvlp 103.1 fm, locally, very proud to be a part of the programming at wvlp 103.1.
• 0:53
  Speaker 1: You can find their program at wvlporg and I highly recommend many of the shows that are available to you to stream via their website.
• 1:03
  Speaker 1: Also through tune in radio.
• 1:05
  Speaker 1: You can check us out there and find this show and many others at wvlp available.
• 1:13
  Speaker 1: So you can also check on our socials at feral wealth and if you have any questions that you'd like to hear or any topics you'd like to hear, we'd love to be able to hear from you.
• 1:24
  Speaker 1: Just email me at greg at feralwealthcom and we'd love to hear from you.
• 1:30
  Speaker 1: Again.
• 1:30
  Speaker 1: The show is Money Matters with Greg and we talk about money here and how things are affecting your money.
• 1:36
  Speaker 1: We're going to talk about modern portfolio theory here today.
• 1:40
  Speaker 1: It is really the basis as to what we drive and how we create portfolios, and mpt is a noble, peace prize winning theory that we are big believers in and wanting to be able to talk about that.
• 1:57
  Speaker 1: And then we're also going to update on the market, and you know what it's been most of the shows that we try to do.
• 2:05
  Speaker 1: I mentioned the market.
• 2:06
  Speaker 1: We talk about investments and how things are going in the market.
• 2:10
  Speaker 1: Typically, we run by it and be brief, but just in the last few months it's just taken over the show, just because it's just been so important for everybody here.
• 2:23
  Speaker 1: What's going on?
• 2:24
  Speaker 1: The market's been moving at a relentless pace up and down.
• 2:28
  Speaker 1: We've had a big move just in the last few days.
• 2:33
  Speaker 1: The news has been, the news cycle has just been tremendous, and I feel like it's necessary to update as many people as possible and just bring you up to date on what exactly has been going on.
• 2:47
  Speaker 1: You know we recently had the US stock indices gapping mostly higher with a new AI chip deal optimism.
• 2:58
  Speaker 1: That happened on Tuesday of last week.
• 3:00
  Speaker 1: By the way, it's May 15th today.
• 3:02
  Speaker 1: Happy May 15th.
• 3:03
  Speaker 1: And, by the way, I hopeth um, today.
• 3:03
  Speaker 1: Happy may 15th and, by the way, I hope everybody had a great mother's day.
• 3:07
  Speaker 1: Uh, to you and your mothers, uh, out there, I hope you spoiled them and I hope they were spoiled.
• 3:12
  Speaker 1: And, uh, I hope all the mothers listening today had a great day.
• 3:16
  Speaker 1: Uh, thank you for all you do and for putting up with all of us.
• 3:19
  Speaker 1: Uh and uh, thanks for being awesome moms.
• 3:22
  Speaker 1: I know my mom is extremely important to me and just wanted to be able to give a shout out here to all great moms out there.
• 3:33
  Speaker 1: Thanks for being awesome.
• 3:35
  Speaker 1: Back to the AI chip deal optimism for the last Tuesday.
• 3:39
  Speaker 1: There was also news on a tax cut bill that was advancing through the house and the approval process was very well received in the market Overall.
• 3:50
  Speaker 1: You know, it's just basically been just kind of a rip.
• 3:54
  Speaker 1: You had a number of different things that came out of Japan and that was thoughts that the trade deals with Japan and South Korea look like they're being finalized.
• 4:05
  Speaker 1: China announced a pause on their quote-unquote unreliable entities list for multiple US companies and that halted the export control of measures to really kind of further ease the US-China tensions.
• 4:20
  Speaker 1: Qatar announced plans to invest $1.2 trillion in the US in the coming years.
• 4:26
  Speaker 1: That was just announced just in the last couple of days, you know, including a $200 billion deal with Boeing for long range jets.
• 4:37
  Speaker 1: That was touted.
• 4:39
  Speaker 1: That will result in 400,000 US manufacturing jobs.
• 4:43
  Speaker 1: So that was big news.
• 4:46
  Speaker 1: And so we're really kind of seeing this new bullish argument that has been jumping into the news cycle.
• 4:57
  Speaker 1: And what a switch.
• 4:58
  Speaker 1: I mean, a month ago, or even a little bit later than that, the outlook of the economy was stagflation and the outlook for stocks was bordering on a quote-unquote lost decade, similar to what was witnessed in the 1970s and in 2001 through 2009.
• 5:15
  Speaker 1: Man, things have really changed and just in the past month the S&P 500 surged basically 10%.
• 5:22
  Speaker 1: The VIX dropped from 30 to 18.
• 5:24
  Speaker 1: The sentiment indicators that we watch have swung to be more bullish.
• 5:28
  Speaker 1: The CNN fear slash greed index that we watch, it's back to the greed category at 71.
• 5:36
  Speaker 1: That's close to the extreme greed number, which marks 75.
• 5:40
  Speaker 1: And that's close to the extreme greed number, that which marks 75, and that's exploded really from a negative, very negative reading back just a month ago 19.
• 5:52
  Speaker 1: So you see how sentiments really changed and I would say you know just in watching the cnbc's and the bloombergs and the fox business throughout the day.
• 6:02
  Speaker 1: They're all on in the office at times.
• 6:04
  Speaker 1: You know the vast majority of the analysts that we follow and what we watch is now positive on stocks, and you know so.
• 6:12
  Speaker 1: It's behind all this bullish argument.
• 6:13
  Speaker 1: You know it's a 10% global tariff.
• 6:16
  Speaker 1: Really, what it comes down to is it doesn't look like it's going to be enough to derail a US economy or cause stagflation.
• 6:23
  Speaker 1: So with the reduction of the tariff in the UK that came about just last two or a week ago and China is really leading its investors to believe that the tariff regime for the Trump administration will be a 10% global tariff on imports.
• 6:40
  Speaker 1: A larger tariff on select categories such as steel on imports.
• 6:46
  Speaker 1: Larger tariff on solid categories such as steel and non-Canadian and Mexican imports and pharmaceuticals, among others.
• 6:56
  Speaker 1: The exemptions for key imports such as, let's say, energy or electronics, semiconductors, auto parts really just kind of seeing where things are easing here, where things are ultimately falling, which is kind of what we've been talking about on where the basically the art of the deal is with Trump and how he tries to negotiate and ask for the world and then usually backs off from there and gets ultimately where a selling point.
• 7:27
  Speaker 1: You know the other bullish argument is inflation will not rise and the Fed will cut rates.
• 7:32
  Speaker 1: You know it's undeniable that a 10% global tariff will increase prices.
• 7:38
  Speaker 1: But the Fed really follows specific inflation measures the CPI and the core PCE price index, and it's possible that decreases in housing and energy will really offset any price increases in consumer goods.
• 7:55
  Speaker 1: Now I always like to mention housing prices increase increases.
• 8:01
  Speaker 1: It works slowly out of inflation data so it's a much slower uh tell, but that's one of the reasons the cpi remains so elevated for so long.
• 8:12
  Speaker 1: So it works both ways.
• 8:14
  Speaker 1: And uh, while, uh, you know, with housing price increases now low combined with potentially lower oil prices, is now low combined with potentially lower oil prices and, like today, oil is down 3%.
• 8:31
  Speaker 1: On the news out of Iran and a possible nuclear deal that looks like it's pending Bottom line, inflation is not a big risk as the Fed thinks, and once that was really obvious.
• 8:41
  Speaker 1: That was an easy play up.
• 8:42
  Speaker 1: But if they cut rates that'll further support stocks.
• 8:48
  Speaker 1: So we are seeing a valuation that we always like to be able to look at as far as forward valuation on forward-looking earnings.
• 8:59
  Speaker 1: And the S&P is rather expensive when you're getting up there as far as where we are today based on earnings and where earnings are becoming.
• 9:06
  Speaker 1: However, if you look at estimated earnings come July we're not going to be looking at much of the year here because things have moved so fast and furious You're going to be looking forward to really July, really into the year 2026.
• 9:21
  Speaker 1: Really July, really into the year 2026.
• 9:22
  Speaker 1: And 2026 S&P earnings are expected to be somewhere around $290 a share and using this next year S&P trading, it's only about 20 times and that's expensive from the average of 16 or 16, 17 in there is where we kind of look at the average.
• 9:44
  Speaker 1: 16, 17 in there is where we kind of look at the average.
• 9:48
  Speaker 1: But that means that the S&P could rise another 290 points or so and still not be overvalued.
• 9:52
  Speaker 1: So do you agree with the bullish argument?
• 9:55
  Speaker 1: Now you know what would I say is look, you want to be cautious, for sure, and you want to find yourself sort of.
• 10:12
  Speaker 1: You know, as we say, just look at the data and dig into the data.
• 10:13
  Speaker 1: But if you agree with this, it's not crazy to agree with this argument that we could be just fine here.
• 10:19
  Speaker 1: If, if you don't agree with it, there's still so much uncertainty, it's tough to dismiss.
• 10:25
  Speaker 1: I totally get it too.
• 10:27
  Speaker 1: So it's one of those things where you know it could be either way.
• 10:33
  Speaker 1: You're being a little bit more aggressive, I guess, if you do agree with the bullish sentiment.
• 10:38
  Speaker 1: But things aren't as bad as they certainly uh, look like they were um just a month ago, uh, or even you know even a few weeks.
• 10:52
  Speaker 1: All right, so that's my update on the market, and I again I apologize, it's been um, uh, I just feel like it's necessary to bring up the market initially in the show.
• 11:05
  Speaker 1: We've not been able to add a lot of guests to the show as many as we'd like, just because we feel like we need to spend the time filling everybody in on where all this tariff talk and earnings talk has taken us.
• 11:22
  Speaker 1: Now, that being said, I really wanted to get into a basic premise of how most wealth managers and most portfolio managers build a portfolio and how and why they do it in the way that they do, and just sort of explain in a very simple terms what exactly is modern portfolio theory and how does it work.
• 11:52
  Speaker 1: And I wanted to be able to get into that today as much as possible and just sort of discuss this in a very simple terms, and I hope I'm able to do so.
• 12:02
  Speaker 1: This in a very simple terms, and I hope I'm able to do so.
• 12:09
  Speaker 1: All right.
• 12:12
  Speaker 1: So what is modern portfolio theory or MPTs?
• 12:13
  Speaker 1: Basically, it's an investment framework that was developed by Harry Markowitz in the 1950s actually 1952, that really aims at to maximize expected returns for a given level of risk and to minimize for a given level of expected return.
• 12:27
  Speaker 1: So when you're talking about analogies and I'm going to have a number of analogies coming up to help you with this it really emphasizes diversification, which shows how combining assets with varying risk levels that you have and sort of correlations to the market and away from the market can kind of create a portfolio that optimizes the best risk return trade off for you and your risk tolerance.
• 12:58
  Speaker 1: So the key idea is that the portfolio's overall performance depends on not just an individual asset return but on how those assets all interact and how they're measured by their correlations and their volatilities, and ultimately you're putting together a risk tolerance number for you as an investor and how you want to be able to make sure that you have a portfolio that is the best for you as an individual and best for your family.
• 13:39
  Speaker 1: So I have a number of analogies in regards to this and I just want to make it kind of simple.
• 13:45
  Speaker 1: But imagine I love to cook.
• 13:47
  Speaker 1: So everybody knows, knows me, knows I love to cook.
• 13:51
  Speaker 1: You can check us out at Farrell at Farrell's Kitchen on Instagram, for sure.
• 13:56
  Speaker 1: We certainly have a number of different meals that I've made over the years.
• 14:02
  Speaker 1: Our daughters asked me to start doing this during COVID because I was cooking meals for the family, pretty much breakfast, lunch and dinner, and it's really turned into now well over 400 posts or so.
• 14:15
  Speaker 1: And check it out when you get a chance and if you have any suggestions as far as what to make or any questions about you know how we do our pulled pork and our ribs and everything else, we'd love to explain it.
• 14:32
  Speaker 1: I love talking cooking as much as we can.
• 14:34
  Speaker 1: That being said, I also like to fish.
• 14:40
  Speaker 1: I love to fly fish and many a times like to fish.
• 14:47
  Speaker 1: I love to fly fish and many of times I'd love to go fly fishing.
• 14:48
  Speaker 1: You know we have to have a meal, right, we have to pack something for lunch, of course, to sit on the river.
• 14:52
  Speaker 1: You're on the river all day and you don't necessarily, you know, need a huge meal, but you definitely want to have an assortment of different things that you make and, and with any meal there's many different ingredients that you put in, and with any river lunch or picnic or whatever you want to call it, you certainly have a mix to pack.
• 15:18
  Speaker 1: You have sandwiches, you have fruit, you have chips, maybe a dessert, maybe a thermos of coffee or other beverages that you might be interested in, but if one item doesn't really work out, you've still got plenty to enjoy.
• 15:37
  Speaker 1: And really that's the core to modern portfolio theory.
• 15:41
  Speaker 1: It is about spreading investments across assets, across different assets, like stocks, like bonds, real estate to really kind of have a balanced risk-reward.
• 15:57
  Speaker 1: And that includes commodities.
• 16:00
  Speaker 1: And lately, you know, certainly the conversation includes commodities.
• 16:06
  Speaker 1: And lately, you know, certainly the conversation about whether or not to include different currencies as far as cryptos and everything else is definitely something to talk about, but it all depends on your risk and what you want to be able to talk about.
• 16:21
  Speaker 1: So we look at many of those different assortments or those different assets as simply large cap, big large companies, huge companies, mid cap, middle-sized companies, small cap, smaller type companies that are building themselves into a mid cap.
• 16:45
  Speaker 1: Then you look at emerging markets, you look at frontier markets.
• 16:49
  Speaker 1: You look at international flavor and multiple different things.
• 16:55
  Speaker 1: They all go into that basket, ultimately, and not all investments move in the same direction at the same time.
• 17:03
  Speaker 1: When stocks are having a rough day, bonds might hold steady or even go up, and modern portfolio theory uses math to figure out the best mix of investments that gives you the highest possible return for the level of risk you're comfortable with.
• 17:18
  Speaker 1: And it's like finding the sweet spot where a portfolio is diversified enough to weather market storms, but still positioned to grow.
• 17:27
  Speaker 1: Why does this matter?
• 17:29
  Speaker 1: Because no one wants to lose sleep worrying about their investments, and at Ferro Wealth we use ideas like modern portfolio theory to build portfolios tailored to your goals.
• 17:44
  Speaker 1: Whether you're saving for retirement, a dream home or kids' education, the last thing you want to do is lose sleep at night, and you want to know that you're protected and you're taken care of in times of volatility like we've been having.
• 17:57
  Speaker 1: And modern portfolio theory really helps with that.
• 18:00
  Speaker 1: And it's not about picking that one perfect stock.
• 18:03
  Speaker 1: It's about creating a team of investments that all sort of work together and really win for you over the long haul.
• 18:14
  Speaker 1: All right, again, this show is Money Matters for Greg.
• 18:16
  Speaker 1: I'm Greg Farrell, ceo and President of Farrell Wealth.
• 18:19
  Speaker 1: We're broadcasting here at WVLP 103.1 FM.
• 18:23
  Speaker 1: We're also broadcasting wherever you pod on Spotify, on Apple and whatnot and I failed to mention one very critical thing.
• 18:37
  Speaker 1: I'm going to apologize for this.
• 18:38
  Speaker 1: I'm going to have to add this in.
• 18:41
  Speaker 1: Give me one second.
• 18:42
  Speaker 1: It's always something I like to be able to mention.
• 18:46
  Speaker 1: Of course, I apologize.
• 18:48
  Speaker 1: I usually put this at the beginning of the podcast, but failed to put it in the beginning, so I just want to mention the opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual.
• 19:04
  Speaker 1: To determine which strategies or investments may suit you, consult the appropriate qualified professional before deciding.
• 19:11
  Speaker 1: All right, so hopefully that makes our compliance department happy and we're able to broadcast the show accordingly.
• 19:22
  Speaker 1: So, with that being said, let's go through some other things that we want to be able to talk about.
• 19:28
  Speaker 1: As far as some other analogies, all right, so we're talking about our portfolio theory.
• 19:34
  Speaker 1: Here on the show, it's all about money in regards to your money and your portfolio.
• 19:39
  Speaker 1: So when you're building your own portfolio or you have a wealth management group building your portfolio, you can ask questions along these lines, and these are some of the analogies I like to be able to use.
• 19:53
  Speaker 1: Obviously, we just talked about cooking and going through many of the ingredients or the items you might make on a trip or a hiking trip or a day out at the beach or whatever it might be.
• 20:06
  Speaker 1: There's that sort of diversification in things to eat and to enjoy throughout the day.
• 20:14
  Speaker 1: The other one is the sports team analogy.
• 20:16
  Speaker 1: Now you think about your portfolio like a championship sports team and unfortunately we're in Chicago here or outside Chicago and we're big Chicago fans and we haven't been able to think about championships in a really long time.
• 20:29
  Speaker 1: But we're going to get PTSD from a number of different losing seasons.
• 20:36
  Speaker 1: But we're going to work through that and we know that a big championship team, a true championship sports team, is you don't just have one star player who might have an off day.
• 20:47
  Speaker 1: You need a balanced lineup Some players score big, others who can defend and a few who just play steady and they're just steady players.
• 21:01
  Speaker 1: And Modern Portfolio Theory is like coaching that team picking investments that work together.
• 21:07
  Speaker 1: So when one's struggling, others step up, keeping your portfolio strong and aiming for the overall win.
• 21:15
  Speaker 1: I talked about recipes, or I talked about making a picnic basket or a meal for fishing on the river Along those lines.
• 21:27
  Speaker 1: The next analogy would be building a portfolio theory.
• 21:30
  Speaker 1: A modern portfolio theory is like cooking your favorite dish.
• 21:32
  Speaker 1: Now you just don't dump one ingredient like all the salt or all the sugar together.
• 21:39
  Speaker 1: It won't taste very good, so you need to mix ingredients in the right amounts Some stocks for growth, bonds for stability, maybe a dash of real estate or commodities.
• 21:52
  Speaker 1: Modern portfolio theory helps you find that perfect recipe to get that flavor, those returns that you want, with a really good meal, without too much spice, which would be the risk.
• 22:06
  Speaker 1: The next would be a music band analogy.
• 22:09
  Speaker 1: Now imagine if you're investing.
• 22:12
  Speaker 1: Imagine your investment as a band.
• 22:14
  Speaker 1: You do not just want a drummer banging away or a solo guitarist banging on the guitar the entire song.
• 22:24
  Speaker 1: You need a mix, right.
• 22:26
  Speaker 1: You need to have drums.
• 22:27
  Speaker 1: You need to have a guitar.
• 22:28
  Speaker 1: You need to have a bass.
• 22:28
  Speaker 1: You need to have drums.
• 22:28
  Speaker 1: You need to have a guitar.
• 22:29
  Speaker 1: You need to have a bass.
• 22:29
  Speaker 1: You need to have vocals.
• 22:30
  Speaker 1: You need to have backups.
• 22:31
  Speaker 1: Backup vocals Maybe a tambourine, maybe a cowbell which is one of my favorites, but all of those that harmonize right.
• 22:42
  Speaker 1: And modern portfolio theory is like being that band's producer.
• 22:46
  Speaker 1: You blend assets that don't have all that rise or fall at the same time, but a harmony that actually puts together a portfolio that plays a smooth tune for, ultimately, for your financial goals.
• 23:02
  Speaker 1: And then the last analogy that I have for you is if you were to create a garden and you were a gardener, and you were a master gardener, like many of the clients that we have, uh, that are, that are very, very into gardening, um, and I appreciate that, because I'm not necessarily the best uh at the, I don't have necessarily had the best green thumb, but I sure uh and will and willing to learn, um, but your portfolio is really like a garden and you don't just plant one type of flower because if, let's say, a pest hit that, or weather changes, you're in trouble.
• 23:36
  Speaker 1: That garden is going to be in trouble and instead you plant roses and tulips and veggies and you know, some bloom early, some bloom late.
• 23:44
  Speaker 1: And modern portfolio theory really helps you design a diverse garden of investments that grows steadily, even if one part faces a rough season.
• 23:56
  Speaker 1: And you know, with that said, there's always the conversation about when to harvest and to slowly sort of pick away some of the gains of the garden to be able to use.
• 24:11
  Speaker 1: So that's another analogy as well, as far as maybe harvesting some of the gains that you've made and then replanting, which is really, really important for an investment philosophy too.
• 24:32
  Speaker 1: All right, so basically, for all those analogies that we have out there that I just threw to you, so, um, you know, we talked about cooking, we talked about sports analogy, we talked to a recipe analogy, um, music band analogy or some sort of band analogy, and then a garden analogy, and really, just, it comes down to, you know, pick one that is your vibe.
• 24:48
  Speaker 1: The sports analogy might resonate with you, you know, and also, certainly, you know a recipe or garden.
• 24:58
  Speaker 1: I certainly hope you can just use one of them as an idea, as this is why you want to have a diversified portfolio.
• 25:04
  Speaker 1: You know, and we again, as being a chef, being a home chef that I am, we really like to craft a custom recipe for each client's financial future, and that's really the analogy I would definitely use personally, just because I love to cook and if you are in the area or if you have any questions about cooking, I am very good about handing off different things that we make, or I make, to clients and friends.
• 25:39
  Speaker 1: So if you'd like my salsa or any of the vinaigrettes I make or anything else I usually pass out, or barbecue sauce, just email me at greg at farrowwealthcom and I'll take care of you as I make another batch.
• 25:57
  Speaker 1: But I hope that was some sort of help in regards to modern portfolio theory, a theory that we follow here at Farrow Wealth and how we build portfolios for clients.
• 26:12
  Speaker 1: So, with that said, the show's money matters for Greg and I'm Greg Farrell, ceo and owner of Farrell Wealth.
• 26:17
  Speaker 1: It's a wealth management firm, an independent wealth management firm, here locally in Valparaiso, indiana, and we serve clients in 22 states.
• 26:26
  Speaker 1: I would be happy to have a conversation with you and yours as your family and discuss many things that are out there in regards to finances.
• 26:37
  Speaker 1: The show is about money and that's why we talk about how we can help you grow and create your money, protect and preserve your money, distribute your money in life and distribute your money after death.
• 26:48
  Speaker 1: Those are the four quadrants of our wealth management process that we see our high net worth and ultra high net worth families where we can basically put most of the things that we work with at least we have a list of 13, and we'll go over that list in another show, but there's really 13 issues that we see that go inside of those four quadrants.
• 27:15
  Speaker 1: That being said, thanks again to WVOP for allowing us to broadcast, being a part of their team 103.1 FM here locally.
• 27:24
  Speaker 1: Thank you again and I hope you enjoy the podcast and like and favorite on all the different places you can.
• 27:32
  Speaker 1: We'll ultimately put this on our YouTube channel as well and hopefully everybody has a great May 15th here in 2025.
• 27:42
  Speaker 1: And you have a hope.
• 27:46
  Speaker 1: You had a fantastic Mother's Day and look forward to a great spring.
• 27:51
  Speaker 1: Thanks again and we'll talk to you soon.