S2EP 7- Volatility is Not the Enemy, Unpreparedness Is
In this episode, Victor and Kim Gaxiola explore how to become a resilient investor amidst market volatility, geopolitical tensions, and monetary policy shifts. They share practical strategies for protecting your portfolio, understanding the impact of Fed policy, and planning for the unexpected with confidence.
Key Points:
- The importance of planning and preparation in weathering market storms
- How to audit and diversify your investment concentration and risks
- Navigating market reactions to geopolitical events and rate fluctuations
- How leadership changes at the Federal Reserve influence market and investment strategies
- The specific impact of Fed rate changes on tech stocks, housing, and overall portfolio resilience
- Practical steps for managing concentrated holdings, RSUs, and liquidity buffers
- The significance of having a flexible and adaptive financial plan
- The role of quality companies with strong balance sheets and dividend growth
- The importance of regular portfolio reviews and adjustments
Full Transcript of the Episode
Victor Gaxiola
So welcome back everybody to the Resilient Investors podcast today. Kim is joining me. Carolyn is in the middle of all the tax and tax prep. So by the time this actually airs, the tax day would be behind us. I'm sure she is resting, relaxing, but it's crunch time for her, isn't it Kim?
Kim Gaxiola
Yeah it is, and so glad that we got another season almost done. One day and counting, right?
Victor Gaxiola
That's right. Well, for us it is. mean, by the time people listen to this, it would have been behind them. So hopefully you all paid your taxes. If you had to pay taxes, at least you all filed. If not, you did an extension. But the long and short of it is this time of year always creates a whole lot of activity. And speaking of activity, as Kim is well aware, for the past couple of months, I've been doing a whole series of investment reviews with clients all over the country. And what I really wanted to share today is a little bit of some of the themes and some of the things that kind of surfaced as part of the conversation.
Obviously, a lot of concern right now with the volatility that the markets experience, much of which has been driven with the conflict between the US and Iran. And by the time this airs, hopefully we're getting closer to resolution. If not, a resolution would have already been outlined. But we really wanted to build kind of a podcast and talking about two major areas. The first one talking about how do you become or how is it that you become a resilient investor? how do you become someone that can kind of weather the storm?
And based on our experience, based on how we've structured strategies for clients, to share a little bit about how we've built it so that it is resilient and people are not as concerned during times of uncertainty. So we thought we'd start with that and then we'd like to talk about the upcoming nomination, if not already nominated, future Fed chair, and more specifically open up a little bit more of a conversation about the impact of the Fed.
Specific to the fortunes of your portfolio, but also the changing variables that can occur when rates go up and then what happens when rates go down. So I think we'll start with that.
Kim Gaxiola
That's a lot. So let's get right in.
Victor Gaxiola
It is a lot. Yeah, so Kim, as you know, I've been meeting with people and talking about, of course, a lot of what's been taking center stage is our conversations about the potential impact to portfolios as it relates to the conflict that's taking place. And I think that whether it's this conflict, whether it's the pandemic, whether it's, know, X, Y, Z, the housing market, the market has experienced overwhelmingly a number of different times of volatility that often lead to corrections many times those corrections are as a result of the actual event itself Sometimes those corrections are a result of just the stock market for the most part is overvalued and it needs to revert back to a mean But what I thought I'd share today is you know in our experience what really leads to a resilient investor and I love this It's the title of this podcast is that volatility should not be considered the enemy because unpreparedness is. And I think that I love that kind of positioning just because that's what we find. It's that whole idea of failure to plan, or what is the saying of, it's a failure to plan? What is the saying? It's like.
Kim Gaxiola
That's exactly what I was thinking, right?
Victor Gaxiola
So it reminds me of the saying that says a failure to plan is a plan to fail. right, know, and so part of that is providing a lot of comfort to our clients and saying, look, you know, they know, especially those that have been with us for 20 plus years, that this isn't new. I mean, this isn't our first rodeo. We've seen, you know, number of different market events, market activity that actually leads to things going up or down. And of course, most of the concern is when it's going down, but they've weathered through that storm.
Kim Gaxiola
Absolutely.
Victor Gaxiola
and part of it is maintaining that steady hand on the wheel during choppy waters. And the reason why people can feel more resiliency and feel comfortable is because there is a plan. We expect this.
Kim Gaxiola
You know, it's funny, I've never said this out loud, but now that we're talking about it, I really have to say that having a financial plan is like having insurance, because we are there to poke holes at the things that could go wrong.
Victor Gaxiola
Yeah, I mean, and it speaks to things that are often, know, anybody does a quick Google search and says, what's the ideal financial plan or financial investment portfolio, you know, structure, they're going to talk about diversification, which is one way you can address this is making sure that, you know, you have not all your eggs in one basket or in one specific sector, but that it's spread out because what you find is that there are patterns in the market, you know, up or down, or in different cycles, there are certain areas of the market that are going to perform better than others. And so a lot of this exercise is having exposure to multiple sectors, but then also being nimble enough to move money within sectors, or let's say from fixed income into equities, or perhaps bringing in some alternative investments. So it's really, what's that recipe going to look like? And the changing taste and appetites that we have, or the economy provides to us, is going to change.
Using the food analogy, maybe Mexican food is in favor, you know, during the first quarter and then things kind of shift over the summer and guess what? Now we're loving Greek food. You know what I mean? So it's like changing the recipes.
Kim Gaxiola
And your appetite, your appetite for risk changes too. When I have 10, 15 more pounds on me, my appetite is a lot bigger than when my stomach is smaller and I can't eat as much. Same thing goes for volatility. When there is no volatility in the market, that's usually a sign that things are going up, up and up. And clients have all the appetite for risk in the world.
But as soon as volatility spikes, they change their minds about how much risk they want. Risk is a moving target.
Victor Gaxiola
Yes, and then this is what I often tell people, you know, as we go through this and I think I've said it before definitely on this podcast, I find it that it's extremely easy to buy a stock because usually when you're buying a stock it's all based on enthusiasm or perhaps your confidence in a specific company or a specific theme and say, hey, I feel really good about this. The real challenge and the thing that people have a very hard time doing on their own is selling, selling a stock because we've come in many times as individual investors, you can become emotionally attached to the stock, especially if it's a stock. That you know a lot about or maybe it's your own employer stock. And you say, hey, I know the management, I know what we're producing, I talk to the customers or I see our revenue coming in. So you become married to it and often people place way too much weight on their single stock. We are more like surgeons in this particular case and looking at a portfolio and looking at the composition and not feeling in any way an emotion attached to removing something that's out of favor. Replacing it with something that looks more attractive or has better prospects going forward. So I think that's one of the roles that we play. And I think is when anybody develops a financial plan, I mean, it needs to be able to survive both the storm, but it needs to survive the calm as well.
Kim Gaxiola
So to prepare that financial plan, there's a few things that you should be thinking about doing right now. The first is to number one, audit your concentration. First and foremost, audit your concentration. And when you do this, don't be separating your investment portfolio from your company benefit accounts. We have a lot of tech employees here in the Bay Area who have, you know, upwards...50, 70 % of their network tied to their company, who's not only providing a very healthy paycheck, but also providing RSU benefits, you may be buying employee stock purchase plans or getting some sort of stock options. Those are the people that need the help the most right now. They should be auditing their holdings and making sure that they're not overweighted. And if they are overweighted, can their... other assets sustain the lifestyle that they are very comfortable with. Okay, so, you know, rule number one I get when I have a work with a new client is if you have a concentration in your company stock, make sure that you can survive without it. Then maybe that concentration isn't so bad and we can work on building wealth with it. But if you think that, but if that stock was to drop 50, 75%, and that would be a detriment to your retirement or to your income now, then we need to rethink that position. So absolutely most important, audit your concentration. This also could be, if you don't have a company stock, this also could just be, how much do you have in equities? You could have had an allocation of 65%, 35 % stocks and bonds.
And now it's like 80 % stocks because the market has moved so far upward. And let me tell you, even with the pullback that we've had, that pullback was minor. And so you could still have a high equity concentration more than you're comfortable with. So always things to look at. Those are areas that we're always tweaking with our clients to make sure they're still in their risk tolerance level. Know your liquidity windows also.
You know, know how much money you need to have as your emergency reserves and make sure they're there. and if now's the time, your stock has, you know, increased in value, perhaps you trim some of that because maybe you've used up your, your liquid reserves and you need to replenish those. So manage your liquidity, with your trading windows if you are in a company that holds stock.
We are getting into Q2. April is earnings announcement time. So listen to this. If you are in a trading window and can only trade at a certain time, chances are you're going to be able to trade after your earnings come out. And so you really want to make sure that you're managing your positions in your company's stock and using those trading windows when the blackouts are not closed. And, you know, make decisions in a calm place. Do not be reactive. I think it's very common for us to have clients calling us in the middle of a storm, whether it's the war in Iran, whether it's the trade war last year, or whether it was 2022. What are we doing right now because the market is falling?
And I always tell people, know, we're on top of the markets 24-7, but we're looking for the long-term trends. We are not looking to react because of volatility, because normally when you react at that point, it's the wrong time. If we had reacted to Iran when the first news came out and the market was down probably about 10 % to now, maybe we would have made a decision selling at 10 % lower than we are today.
Victor Gaxiola
Yeah, so good points all of those as far as specific actions that you can take to protect yourself You know one of the things that kind of came up in these investment reviews, too Was just a reminder to people that we do not attempt to predict the future We can help really prepare people for the uncertainty and the changes that we expect they're gonna take place So part of it is like I don't know when this outcome, you know specific outcomes or say resolutions are gonna happen
The best thing that I can control is exactly what that portfolio strategy and how it's structured. And it's structured to be resilient with the expectation of uncertainty and change. And so what we really are doing is building these portfolios to endure surprises, endure surprises rather than trying to forecast them. And I think that's an important point.
Kim Gaxiola
Right? The largest shock always happens on the first onsite of that news. And then what happens is it feels like the media just keeps manipulating those same articles. You know, it looks like this won't be a forever war. It looks like it is going to be a forever war. Every day it keeps switching back and forth and they attribute market change to that. But it's never as big as the first day.
So it's really important to understand that media has a tendency of manipulating things for eyeballs and for ad sales. So don't get too caught up in them.
Victor Gaxiola
Yeah, and so I'm always reminded to using a sports analogy. It's like offense scores points, but defense wins championships. And so when it comes to portfolio construction, we do favor, you know, defense over offense, and we really do prioritize that resiliency. And some of the ways that we do that, and Kim is really well aware because she helped really build this strategy is we seek high quality businesses. You know, whether the market is doing up or down or whatever world events are taking place.
Kim Gaxiola
Yeah.
Victor Gaxiola (17:25.816)
There are a number of companies that we feel very confident are going to continue to be able to provide a quality product or quality service and they have the resiliency to endure any short-term volatility. We look for companies with strong balance sheets, cash rich, strong, can pay a dividend. And if they can pay a dividend, they're usually in pretty good shape if they can continue to pay a dividend. And most of those companies that do pay a dividend have been around for a while. So they've weathered a couple of altercations throughout their long tenure and then finally it's looking for those companies that are not only paying a dividend but are increasing that dividend over time and have a you know history or they have a rich history of increasing that dividend over time so it's like I like to say it's like owning an apartment building right and that apartment building is appreciating because it's sitting in a really good neighborhood but guess what you're getting rent and they're paying you a dividend that's what the dividend is rent and every now and then you get to increase the rent. as a landlord of a portfolio of quality stocks that are paying dividends, that's the way we are resilient to be able to weather the uncertainty that comes. And the surprise is that occasionally come in the markets throughout year in, year out. So hopefully that provides a little bit of comfort, but Kim, that was a lot of what our conversations kind of centered around is just.
Kim Gaxiola
Absolutely. you know, we know, we know there will be uncertainty today, tomorrow, five years from now. There will always be uncertainty, but we are building portfolios and our stocks are stocks that can endure those surprises rather than trying to forecast what kind of surprises are coming next.
Victor Gaxiola
That's true. All right, so switching gears now, something that is not necessarily something we could have predicted. And this is the fact that we are in the throes of a changing Fed chairman at the Fed. Kevin Warsh, which we had discussed a little bit about in a previous podcast, is gonna go through the nomination process, go through the confirmation process, I should say, in order to be the newly appointed
Fed chair replacing Jerome Powell who has been serving as a Fed chair now for a number of years. And so we want to talk a little bit more about his appointment specific but then getting into a little bit detail of the value or I should say the impact or potential impact of the Fed chair and more specifically the Fed itself and how it translates into portfolio performance and the things that you may want to think about depending whether or not interest rates go up or down. So why don't we start there.
So let's talk a little bit about Kevin Warsh. So I think one of the things that we were kind of encouraged about is that he is of the next generation now. So we're looking for new generation, new talent moving in to a very important post and to be the chair of the Federal Reserve. And really interesting is that it was disclosed just recently that the new Fed chair has over 100 million in personal investments, including stakes in SpaceX, Polymarket and today we really want to talk about how, know, a little bit more about him and then of course, you know, the impact to your financial plan as a result of the appointment. So why don't we start there?
Kim Gaxiola
I like him already because he's Gen X. He's been through the same trials and tribulations that we have growing up and having and owning investments. And he's had a lot more knowledge because he's been behind the scenes during all of those different periods of turmoil.
And so I'll just start off right there and tell you, it's about time. Our generation is coming up to this high level of leadership.
Victor Gaxiola
Yeah, it's funny when you start seeing it. What's scary is when some of these people in leadership positions are younger than us, in which case it's like, oh, wow, OK. You could have been a congressperson. It could have been somewhere and doing something different. Well, a couple of background on him. He was a former Fed governor. He served from 2006 to 2011. He's been in and out of the Fed circles for a number of different decades. We do expect that by the time this goes out, either he's going to be in the middle of the confirmation process or would have already been confirmed.
Looks like they are kind of expediting his appointment. Now, interestingly enough, he is viewed by most circles as being much more hawkish than Powell, meaning that that could lead to potential higher rates for longer or at a minimum less predictable rate cuts. So that definitely would have an impact. And then finally, he does have a Silicon Valley connection. So he is it's pretty notable. He's invested, like I mentioned before, in SpaceX, a number of different tech ventures and has a different lens on the tech sector. And I think that that could bode well for those of us who serve or work in this tech space.
Kim Gaxiola
I think that that's really important to say and I don't know if everybody really understands what that means. But when it comes to financial planning, this is like a great example that I always tend to use is the younger the generation we are working with, the more they really count on the financial planning software tools that we have available to us. Financial planning wasn't so big when the Baby Boomers were our age. As much as we tried to share with them our tools, our software, a lot of times it was like, no, I don't want to deal with that, just tell me how my investments are doing. And then we get into Gen X and they've been very much more with us in the technology and using that technology for the data that it provides to help us see out how our lives can be changed by our saving and investing. And so I think that that's really important because he is of the generation that believes in using the technology, believes in using that data because it is so vast and so accurate to make decisions and to help formulate decisions for the future.
Victor Gaxiola
Right. So if you're sitting there asking yourself, why should it matter? Why should it matter that the Fed chair, what does it matter to the tech employee? Well, little recap here. As you know, the Fed controls the federal funds rate, which flows downstream to everything, mortgage rates, saving rates, bond yields, and how investors will really value growth stocks. And I think that this is really the area that is most impactful for those of us in tech just because
Most tech companies tend to be more growth oriented. So when rates do go up, growth stocks can get hit hardest just because tech is in a growth sector. However, on the flip side, when rates go down, tech tends to benefit as future earnings become more valuable in today's dollars. So you can see that there's almost this correlation that happens with the Fed rate up or down. Now, of course,
A lot of it is going to depend a lot on the individual company itself. It's not just because the rates go up that this is a direct translation. There are other factors involved. But for those of you that are holding RSUs, it can be really tied to that stock price. RSUs are tied to the stock price. So it's just definitively tied to what the rate expectations are going to be. In 2022, for example, we saw that the Fed was increasing rates aggressively, and the NASDAQ dropped about 33% that year. so, RSU holders who had a concentration and a lot of their net worth, let's say, built into these RSUs could have seen a massive paper wealth evaporate. So, that's why there's a sensitivity obviously to rates when it comes to, especially when you're holding a concentrated equity position in a growth-oriented stock.
Kim Gaxiola
Right, and really important on that is we talk a lot about the MAG-7 and all of those larger companies, but in a year like 2022, when all those stocks went down, most of those top seven companies went back up to their highs and then proceeded on higher.
But if you are in a smaller company, which the majority of the people are in a smaller company, some of those companies that took off in 2021 still have not seen and still are 20% of what their valuation was in 2020 and 2021. Those are the companies that are more vulnerable to this.
Victor Gaxiola
Yeah So, you know the introduction of a new Fed chair does include a little bit of uncertainty and as we mentioned before When it comes to volatility the market doesn't like uncertainty So if if worse comes in and start signaling a different policy than what Powell had put we can kind of expect that we may experience a short-term volatility and Especially in these rate sensitive assets. So it's just really a matter of like a wait and see
I'd like to be the eternal optimist in me seems to think, we're bringing someone new. I am all for change. And I do think that given the fact that he has a background and understands the tech space, that it should be a positive for those of us that work or serve the tech area. So that's really, you know, very concentrated on the tech space. But there are other areas, obviously, that the Fed rates changes could impact. And that's home ownership, you know, when it comes to home and getting a mortgage.
So Kim, I know that there was a piece that we had shared. Love for you to talk a little bit about it as it relates to the ability to purchase a home and some of the challenges that people have these days.
Kim Gaxiola
Absolutely. This is really catered to a lot of people here living in Silicon Valley that have experienced home values going up, up and up. Those people that are still maybe saving for the day when they can finally afford a home are just having a problem. A lot of times what, what, you know, maybe your real estate agent will tell you is just keep cashing in those RSUs.
So you have cash available to put down for a down payment. And I think it's really burned people here in the Bay Area because your cash is not growing at the same rate as the real estate values are. And so you're just consistently being chased out of the market. So maybe a different way of looking at that is really thinking about what you own, think about those restricted stock units you own, and perhaps, not selling. Perhaps if your company is trending and growing, you know, maybe you hold on to that and just know that that's your piggy bank for your home ownership. Yes, there's some risk involved in that, but there's more risk in cash because cash never rallies as much as your real estate here in the Bay Area has or stocks. So Something definitely to think about. If that is too scary because the volatility of your company's stock is all over the place and you're a little bit closer, work with an advisor. Work with somebody that can create a diversified portfolio that can still grow and keep up with the rising cost of real estate. So that's one thing that we're talking about a lot and having a different angle to that. Also consider ...
If real estate, if interest rates rise, a lot of real estate investors think, no, I'm going to get priced out of the market because interest rates are rising and my mortgage is going to be higher. But when interest rates rise, there is less demand out there to buy homes. And so perhaps that makes the market softer and you have an opportunity to get in. So.
You know, I always think it's really important for contrarian thought process to go in on this whole thing. You know, on the flip side, if rates come down because things get really tight and fear of recession kicks in, those rates that go down will prompt more and more buyers in the real estate market. And so again, maybe your mortgage will be cheaper, but the price of your home is gonna go up because there's more demand. So kind of think in reverse of what you're accustomed to feeling when it comes to mortgages and the housing situation.
Victor Gaxiola
Yeah, and I think it really just comes down to your own personal financial plan. You know, what suits you? What's your own individual plan? Because it wouldn't be right for everybody. There's no one size fits all when it comes to this. And you certainly shouldn't be making real estate, big real estate decisions just based on the Fed direction. It's really like what's best for you and your family? What's best for you when it comes down to it? So I think when it comes to, you know, the common theme, the...too long didn't read of both, whether we're talking about volatility due to geopolitical events or potential volatility due to changing Fed or Fed policy, the important underlying theme between the two of them is to have a plan, to have a plan for both, to have a plan for the unexpected or the expect.
Kim Gaxiola
This is absolutely. Yeah, always be planning. Yeah, yeah.
Victor Gaxiola
A B P
Kim Gaxiola
You know, on the flip side, it's so funny because we did do a plan where we were preparing to buy a house for a client. And, when they decided not to keep selling their stock, they ended up in a situation where the stock value increased much faster than home value. And as a result, they, they had enough to put 50 % down on a home if they wanted to, instead of just the 20%. And they had so many more options as far as houses to look at. really a cool, cool scenario. And when sometimes people think, I don't need planning, retirement is the future and that's 20, 30, 40 years off. No, but we're helping people make decisions that will make five years from today better.
Victor Gaxiola
Yeah. So here are the resilient investor moves. So first of all, you can't control the Fed and you can't control volatility. What you can't control, however, is your plan. And that's, know, and we make modifications to the plan. That's why we meet with people who build a financial plan at least once a year, sometimes twice a year to make modifications and changes. But we're always on the same page. I think that's important.
Obviously, revisit anything that might be sensitive to rates. So if you're carrying any debt, whether it's a HELOC, a large mortgage, or potentially a business loan, there are things that you may want to revisit depending on the changing of rates. And then just make sure that your financial mix is diversified and appropriate for where you are and the tolerance you're willing to make. At the end of the day, you need to be able to sleep at night. You need to be comfortable.
But you also need to know that you've developed a plan that's gonna get you where you wanna be. And for us, it's really helping you define what that lifestyle is gonna look like in retirement. So we're more than willing to help. This is exactly what our team is designed to do. We've been scaling by building a strong team that covers all the different facets of a financial life, whether it's financial planning, investment management, tax planning, estate planning, or legacy planning.
All of it can start with a conversation with our team and we always encourage you, if you're not already working with us, to just reach out. We provide a link in the show notes after each episode. We also want to know if you're finding value in these podcasts and if there's any specific topics that you'd like us to discuss, can send me an email at victor at resilientplanning.com. Always open to discuss new things, topics, things that are top of mind. Now Kim's gonna be away for a while for the next couple of episodes and we're gonna miss her.
But Carolyn and I will carry forth with the podcast of the Resilient Investors Podcast to share our insights on different topics and we hope that you'll join us then. And if you're not already subscribing to our podcast, whether it's on Apple Podcasts, Spotify, or if you're watching this on YouTube, please subscribe. That way you get the latest versions as they come out. Sometimes we bring them out at different times depending on what the topic is, but we hope you participate and be part of the show going forward. So with that, Kim.
Any last words before you head out for a little bit and we'll catch up with you down the road.
Kim Gaxiola
I just think, you know, thank you to the team who is there. You know, for those clients that are listening in, you know you're not alone. And for those clients that are not clients, those people that are listening that are not clients, why go it alone? We have a great team here that is always ready to walk through so many of life's uncertainties with you.
Victor Gaxiola
All right, well, Godspeed, and we'll catch up with you next time on the Resilient Investors Podcast. Thanks for listening.
Kim Gaxiola
Thank you. Bye.
-------------------------------------------
# END OF PODCAST
Show Notes
- Resilient Wealth Planning YouTube Channel- CLICK HERE
- Case Study: Buying a Home in Silicon Vally- CLICK HERE
- Have a question? Send an email to victor@resilientplanning.com