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Explore our latest insights on markets, the potential impact on portfolios and investment strategies to help guide clients in today's environment.

Highlights from our 2021 market outlook

In our 2021 market outlook event, we shared what's top of mind around the globe and provided insights to help you navigate this new investment landscape. Discussion topics include:



BlackRock CEO Larry Fink on 2021

Larry Fink shares his perspective on markets and the future of sustainable investing.

  • MARTIN SMALL:  Good afternoon.  Welcome and thank you for joining us.  I’m delighted to be joined today for the BlackRock Market Outlook by Founder, CEO, and Chairman of BlackRock, Larry Fink.  We’re going to spend a crisp 20 minutes exploring Larry’s perspective on global markets, sustainable investing, racial equity, and some thoughts about stakeholder capitalism.  Larry, happy new year, welcome, thanks for being here. 

    LARRY FINK:  Happy new year to all of you.  Hopefully 2021 is a transformational year for all of us.

    MARTIN SMALL:  A perfect opening, Larry.  Let’s dive right in.  I’ve always known you to be an eternal optimist, a relentless optimist.  With a year like 2020 behind us, a pandemic that is still with us, and what definitely feels like some more uncertain and unstable times to come, I thought I’d start with an open-ended question.  How are you feeling, optimistic?  What do you think 2021 has in-store and what’s on your mind?

    LARRY FINK:  Well, for me to talk about ‘21, I need to just review I think what ‘20 really has become.  2020 really has created huge societal problems because of COVID.  Anytime we have a recession we see even more extreme in terms of the have and have nots and the wealthy and those who are – have more troubles.  In addition, we saw sectors of our economy that have been flatlined and we’ve seen other segments of our economy doing quite well.

    With that backdrop though, I left 2020 with incredible optimism.  I believe we see so many elements of how capitalism has worked, not failed but worked.  When you reflect that it’s only taken ten months for US, German, and UK pharmaceutical companies to develop vaccinations, that even before this one episode it took five years for any pharmaceutical company to come up with a vaccination or some remedy for Ebola, but prior to that it was tens of years to come up with some form of science to help humanity.  And to me, this is a great example of the intellectualism of our corporations worldwide, the role of capitalism, and this, the competitiveness of all these pharmaceutical companies working to, you know, working to try to come up with a solution.

    Some of the solutions that we have discovered are going to be changing healthcare forever.  And to me, these are just – this is a great example of what capitalism can drive.  

    Two, there’s no question our behaviors changed dramatically because of COVID in 2020 and we’ll continue to change our behaviors until we have mass immunity, you know, later in 2021.  And yet, we’ve seen segments of our economies doing really well.  We’ve seen savings rates up very, very large, and we’ve seen a significant rally in the equity markets in those segments that have been really benefiting because of consumption transformations, the way we educate, the way we do work. 

    You’re at home right now and we’re working from home quite successfully and this is the beauty of what public companies and private companies have done in terms of adapting and growing and building.  And I do believe there’s many blessings from our learning of how to live in this COVID world and these are going to transform us for decades.  And we’ve seen a truncation of what – of technology trends that may have been 10 or 20 years truncated in 10 months.

    And so, how we adapt, how we live, how we have opportunities are really amazing.  And so, I’m sitting here in the office in a studio room, but I just feel like there is so many great opportunities for investors going forward.  

    I am still a globalist.  I know it’s not proper to talk about globalization.  But I do believe there’s going to be great opportunities in the world of investing.  And as we are witnessing, we are seeing great companies becoming public companies now.  This fear that people want to be – go private, that has reversed itself.  We’re seeing phenomenal companies going public, whether it’s through a SPAC or through an IPO.  

    But we’re seeing a real revolution on – going on in how capitalism is building opportunities, opportunities in job creation, opportunities in segments of part of society.  We’re seeing some countries doing much better than others.  But overall, we should be going into 2021 highly optimistic but with an asterisk.  We have to also make sure that we understand that there’s great societal divisions.  Segments of society have been left behind.  Those who are in hospitality and lodging, their livelihoods have been, you know, terribly harmed and it takes time for people to find new jobs or moving to new places where they can seek jobs. 

    So, it’s all working out.  But there is a time lag between, you know, job destruction and job creation and those are some of the issues that we all have to be very mindful.  And I do believe, as you raised a question about stakeholderism, I think more than ever before stakeholderism is going to become a dominant conversation in ‘21.  

    MARTIN SMALL:  Larry, looking back on 2020, if we might stick on a markets point for a second, in 2021 we saw central banks spring back into action in a way that I don’t think we had seen since the first financial crisis back in 2008, ‘09, ‘10, European debt crisis in ‘11, ‘12.  It really seems like central banks have been incredibly active and I think by all marks pretty successful at what they’re trying to do.  Could you give us some thoughts a little bit or a scorecard on the fiscal side for policymakers?  Is there more left to do?  Have they done enough?  How are you thinking about that and some of the intersection and flow to the real economy?

    LARRY FINK:  I am very proud of how the central banks responded globally.  I think they did a great job of harnessing the world and stabilizing attitudes and markets very rapidly in March and April.  But I want to be clear about the over-dependencies of central bank behavior, because central banks’ only ability is to monetize assets.  And so, through asset purchases and lower interest rates we monetize the value of the assets and that creates even more income inequalities because those who have financial assets really benefited and those who do not are, you know, are not benefiting from central bank behavior.  And if you’re a retiree who are earning money on current income, you’ve been really harmed. 

    And so, the problem we have in so many of these Western societies right now is the over-dependence on monetary policy and it creates really big inequalities in society.  And that’s why we have to be much more dependent on the fiscal stimulus.  

    If you look at what China has done from the 2008 and ‘09 crisis, they didn’t aggressively use monetary policy, but they aggressively used fiscal stimulus back then and that’s why China was able to get out of its financial recession that was created in ‘08-’09.  Again, Europe benefited strongly this time because they were less dependent solely on monetary policy in Europe and they did much more fiscal stimulus as a balance.  

    In the United States, we did some fiscal stimulus but were, you know, the question is have we done enough?  I mean I would argue if we’re worried about job destructions and how we are now living and consuming and how we’re receiving information, I would’ve argued if we – if in the United States we could’ve done some form of fiscal stimulus in the form of infrastructure.  It would create much more longer-term economic growth, more job creations.  I would be advising the new Administration that if we’re going to do another fiscal stimulus it has to be through some form of infrastructure bill that creates long-term jobs, improves the quality of our infrastructure.  

    I mean one thing that we know, one of the great schisms between the people who are benefiting in this world and are – or those who are being harmed is broadband at the home.  We all know that working from home, being educated from home, having conversation with doctors at home, it requires broadband.  And for those parts of our society that does not have broadband, they’re going to be left behind.  We all know that.  We all know.  

    We all live now with a dependency of broadband and in all my conversations with many governments worldwide, that should be a, you know, a mandatory, you know, feature of life, no different than 50 and 100 years ago having a telephone, that everybody needed to have access.  Well, broadband to me is like having electricity at your home or a telephone at your home.  And those are the types of things that if we created some form of infrastructure spend through fiscal stimulus, maybe public/private because there’s a lot of private capital we all know sitting in the sidelines, that we can really create long-term jobs, restructure our economy, and allowing more and more parts of our economy to benefit from this technology change.

    MARTIN SMALL:  Last year, Larry, at BlackRock in your Annual Letter to CEOs and also in a letter from the BlackRock Global Executive Committee to clients, we talked here at BlackRock about sustainable investing as a new standard for investing.  Something feels different about the last 12 months when it comes to the pace and adoption of sustainable investing.  I’d be curious to hear your views about where has the investing world come over the last year on sustainable investing and ESG and are you happy with where the industry is and where BlackRock is? 

    LARRY FINK:  In the next few weeks, I expect my 2021 COO letter out without giving anybody a head’s up.  But I believe more than ever before that environmental issues, sustainability issues are going to become more and more dominant, more and more dominant because of the change of Administration and the emphasis that the Biden Administration is going to place on climate and sustainability.  The push in Europe is even accelerating.  And what’s even more extraordinary, countries like China and Japan are now pushing more towards sustainability.  I had conversation with the leadership in Japan recently and that is going to be, you know, the Suga Administration’s real target of moving Japan much faster towards a more carbon-free, carbon net neutrality in terms of emissions for Japan.  

    This is happening.  And the healthcare risk that we’ve witness with COVID is not dissimilar to the healthcare risk we have to our planet.  And I think we’re seeing greater and greater evidence of the – of climate risk, the physical impact of climate risk, and if anything in 2020 we saw an acceleration of interest worldwide by clients.  And I think that acceleration is only going to accelerate.  

    In 2020, 70% to 80% of all sustainable products outperformed their similar or like indexes.  We now, through technology, have better abilities to customize indexes that have more sustainability attributes to it.  And I believe in the coming years more and more of the large macro, big, large pension funds are only going to be investing in sustainable customized indexes.  I think you’re going to see huge movement away from the standard indexes and this is one of my real big bets going forward.  You know, public funds are going to have a harder time to say that they’re going to be investing in an index that have the overall index not able to meet the Paris Accord standards going forward. 

    So, I would urge every investor to be refocusing on what does this all mean.  And I – and we witnessed a huge change, even which is a very positive thing, huge behavior by many of the energy companies on disclosing more of how they’re navigating.  In our conversation with many of the CEOs of the large energy companies, they know they have to change.  We have to do it as a society.

    The one thing that is clear to me, we can’t just put this pressure on public companies, but society needs to make sure that this is – that we’re doing this across society, not just with public companies.  We need to make sure that our cities and our states are moving towards this too.  That requires huge infrastructure spending, getting back to my other statement.  And so, I would urge everybody who’s listening today, refocus on how much sustainability is going to become the, one of the dominant themes going forward.  And we believe this acceleration is only going to be – is going to be transformational.  

    I said it in a media interview a couple weeks back that in my 40-plus years of being in finance I witnessed two big changes and one of them we’re just beginning to live in it.  The first one was when I was young, and I started in the mortgage industry.  I witnessed and was – and I saw what securitization was going to do to the entire US capital markets and how that was going to transform housing in America and transform our global capital markets and it certainly did.  I believe sustainable and sustainability is going to be that much, as much, as transformational as what securitization was in the early – in the late ‘70s/early ‘80s.  

    MARTIN SMALL:  Larry, one other thing I’d like to take out, which I think has – take up a little bit up a little bit, which I think has been an undercurrent in several of your thoughts so far in this session.  We’ve had hundreds of years in the United States of people debating the role of what the federal government does and what state governments do and what cities do.  But I think a new debate is really taking shape over the last couple of years and perhaps now more than ever when you think about some of the topics you raise in stakeholder capitalism is what is the role of public sector entities in the government and what is the role of the private sector?  What is the role of corporates when it comes to big issues of human rights, when it comes to racial equity, when it comes to the health and welfare of employees in our communities?  Can you just share a little bit of how you’re thinking about some of these issues of stakeholder capitalism and also how do you think these’ll shake out over the longer-term and what are the implications for us as private, you know, investors and entrepreneurs?

    LARRY FINK:  Well, let me start off with my conversations I’ve had with many governmental officials in recent weeks, some even yesterday.  Government knows it can’t do it alone anymore.  They know they have a lot of limitations today, especially where democracy’s being, you know, being tested right now with the philosophical divisions that we’re seeing in our societies.  

    And so, there’s more dependency on the private sector to take more responsibility.  And I truly believe those companies that have shown that responsibility, those companies who are focusing on all their stakeholders, their employees, their clients, the community where they’re operating, those are the companies that have the best and more durable long-term profitability that then benefit their shareholders.  

    And, you know, we see so much evidence, more than ever before, that the companies who are focused on all their stakeholders, especially in this COVID where when you have to be focusing on how do you help your employees deal with the mental issues, the health issues around COVID, how do you make sure that you create, you are inspiring your employees who are all working remotely, how are you making sure your employees are feeling connected?  These are – the companies who are able to do this well, you’re seeing elevated opportunities for these companies who were really focused on their employees.  And when you’re focused on your employees and your employees feel committed to what, you know, to the foundations of the company, the philosophy of the company, the culture of the company, they’re able to, you know, permeate that to their clients.  And those who are focused on their clients through that culture, the clients are rewarding those companies with more share of wallet.  

    And then, what I think the big test now is in this deglobalizing world that we’re trying to – we’re faced, we have to prove in every community we’re operating in that we deserve that license to operate.  So, in the United States, we need to prove in every community in the United States that we’re American.  But in Japan, we’ve got to prove we’re Japanese.  In Mexico, we’ve got to prove we’re Mexican.  And we need to prove if we’re going to be a multinational company that you deserve that license.

    Those companies who can do that well, especially in this world today of divisions, but those companies who are able to do it in a unified way, in a consistent way, in a durable way, these are the companies that can really show their shareholders that they have the durability of profitability and that they’re going to be able to be leaders of the future.

    MARTIN SMALL:  Larry, I think that’s a terrific call to arms and a great place for us to stop on our crisp 20 minutes.  I want to wish you, again, a happy new year and I’m excited for a wonderful 2021 ahead.  And maybe you can give a good send off for all our wonderful financial advisor clients here today.

    LARRY FINK:  Well, I would just say to all of you please stay safe and healthy.  When you have that opportunity to get that vaccination, get it.  And let’s all go out and go to a restaurant and have lots of wine and celebrate and enjoy life to our fullest.

    MARTIN SMALL:  Thank you very much for being with us, Larry.  I’ll see you at the restaurant for that glass of wine. 

Kurt Reiman shares our market outlook

Senior Strategist Kurt Reiman shares BlackRock Investment Institute's 2021 market outlook.

  • MARTIN SMALL:  I am joined now by accomplished recording artist, talented piano player, Kurt Reiman, who also happens to be the Senior Strategist for the BlackRock Investment Institute.  Kurt, thanks for joining us here today.  It’s great to see you.  Happy new year, my friend.

    KURT REIMAN:  Happy new year, Martin.  Great to be here with you.  

    MARTIN SMALL:  I want to – awesome.  I want to cover several topics during our conversation, including our outlook, the ramifications for the 50/50 split in the US Senate, deglobalization, sustainability.  Hopefully, we can get through all those things in, again, our crisp 20 minutes.  So, let’s dive right in.

    Nine months ago, Kurt, the BlackRock Investment Institute was asking financial advisors to help clients stay invested, hang in there through difficult markets, and see through the uncertainty related to the virus and the election.  What message do financial advisors and investors need to hear today?

    KURT REIMAN:  Yeah.  That’s right.  I think we have to keep in mind that the traditional business cycle playbook doesn’t apply here in the same way that a lockdown, a shutdown back in March, April, and May of last year and the consequent decline of the economy and the financial markets.  You know, the restart and the reopening is very different from a recovery.  

    So, we are sitting here today still very much observing the three signposts that we’ve been following all along.  I think, you know, with all of these it requires I think a certain degree of realism.  But I think also on all of that we have a certain hope for optimism.  And the three signposts that we’ve been following are the pathway of the virus; the combined, as Larry was talking about, the combined monetary and fiscal policy support that the economy has needed, if you will that bridge that’s been provided; and then thirdly, just the liquidity in the global financial system, which was really, you know, one of the key concerns back last spring.  But today I think we’re seeing, you know, certainly, you know, ample liquidity.

    So, you know, maybe just on a couple of these signposts.  First off, when it comes to the virus I think in the near-term, we’re seeing rising case counts, hospitalizations, alarmingly death rates.  So, we’re not out of the woods here.  And also, I would even, you know, reinforce the issue that, you know, we don’t know everything about this virus.  You know, it’s something where, you know, we’re hopeful and with the vaccine rollouts, I think, you know, looking into the back half of this year, you know, much more optimistic.

    But, you know, that, I think that’s the key here is that the near-term likely to be, you know, punctuated with concerns about renewed lockdowns.  But then over the back half of the year some optimism around the rollout of vaccines.  And we’ll hear more from Johnson & Johnson, for example, this month with what is likely to be a single dose and longer shelf-life vaccine.

    But, you know, the other piece of this, you know, again very different dynamics, not traditional business cycle dynamics.  But because we’ve all lived through it, because we realize that this is more of a natural disaster than anything like a traditional recession, policymakers have been, you know, more quick to react and we’ve seen that.  That bridging is so essential, and I think with the vaccine policymakers feel like they’re building a bridge to somewhere.

    And so, you know, coming into this year with the additional fiscal relief that we saw in December, the new Administration, I think that piece is also very important to thinking about the cyclical outlook.  You know, and then I would also just sort of round out the other piece, which gives us, you know, some confidence in, you know, in the outlook for the economy and financial markets in this year is just the fact that, you know, central banks are likely to stay pretty accommodative, unlikely wanting to see any unwanted tightening of financial conditions.

    MARTIN SMALL:  Let’s double click on that, Kurt.  You mentioned sort of fiscal and monetary stimulus both being part of the signposts you’re watching, and I think some of what you continue to watch and expect on the monetary side.  But can you talk a little bit about what fiscal and monetary policy might look like going forward and how you see those interplays affecting the markets in the long-term?

    KURT REIMAN:  Yeah.  That’s right.  The, you know, the turn of events back in early November, call it Pfizer Monday, you know, was really, you know, a key ingredient to the story in financial markets that played out over the fourth quarter into this year.  We’ve seen an increase in market-based measures of inflation expectations.  Small caps have outperformed.  We’ve seen value outpace the broader market.  Rates have backed up and this is largely on the anticipation, not just for the vaccine rollout, but just, you know, confidence in the ability of policymakers to deliver primarily on the income bridge and the need for cash flows for individuals and businesses. 

    Now, of course, that raises the long-term, you know, outlook for increased debt as a share of GDP, which, you know, is a longer-term concern that we should all be thinking about.  But for the near-term it provides that necessary support.  

    Now coming into this year with the Georgia Senate runoffs and the Senate tipping, you know, very narrowing into Democratic hands and we have now a unified government in DC, you know, I think what we’re looking for is another round of fiscal stimulus on top of the news that we had in December.  And so, you know, that’s another perhaps as much as 5% of GDP that we can add to the equation that’s going to come in the form of income replacement, aid to state and local governments, and possibly later this year a down payment as you heard Larry talk about before, a down payment on infrastructure.  

    So, you know, this is a pretty supportive cyclical backdrop, one, you know, in the early stages of this year as we’re still, you know, battling the virus.  I would, you know, think about this as relief measures.  But as the year unfolds int other second half of this year with the economy looking better, it’ll start to look more stimulative and even procyclical. 

    MARTIN SMALL:  Kurt, one of the things you mentioned was kind of value versus growth.  I don’t think I’ve ever in my 20-plus career in financial services been bombarded with so many charts of value versus growth.  But everyone I think is looking forward to a return to more normal conditions, markets included.  

    There’s a healthy debate about value versus growth as value would seem to benefit from an economic restart.  Do you see that continuing or will growth continue where it left off before the pandemic?

    MARTIN SMALL:  Right.  Yeah.  And I think, by the way, this’ll be a great question for Kate in your next segment.  But I would say that, you know, the question is a bit a, you know, it’s phrased as an either/or.  I would actually think of it more as an and.  And so, it’s about where you take exposures within growth, where you take exposures within value, because I think you want to have exposures to each.

    Now, within value I guess I would say that for right now where do we find opportunities?  I think it would be in, you know, cheaper parts of the market geographically, but specifically emerging markets.  And I would even put a finer point on that and say emerging markets in the Asia complex, especially around the fact that these are countries that have contained the virus successfully.  Their economies have already gotten back to 2019 levels of growth.  They’ve even back to, in some cases like China back to trend.  So, I think this is an area geographically that’s cheaper, where there is, you know, some emphasis on the economic story playing out, both in the near-term but also the, you know, the structural story around, you know, China’s, you know, convergence to developed economies.

    Also, within that value bucket, I would place small caps, although I wouldn’t necessarily call them cheap.  But they are, you know, they’re cheaper relative to their own history.  They’ve come a long way.  I would think about this, you know, pick up in global GDP, especially around the fiscal story that we’ve talked about, as providing some boost to small caps but already have come a long way.

    On the growth side of the ledger, I think what we should be keeping in mind is, you know, that, yeah, there are some companies and some sectors that are looking a bit, you know, maybe you’d call it, some people would call it frothy.  But there are areas in the economy, as we heard Larry talk about earlier, these transformed technologies that, you know, come in the whether it’s entertainment from home or e-commerce or other areas of digital or tech-adjacent, which I think we still have to keep an eye on in the portfolio.  So, these tend to be, you know, sectors and companies that have strong cash flow.  Cash flow’s really important right now, high return on equity structurally.

    There’s also been I think importantly here stable and right-sized balance sheets, you know, not too much leverage.  And so, that quality exposure I think is something that within the growth bucket we would favor.  Now where do you get that exposure more?  You’ll find it more in the US and more in emerging markets and that explains why we’re overweight those two markets; whereas, less represented is places like Europe and Japan, where we’re underweight.  

    MARTIN SMALL:  The BlackRock Investment Institute has been very positive over the course of the last year on technology and healthcare and some of the trends you just touched on in terms of being selective within value and growth I think also capture that topic.  But we get the question from thousands of advisors aren’t these areas of the market overdone?  Why would these trends continue to succeed, Kurt?

    KURT REIMAN:  Yeah.  Again, I think, you know, this is also a great question to get Kate’s point of view on.  But this is, you know, this is the real question is that when we’re looking at the economy today and we think about some of the transformations that have taken place, this is all going in the direction of a lot of large cap equities.  Now, this is one of the questions that we had all last year about whether there’s a disconnect between, you know, Main Street and Wall Street.  And one thing is for sure.  During the midst of this economic outage some of the pain and the schisms that Larry was talking about before has meant that the incomes that people have either received from their jobs or that they’re getting from the relief measures, that’s not necessarily going into, you know, small businesses or your downtown.  

    As we have changed our behaviors and as we’re spending in the midst of a pandemic, what have we done?  We’ve been, you know, shopping online and we’ve been changing the types of things that we’ve been purchasing.  And I think that stays with us.  This is, you know, this is a true growth engine that was already in play before the pandemic hit in March.  We were talking about trends in digit, trends towards e-commerce, that these have just been accelerated or, if you will, turbocharged.

    So, there’s a growth story here and I think investors will be paying a premium for this.  But there’s even another wrinkle to this which that I think is maybe under-appreciated, which is, you know, if we’re in a world of still low bond yields, right, and you can’t get the same kind of income or capital preservation from traditional government bonds, then where can you go for income today?  And one of the things that I would point out is that within equities where do you get dividend growth?  A lot of times it’s from these secular growth sectors like technology and healthcare.  It’s not the same kind of tech sector from, you know, back in the dotcom days where, you know, maybe it was, you know, more volatile and around earnings that weren’t there.  This is a completely different technology sector where, you know, it’s more of a consumer and a business staple.  So, in that sense with, you know, stable balance sheets I think that this is – there’s a reason for that growth premium.

    Lastly, what I’ll say is low yields as we’ve been talking about and I think the Fed is likely to stay here and keep rates low.  That is supportive for equities more broadly.  But in particular, it supports some of these sectors that have longer-term growth because of their long data cash flows.

    MARTIN SMALL:  Kurt, in the last two minutes or so that we have, we heard from Larry earlier that sustainability is the biggest paradigm shift for capital markets since securitization in the 1980s.  We’ve seen more and more institutional investors adopting ESG and sustainable strategies, sustainable benchmarks.  But we know in the past sustainable, particularly across I think US wealth markets, was seen more as a satellite or a niche category.  What’s the investment case that you would make for sustainable investing today as mainstream in portfolios?

    KURT REIMAN:  Well, first, I would say that we’re now quantifying the previously unquantifiable, right.  More companies, as they disclose, we get more information that’s material to the investment case around environment, social, and governance factors.  And when we look at companies that score well on these factors, what do we find?  We find greater exposure to that quality factor I was talking about before, which I think is evidence of operational excellence for these companies.  They also tend to be thinking more about transition readiness at a time when investors and society at large are thinking about key transitions, whether it’s a transition to a low carbon future or whether it’s a transition to an economy that considers more how to get to greater equality across a number of dimensions.

    That is important and in a world where equity returns are likely to be more difficult to come by, right, compared to last year or the year before or even our generational experience, I think we’re going to see more compressed returns across a range of financial assets.  Then what we – will be also important to calibrate is the risk that we’re taking. 

    So, when I think about exposures to sustainability, I think about the one-time, as you mentioned, right, as capital is directed in this direction, that one-time reduction in the risk premium associated with equity investment but reducing the risk premium of companies that have the highest ratings relative to those with the lowest ratings.  I think that’s something that is under-appreciated and I – and it takes the conversation away from what is oftentimes in sustainability a values-based exercise, so thinking about the value that is inherent in the companies that score well on these range of sustainability criteria.

    MARTIN SMALL:  Terrific.  Thanks very much, Kurt.  You have one of the best video background games in the industry.  So, I’m going to go ahead and say that Martha Stewart has nothing on you.  Thank you very much for sharing your insights and the BII outlook for 2021.  

    And next, my friends, we are going to sit down with a panel to discuss how we take these insights that Kurt has shared with us and turned them into action in our portfolio.  So please stay with us.

Hear from our investment panel

A panel of our experts discuss current market themes and portfolio redesign strategies.

  • MARTIN SMALL:  Welcome back, friends.  We’re back with our Take Action part of the program.  We just heard the BlackRock Investment Institute views on 2021.  So, the next natural question is what do I actually do with all this information?  

    To answer those questions, we have a highly esteemed and wonderful panel, my colleagues, Kate Moore, head of Thematic Strategy for Global Allocation at BlackRock; Jeff Rosenberg, Senior Portfolio Manager for the Systematic Fixed Income teams here at BlackRock; and finally, the always esteemed and always popular Patrick Nolan, Senior Portfolio Strategist for the BlackRock Portfolio Solutions team.  Kate, Jeff, Patrick, happy new year.  Excited to see you all today.  Kate, you get the background award over my other colleagues here who are sitting in undisclosed locations in witness protection programs.

    So, why don’t we start with Patrick?  You and your team consult with thousands of financial advisors every year on their portfolios.  I think we looked at 20,000 plus advisor models and portfolios in 2020 and you analyze those portfolios in aggregate across the risk spectrum.  Let’s start with what advisor portfolios look like today.  What stands out for you in the last 12 months?

    PATRICK NOLAN:  Sure.  So, a couple things right off the bat.  We’re dealing with a lot of market volatility, right.  There’s no wisdom in that statement.  2020 was a pretty volatile year.  It’s playing out in model risk.  

    The average advisor portfolio in our data is about 25% more volatile as measured by our Aladdin Risk Management system than it was one year ago, and the asset allocation hasn’t changed all that much.  The average moderate model, as an example, was about 60/40 last year.  It’s about 60/40 now.  But volatility’s up about 25%.  So, we have to be mindful of the risk path that we’ve taken. 

    The second thing that I’d point out is advisor models are very US-centric at this point.  The average equity sleeve is about 75% in US allocation.  That is the highest number we’ve seen since we started doing this analysis about five years ago.  Now, as Kurt mentioned, we like the US.  But the average advisor model owns an awful lot of it and a bit more than perhaps we were thinking when we contemplated an overweight position.  

    The third thing I’d say is bond durations are up.  In fact, they’re the highest we’ve seen them since we’ve started doing this analysis.  Now, the irony of that is that we’ve been talking about raising bond durations for some time off of a pretty low position because of the ballast opportunity that duration offers.  Now what’s interesting is at this very moment when durations have gotten to their highest level that we’ve seen, it’s the exact moment that coincides with a period where we’re starting to question whether or not that duration will actually provide ballast to the same extent that it has in the past. 

    And finally, from a yield perspective, knowing so many people are looking for income, we have yields right now measured across the universe that are at their lowest level in the history of our analysis.  So, we saw spreads widen out last year and then round trip, but yields are not even where they were at the start of last year.  They’re even lower than that.  So, a challenging moment for income as well.

    MARTIN SMALL:  Patrick, given those stats that you just spelled out, what’s the main message that you’ve been starting out and giving advisors here in these 2021 engagements we’ve been doing?

    PATRICK NOLAN:  Yeah.  So, we’re here talking about the year ahead, right, and Kurt just offered our thoughts around, you know, the next 6-12 months type of a window.  But the thing that’s interesting to me is what our CMAs and CMAs around the industry are suggesting, which is that we could be looking at a pretty significant regime change from a return and risk perspective.  

    The average 60/40 model delivered a really nice return over the last decade and going forward we could be looking at, you know, 4%, 5%, 6% lower annualized returns on that 60/40.  It’s a pretty challenging moment to be in from a return perspective.  So, we’ve got to be smart about trying to identify return enhancing trades.  

    But as I mentioned a moment ago, risk is up in portfolios and normally when you think about trying to create return enhancing trades, normally you have to accept a bit more risk and we’re already starting with a portfolio posture that’s elevated in that area quite a bit.  This is why we’ve focused on portfolio redesign as the theme of our year ahead conversation, because I don’t think there’s really just one magic trade out there that gets you everything you need.  We think there’s going to be a number of different trades that are going to have to be matched together, some of them about returning, enhancing returns, some of them about creating additional ballast in the portfolio where the bond sleeve may not be delivering as much, trying to figure out how to keep the risk profile of a portfolio in check while we look for ways to enhance the return profiles.  You know, said differently, I think we’re just going to have to look beyond the 60/40 of today to something that perhaps looks more like 50/30/20, contemplating things like multi-asset products or specialty alternative investments as well. 

    MARTIN SMALL:  Thanks, Patrick.  Jeff, you and the Systematic Fixed Income team have been working on providing diversification to equities through your alternatives funds and other strategies and have had a lot of success in doing it.  But I’m pretty sure having known you all these years that you have spent your life, I think really from the second you were born, hanging out around the bond market.  And I want to understand what has happened these days to bonds as the main vehicle for diversification?  What’s going on with bonds these days?

    JEFF ROSENBERG:  Well, thanks, Martin.  Appreciate that.  You know, the outlook for fixed income is challenged and as you mentioned, you know, I started my career in fixed income at a very young age and have been in fixed income for a very long time.  This is a very challenging time to think about the traditional role of fixed income.

    You know, if we just take a step back, some of the obvious things are very clear.  Interest rates are at historic low levels.  The Fed is undertaking historic change in its operating procedures, shifting from what we’ve all long thought of the Fed as an inflation fighting institution to fighting today’s battle, which is too little inflation.  This fundamentally changes the outlook for the structure of the bond market, the outlook for interest rates.  The Fed is promising an exceptionally long period of staying at zero interest rates with no hurry to, you know, go back to that post-global financial crisis playbook of liftoff and normalization.

    And while interest rates have risen recently, most importantly on the back of heightened expectations for fiscal policy and restart economics as we eventually see the vaccine’s success in getting us back to normality, the outlook for returns in fixed income and the role of fixed income and its ability to play its traditional role as a diversifier are challenged.  And they’re challenged by really three key areas.  

    Number one, as I mentioned, interest rates are low.  So, when we look to fixed income to provide yield, it’s a very expensive prospect in terms of what it can deliver for expected returns in a portfolio.  Two, not only are short-term interest rates low, but unlike the last time we saw the Fed at zero interest rate policy, long-term interest rates are also at historic low levels.  And so, with the ten-year interest rate just above 1% today, it stands far too low to fall the 300 basis points that it typically falls in recessionary environments.  And while no one is expecting a recessionary environment anytime soon and the outlook is really quite the opposite with heightened expectations for growth exceeding even consensus expectations for 2021, the next time that we do get a surprise and we need bonds to provide the level of ballast that they have historically provided, the level of long-term interest rates and how much they can fall is just not what it once was.  And what that means is that the degree of diversification we can expect from fixed income is low and this is happening at the same time as you have low yields and low expected returns.  

    You know, into these two challenges to fixed income comes the new third challenge, which is in the aftermath of the Georgia elections and the Biden Presidential win and we’ll see this shortly, you have significant expectations for fiscal policy contributions to economic growth.  And with that, you’re seeing a rising interest rate outlook and a rising interest rate environment.  And certainly, rising interest rates is another challenge to the outlook for fixed income returns.  You put it all together and you’re looking at expected returns to core and traditional fixed income strategies around zero.  And as we’re going to talk more, that’s really the driving force when we think about portfolios and redesigning portfolios, that the traditional say 60/40, that 40 piece is really going to be a drag on your portfolio returns if you don’t take action because we’re looking at expected returns around zero and less benefit of diversification from the ballast part of fixed income as well.

    MARTIN SMALL:  So, low yields, low expected returns, potentially rising rates, you paint a fairly bleak picture and maybe that’s why the sirens were in the background coming to rescue you.  But what do we do about this, Jeff?  What’s the solution?  What have you and your team figured out on the multi-strategy side that perhaps others aren’t seeing yet?

    JEFF ROSENBERG:  You know, the solution is a lot of different solutions and we’re going to talk about a lot of those here today.  And Patrick and their team have laid out a lot of good frameworks for how to think about that.  You know, our group in Systematic Fixed Income, we’ve put together a lot of the strategies and techniques that we’ve used.  

    You know, the hallmark of systematic investing is providing precision returns and correlation return streams and using very basic technologies like long/short investing to deliver these types of return stream.  They’re found, you know, outside the traditional categories of stocks and bonds and we find ourselves in the category of alternatives and particularly in liquid alternatives in that the wrapper, the vehicle in which we’re providing these alternative investment approaches to deliver alternative forms for diversification are in liquid vehicles.  And so, that provides some attraction to using them as a substitution for other liquid vehicles like your fixed income.

    Key to our strategies and our approaches is the use of these alternative techniques to deliver alternative forms of diversification.  You know, it’s a hard conversation to talk about substituting fixed income for alternatives, because a lot of times when people think about alternatives, they’re thinking about alternative forms of taking on more risk.  And certainly, a lot of things that people have invested in the world of alternatives, if we think about that in the illiquid form, whether it be private equity or private credit, these are instruments that are really about finding new forms of yield on the private credit side or alternative forms of equity upside on the private equity side.  

    But when we’re talking about solving this fixed income challenge, we’re really talking about some solutions from our team and strategies that we employ that are really focused around using alternative investment techniques to deliver alternative forms of diversification.  Key to that alternative form of diversification, however, is not your traditional form of diversification where it can be exceptionally costly, right.  We’re not talking about strategies that spend option premium to protect against the equity downside, but really using idiosyncratic risk and alpha-centered investment strategies, strategies that are looking to take advantage of dispersion, differences in market valuations to deliver a form of returns that can provide defensive performance in equity market downturns.  

    That’s at the core of what we do in terms of an alternative form of diversification.  And we center it around a fixed income-like level of risk so that it functions very well as an alternative to fixed income but provides that diversification while at the same time having some upside participation to reduce that cost that you see in fixed income.  The cost of fixed income is a drag on your total portfolio returns in a world where we expect fixed income to deliver about zero.  We employ some strategies that provide some upside participation that reduces the cost of that alternative diversification.

    MARTIN SMALL:  Hugely helpful.  I love that insight of alternatives for diversification, not just for risk amplification.  Thank you, Jeff.  I know we’re going to come back and touch on some of that as well.

    Let me turn to you, Kate.  As head of Thematic Strategy for the BlackRock Global Allocation team, I think you have one of the most exciting perches in all of the investment world looking across all asset classes and regions.  I look forward to your joining the Mars Space Force at some point.  But advisors get the diversification piece right.  Where should they look for growth in their portfolio?

    I think you heard Kurt talk a little bit about in the previous session providing some warnings against using the same playbook from previous economic regimes.  What’s the right way that you and the Global Allocation team at BlackRock think about taking risk this year and beyond?

    KATE MOORE:  Yeah.  I absolutely agree with Kurt on this one, that if you just look at historic cycles when maybe the economy was re-accelerating after a period of challenge or recession, I think you’re going to miss some of the best and most compelling investment opportunities, not just over the year ahead but I think over the balance of the cycle.  You know, before I talk about some of the thematic stuff, I just want to mention that it’s really tempting at this point to rotate your portfolio maybe away from a growth tilt and into value, because growth has outperformed value so significantly over the course, not just over the last year, but really over the last decade.

    But I think something really critically important happened over the last 12 months and that was a number of the preexisting trends, the kind of forces, both in terms of consumption as well as the economy really re-accelerated or accelerated to a new level altogether as we sort of worked from home in the pandemic and as we adjusted to kind of a new economic reality.  What I will say is this.  While some of those areas of growth are treating at – trading at premium valuations perhaps to the rest of the market, for the most part they deserve it. 

    In fact, if you look at where earnings came from in the first three quarters of 2020, now we’re just starting into the 2020 fourth quarter reporting season, so I can’t speak for the full year quite yet.  But for those first three quarters there was a massive, massive differentiation between more value-oriented companies and growth-oriented companies and what they deliver to the bottom line.  You know, a lot of these growth companies were able to adapt and change, reform and expand their business models to meet consumer and business needs.  And I think those same needs are going to be in place throughout the course of 2021 and that we’re going to see as companies start reporting fourth quarter earnings guidance for 2021 that’s incredibly optimistic in some of these high-flying areas around software and technology services, companies that provide platform and solution, and those that are really catering to a changing consumer and sort of business demand.  So, I would say don’t abandon in early 2021 some of the winners in 2020 because we’re going to find that those companies have really very deep and broad moats around them that are going to allow them to continue to generate really strong fundamental returns.

    Okay.  So that aside, I just want to make this point around thematic investing, which is an interesting way to continue to diversify your portfolio.  When I think about thematic, there are basically, you know, three categories around it.  The first is sort of these long-term structural changes that we know are in place.  They may be sort of slow moving and these are investments that you make for the longer-term when you see the, you know, the sort of the economy and consumption patterns evolving.  

    The second are, you know, themes that are really driven and sort of catalyzed by significant policy or behavioral changes.  Those are some of the ones that did exceptionally well over the course of 2020 and that I expect to continue to do well in 2021.  

    And then, there’s a third category of themes that I look at that are around kind of more cyclical opportunities, changes in the business cycle.  And as we all hopefully get vaccinated over the course of the year and are able to gather together in person, some of those more cyclical trades I think will continue to do well.

    When I invest in a fund, I really focus on those last two, you know, where is there a dynamic catalyst that’s really meaningfully changing the course of a theme.  Around technology I think’s incredibly important, the changes in consumption, the changes in supply chain.  These are extremely exciting.  And I think the renewed focus globally, not just in Europe and China where we’ve seen that really, you know, we’ve seen a lot of policy moves over the course of the last 12 months but also in the US around climate and environment are going to be incredibly powerful.

    So, despite the fact that it’s going to be difficult to perfectly replicate returns from 2020, I see a lot of opportunity and I also wouldn’t abandon all of the winners as we rotate into some of the more impaired sectors in 2021 as the economy reopens.

    MARTIN SMALL:  Kate, let me ask you a question about kind of US versus non-US global international investing.  And I think you heard Patrick at the outset here in the panel financial advisors and I think US investors broadly speaking tend to have a good amount of home country bias.  US equities have had an exceptional run, continue to beat expectations.  Should investors stick to their guns in the US or start branching out more globally?  And if so, where?

    KATE MOORE:  Yeah.  So, this is a great question and I, you know, I hear Patrick’s number 75% US equity exposure, a huge amount of home country bias.  But it’s a lot more complicated than just saying I’m going to buy a little bit of foreign equities or buy a foreign index.  Let me just give you an example.

    Let’s say you were thinking about the UK.  We’ve gotten through Brexit and while there’s going to be some growing pains and some adjustments, and we also know that the UK is going to come through this last pandemic lockdown and perhaps you’re looking forward towards the end of this year and saying growth is going to look pretty good.  Maybe now is the time to buy UK equities. 

    Well, if you look at the UK index and, you know, market composition matters, only 23% of the revenues from UK come from the UK.  So, 24%-25% of revenues for UK listed companies actually come from the US.  You get more exposure from China than you do for the rest of Europe in the UK indices.

    So, market composition matters, both the geographic mix as well as the sector mix.  And I think that’s something we really need to think about when we look to diversify our portfolios away from the US.  I think you need to be a little bit more targeted in your exposure when you look to add say European exposure or Asian developed market exposure and really kind of get more concentrated in specific companies and industries that can provide you gearing to those different markets.

    You know, a stat that I also love is MSCI Europe, which is, you know, part of our benchmark and we kind of look at this.  You know, has about a quarter of its revenue coming from the US.  You only get sort of single digit revenue exposure from each of the major European economies and, in fact, you get more Chinese revenue exposure in MSCI Europe than you get a French revenue exposure.  So, it’s not such an easy solution.  I think a more active approach to non-US exposure is the way you really diversify your geography.

    MARTIN SMALL:  A couple of times throughout this discussion, we’ve touched on China a little bit.  Kate, I know you’ve done a lot of research in China in your career.  I thought maybe we could touch a little bit on what are some of the dynamics that are changing between the US and China and perhaps China and the rest of the world.  We have had some unbelievable and unprecedented actions this year in terms of bans on apps like WeChat and TikTok, Chinese stock exclusions for certain types of issuers from major market indices.  Maybe we can zoom out a little bit.  Where is all this headed and does that make you more or less optimistic about China and China in particular as a big exposure in broad emerging market indexes?

    KATE MOORE:  Yeah.  So, I think we could probably have spent our whole session talking about China.  I know Jeff and Patrick both have great views on this as well.  But I think a really important thing to remember is that direct Chinese equity exposure is an excellent portfolio diversifier.  You know, many of the companies listed in China, not just on the Hong Kong exchange, but particularly on the domestic A-share market, are geared exclusively towards Chinese consumption and Chinese businesses.  These are not as globally diverse as I was mentioning let’s say in, you know, the companies in MSCI Europe or MSCI UK.  In fact, it tends to be a much more insulated equity market and the drivers of the economy and the drivers of consumption and the consumer preferences, frankly, in China are meaningfully different than they are in other parts of the world.

    So, I see a huge opportunity to add China to portfolios, something that I think is pretty much structurally underweight across both our retail and actually our institutional clients as well and that we find that over the long-term, you know, something like the A-share market has incredibly low correlation to other market indices, particularly the other developed markets.  So, I think that’s critically important.

    But you also asked a question, Martin, a little bit around geopolitics and here’s what I will say.  There’s no question, and I’m going to paraphrase from Tom Donilon, who does such a great job of talking about this, that we have entered a phase of strategic competition between the US and China.  But I think over the last 12 months some certain things have changed.  

    Number one, it’s become incredibly difficult to disentangle global supply chains.  And in fact, the fact that China was able to come back online and the economy was able to recover sooner meant that they produced a lot for the rest of the world.  Their export market was incredibly important, and that part of the global supply chain was a critical link.  So, I don’t think we’re going to see as much sort of separation of the supply chain in the near-term as some people have called for.

    I think the second point is that in order for us to successfully get rid of this virus, we’re going to have to have coordination between all of the major economies and major scientists, that’s US and China together, to vaccinate the world.  And I expect Biden and his Administration will focus very much on where we can partner with China, at the same time thinking about these areas of competition, particularly in technology, you know, more strategically and perhaps with less of a sort of an impulsive move or separation. 

    MARTIN SMALL:  Great stuff, Kate.  Thank you.  I want to, Patrick, deal you into this question of home off – home country bias, international and EM investing.  I think if I review the last ten years of my meetings with institutional and financial advisor investors, there’s been tremendous amounts of advocacy about international and EM and they continue to allocate more dollars to the US, and they’ve done well by being overweight to the US.  Any reason to stop?

    PATRICK NOLAN:  Yeah.  It’s a great question and it’s something that I know everyone on this call is – has been, you know, hearing and trying to contemplate the geographic weightings and what’s proper for each client.  And certainly, this is a kind of a long in the tooth story that just hasn’t materialized in quite some time. 

    Let me maybe start by putting some context around this advisor position just so we have a frame of reference.  I mentioned the average weighting in equities is about 75% to the US.  To benchmark that, the MSCI All Country World Index has a US weighting of about 57% or 58%.  So, this is not just a mild overweight.  It’s a big overweight.  And certainly, we like the US.

    It’s not surprising, right.  We’ve seen 13.5% annualized returns from the S&P 500 for the last decade.  So, as you point out, Martin, in your question, it’s worked; why stop?  And, in fact, we don’t necessarily think that this year may lead to poor results from that weighting.  

    However, when you start to think about the bigger picture and this idea of regime shift that I started off with earlier and you take a look at expected returns through CMAs, not just ours but others as well, it’s pretty easy to start to look at other places and say that there are opportunities to enhance returns and, in fact, we may need them.  There are lots of reasons to like places like emerging markets and we’ve talked about them in a few of the segments here already.  I’ll add one more.

    That 75% weighting towards US is not just then one that is seeking returns in the past and perhaps present.  It’s also one that’s increasing risk in portfolios.  Said differently, the increase that I cited earlier, about 25% up in risk year-over-year, the benchmarks that we use which are a bit more global in nature are actually up a touch less than that in volatility.  And we think one of the contributors to the average advisor model being a more – more volatile or the increase being more volatile than before or than the benchmarks rather is the fact that they’ve got such a concentration in US.  

    So, there’s an opportunity here to introduce a bit more international.  We like specifically EM certainly.  But not only does it give you the opportunity to perhaps enhance returns, but it also gives you the ability to mitigate risk as well for the first few percentage points perhaps that you shift over from one to the other.  So, it’s a unique moment where this heavy a weighting is actually causing risk and lightening it up, still remaining overweight US but introducing some of these places that we already believe can enhance returns may also come with risk benefits as well.

    MARTIN SMALL:  So, in the seven or so minutes, about seven minutes that we have left, I want to touch on two things.  One is about the national debt and how that impacts kind of markets.  And then, the second is to talk a little bit about multi-asset and kind of close out with some pitches.  

    So, Jeff, I want to come back to you for one second.  It’s been 186 years since our national debt was zero.  I remember a time when people were afraid about credit downgrades for the United States government.  I seem to recall from the history books these people called deficit hawks.  I don’t see many of those people anymore.  

    We’ve talked about low rates.  We’ve talked about low yields.  But does any of this extraordinary amount of borrowed money worry you in the long-term and how should investors think about this?

    JEFF ROSENBERG:  Yeah.  You know, it’s a great conversation starter for investors to really understand a couple of critical portfolio allocation decisions that they really need to think about.  Now, at the big picture level, you know, we have an unprecedented expansion of debt to deal with an unprecedented crisis.  You know, I’ve used before and I think it’s a great analogy that, you know, COVID is like a war and we’re fighting a war and we’re utilizing wartime finance techniques to deal with financing the fight against that war.  And when we use that analogy, we see that in the aftermath of war financed by debt you get a significant long-term response, especially in developed market countries.

    You know, this large level in – of indebtedness has to be dealt with.  But the typical and I would argue the most likely way in which we’re going to deal with that level of indebtedness is to reduce it over a very long period of time.  I’m talking 20, 40, 50 years, where you employ the combination of two critical policies.  Number one, you pursue more inflationary monetary policy.  Check that box.  The Fed has already committed to that.  That’s the flexible average inflation targeting regime. 

    But you can’t do that and also reduce the amount of indebtedness if you don’t also at the same time employ a second and critical additional policy and that’s a policy of financial repression.  By financial repression what I mean is that you need to employ policies that reduce the borrowing costs of the federal government such that the level of interest that the federal government is paying is below the level of nominal GDP, real GDP plus the level of inflation.  That over a long period of time is how we’re going to pay for this large level of indebtedness. 

    Okay.  So, that’s the macro story.  What does it mean to your investors?  It means that you have to think carefully about the use of cash in your portfolio.  It also means that, you know, people who are worried about runaway inflation, I don’t think we’re going to have runaway inflation.  You don’t need runaway inflation to solve the deficit problem.  What you need is a little bit of inflation at the same time as keeping the lid on interest rates.  That’s the outlook at that I think we’re going to be investing under.

    And so, while investors may be looking at very low levels of interest rates for a very long time, the real impact on their purchasing power is to see that purchasing power being eroded, particularly when the yields that they can get on their safest investments is below the level of inflation.  And so, this is what we have to recognize is the manner in which we’re reducing the impact of indebtedness.  It’s reducing the purchasing power at the same time of our investor savings. 

    And so, we as financial advisors have to recognize that, and we have to take action.  And how do we protect portfolios?  We have to reallocate away from investments that deliver these negative after-inflation returns.  It really challenges the role of cash as a diversifier.  It’s not a diversifier.  It’s a dampener to your portfolio returns but it’s a very expensive dampener because it erodes the value of the real purchasing power of those savings.  

    And so, this is where the role of alternatives, of different strategies.  We talked earlier about the fund, Systematic Multi-Strategy, that I run.  These are all parts of the solution, but they’re all part of this bigger picture story that we can’t rely on the past performance of typically 60/40 portfolios.  And, most importantly, we can’t rely on traditional fixed income to deliver the kinds of returns that it once did, because in the future those returns are going to be a lot lower, and after inflation they need to be negative in order to solve that debt and deficit problem that you are addressing in your question.

    MARTIN SMALL:  In the two minutes or so we have left, we’re going to my favorite question.  We did this last year.  We’re going to do it again, which is you’re a financial advisor.  You are sitting across from a client.  What is the one change that you’re going to ask them to make this year given our conversation today and how would you convince them to actually take that action?  Let’s try to do 30 to 45 seconds.  I’m going to start with you, Kate, because you drew the long straw.

    KATE MOORE:  Oh, that’s lovely.  Well, so actually, I’m just going to continue what I was talking about before, Martin, which is that the investment I would recommend that clients really consider adding to their portfolio is actually allocation to China.  This goes against all of the headlines and the discussion around the separation between the US and China and but really gets to the heart of what we’ve been talking about throughout the course of the last 30 minutes, which is portfolio diversification.  

    As I mentioned before, a lot of the drivers of the earnings of Chinese-dedicated companies are totally different and separate from what you’re getting in the rest of the world.  I also think you’re getting a super-interesting and differentiated slice of the technology pie.  I would note the Chinese government is all in in creating a new technology sort of paradigm based in China and that has been very supportive for companies and their earnings.  I would try and get them comfortable with China as a diversifier, if not in their equity portfolio perhaps across their multi-asset portfolio as well.

    MARTIN SMALL:  Excellent.  Number two, Jeff, you get to go now.  You’re sitting across from a client.  What’s the one change you’re asking them to make this year and how would you convince them to actually take action?

    JEFF ROSENBERG:  Well, it’s basically the answer that I just gave on the debt and deficit question.  You know, the change that we’re asking is when you’re thinking about that traditional 60/40 portfolio.  We need to harvest better returns from reducing the 40%.  We’ve got a lot of different solutions in there.  I talked about liquid alternatives.  We talk about privates, various forms.  

    But that 40 is going to be a drag.  We’re going to need to get more out of it by doing different things.  And one justification is just to look at that big macro view of a rising inflationary environment with very low interest rates is eroding your real purchasing power of those savings. 

    MARTIN SMALL:  Excellent.  So, Patrick, you know, it was close last year but you eked out the victory by financial advisor vote on the answer to this question.  So, as the reigning champion, you get to go last given that you’ve seen what everyone else said.  Patrick, you’re an advisor.  You’re sitting across from a client.  What’s the one change you’re asking them to make this year given our conversation today and how would you convince them to actually take action?

    PATRICK NOLAN:  Yeah, sure.  I’m starting with just trying to soften the sand and make sure that they understand that we are going to need to do some things differently than we’ve done in the past.  So, my conversation would sound something like let’s talk about where we’ve been.  We have enjoyed great returns on the back of real workhorses in our model.  Our large allocations to US stocks, our large allocations to core bonds, they’ve done great for us in the past decade or more and the returns have been there.  The risk has been really well-managed.

    The challenge is that markets change, and we have to change with it if we’re going to get you to stay on track for your long-term plan.  And my job is to make sure that the portfolio’s being altered through time as conditions change.

    So, getting you to a successful outcome, Mr. and Mrs. Jones, is likely going to mean that I’m going to have to introduce some things to you this year and beyond that we haven’t really owned a lot of before.  And I need you to understand why I’m doing it and kind of what the precedent looks like, what the stage looks like, why I’m making these suggestions so that when I bring some new things to you and we’re going to have to spend some time going through some of the details of some of these newer investment types that perhaps we haven’t talked about before.  It’s not just because I’m on a whim.  It’s because the market conditions are changing and I’m trying to do my best to keep you on track for your long-term goals.

    MARTIN SMALL:  Excellent.  Kate, Jeff, Patrick, thank you so very much for all of your insights.  To our audience, if you have any questions about these solutions, please reach out to your BlackRock Market team.  We’d be happy to continue the conversation. 


Morgan Housel talks psychology

The author of The Psychology of Money, shares how investors can overcome common behavioral challenges.

  • MARTIN SMALL:  I’d like to turn now to the last part of our program.  We’re very excited to have our special guest, Morgan Housel, author of The Psychology of Money on today, hosted by the gentleman that I’ve referred to as a national treasure here at BlackRock, Mark Peterson, our Director of Investment Strategy and Education.  Mark and Morgan, happy new year.  Welcome to you both.  Mark, I will hand it off to you.  Thanks so much.


    MARK PETERSON:  Great.  Thanks, Martin, for that generous introduction.  Really excited today to be – to have Morgan Housel, financial journalist and author, with us.  His most recent book is The Psychology of Money, which is excellent by the way, and it has to do with how folks think about money and investing and some of the behavioral challenges that they face. 


    Clearly last year, you know, we had challenges beyond just money and investing, but I think we’ll look back historically and see that it was one of the worst years ever for investor behavior.  If you look at record outflows into equity funds, record cash on the sidelines, and though stock markets still ended up over 18%.  Clearly points to behavioral challenges.  And we all know that managing our client assets is one thing; managing their behavior is another. 


    So, Morgan’s story has really resonated within the walls of BlackRock so much that we wanted to bring him in, share some of those stories with you today, especially some of the ones that are really well-timed for today’s market and the environment.  So, Morgan, thanks for joining us.  I’ll turn it to you.


    MORGAN HOUSEL:  Thanks so much, Mark.  Good afternoon, everyone.  Thanks for having me today.  I’m glad we can still do these events, even if we can’t see each other face-to-face like we used to.


    But as Mark just said, what I want to talk to you about today is The Psychology of Money, which means I’m not going to tell you where the market’s going next or where the economy’s going next.  I just want to talk about what happens inside of our head when we try to make investing decisions and when we think about money.


    And I want to start today with a story of two investors, neither of whom knew each other, but their paths crossed in what I think is a very interesting way about ten years ago.  The first investor is a lady named Grace Groner.  Grace Groner was born just outside of Chicago in 1910 and she had kind of a very difficult life.  She was orphaned as a child.  She never married.  She never had children.  She never went to school.  She lived in a one room house for her entire life.  She worked as a secretary for her entire career.  She was, by all accounts from those who knew her, she was a lovely woman, but she had just kind of a very difficult life. 


    And Grace Groner died in 2010.  She was 100 years old.  And when she died, everyone who knew her was shocked to learn that she left $7 million to charity.  And everyone who knew her said where did Grace, this orphaned secretary, get $7 million.  And they dug through her papers, dug through her accounts and realized that there was no secret.  There was no inheritance.  There was no lottery winnings.  All she did was she took what little she could save from her job as a secretary.  She invested it in a couple blue chip stocks, and she left it alone for 80 years and that was her whole story.


    The second investor I want to talk to you about today is a guy named Richard.  I will leave out his last name.  But Richard had almost the exact opposite upbringing of Grace Groner.  Very wealthy family.  He went to Harvard.  He got his MBA from the University of Chicago.  He went to work on Wall Street in the 1980s and truly became one of the most successful people in global finance.  He was a vice chairman of one of the major investment banks.


    He retired in his 40s to pursue charitable activities.  That’s how successful he was in his career on Wall Street.  Two weeks after Grace Groner died, Richard filed for personal bankruptcy.  He told the bankruptcy judge that the financial crisis of 2008 completely wiped him out to such an extent that his only ability to buy food for his family was selling the furniture out of his house. 


    And the purpose of the story is not to say be more like Grace, be more like – be less like Richard.  That’s not the point here.  The point is that there is no other industry that exists where those kind of stories are even possible.  There’s no other industry where someone who has no financial background, no education, no experience, no connections, massively outperforms during the same period someone who has the best education, the best background, the best experience.  It does not happen in any other field.


    It’d impossible to have a story of Grace performing open heart surgery better than a Harvard trained cardiologist.  It would never happen.  But those stories do happen in investing.  And what that shows I think is something very important that’s easy to overlook, which is that good investing is not necessarily about what you know.  It’s not about how smart you are or how sophisticated the forecasting models you use are. 


    Good investing is overwhelmingly about how you behave.  It’s about your relationship with greed and fear, your ability to take a long-term mindset, who you trust, how gullible you are, who – where you seek information.  And those are not analytical things.  Those are behavioral endeavors.  And the thing about behavior that is so important in finance is that behavior is hard to teach, even to really smart people.  It’s not analytical.  You can’t summarize behavior in charts, in formulas that you can memorize.  It’s this kind of soft and mushy topic, so it tends to get swept under the rug in investing, even if it is one of the most important aspects of successful investing.


    So, what do we do about that as investors, as financial advisors?  To me, I think the only way to wrap your head around behavioral finance and the psychology of money is through stories, stories of real people, real investors dealing with risk, dealing with uncertainty, that hopefully you can empathize with and wrap your head around.  So, whether that’s for you or dealing with your clients you can think about the behavioral side of ... productive way.


    And so, what I want to do for the rest of my time today is share with you three stories, none of which have anything to do with investing.  But all of them, hopefully you will see, have a very clear takeaway about how we as investors and advisors can think about the behavioral side of investing in a more productive way.


    And so, the first story I want to share with you today is that timing is meaningless, but time is everything.  And like I said, this story has nothing to do with investing.  I want to tell you a story about the Wright Brothers. 


    Most of you will recognize this picture, December 17, 1903 in Kitty Hawk.  This is the first second of the first flight in human history and it’s hard to overstate how important this moment was because the airplane went on to change everything in the world.  It changed business.  It changed society.  It changed geopolitics.  It started world wars.  It ended world wars.  If you had to make a list of the most important innovations of the 20th century, the airplane would be at least top five, if not number one.


    And what’s ... is that you don’t need any scientific background to understand how big a deal this was.  It’s not like mapping the genome where you need to understand the nuance.  This was just a man flying through the sky like a bird for the first time ever. 


    So, you can imagine how exciting this moment was and how after this happened everyone came together and said humans can fly now; the world will never be the same; how excited journalists were writing about this moment.  Except that’s not at all what happened next. 


    This is the front page of the New York Times on December 17, 1903.  It’s small print, but you can take my word for it.  There’s no mention of the Wright Brothers in there anywhere.  This is the next day, on December 18th.  No mention anywhere.  And the 19th.  And the 20th.  And the 21st.  And the 22nd.  You can take my word for it, no mention of what the Wright Brothers are doing anywhere in those new – in those newspapers.


    By this time, the Wright Brothers had made six flights.  One of them had lasted for 59 seconds, which was a long time back then.  And there is no mention of their flights anywhere in the New York Times. 


    This kept going for days.  It kept going for weeks.  It kept going for years.  Two years after the Wright Brothers first flew, the New York Times did an interview with a German hot air balloon tycoon and they asked this German hot air tycoon – oh.  Looks like I may have frozen here.  Let’s see.


    And they asked this – okay.  So here we are.  They asked this German hot air balloon tycoon if humans would ever fly, if men would ever fly in an airplane.  And the German air balloon, hot air balloon tycoon said, quote, in the very, very, very far future there may be flying machines but not now, not now. 


    This was two years after the Wright Brothers first flew and the New York Times didn’t even know that they had done it yet.  It turns out that there was one newspaper that covered the Wright Brothers’ first flight.  It was the Dayton Herald in – the Dayton Tribune in Dayton, Ohio, where the Wright Brothers were from.  And this is how they cover the first flight:  Dayton boys solve problem.  And I love how it’s framed, just like a bunch of silly kids doing a science experiment that didn’t have much meaning.


    Years later, the editor of this newspaper, his name was Luther Beard, was asked why he was the only journalist in the world to cover the Wright Brothers first flight.  And Luther Beard said, quote, I used to chat with them in a friendly way because I sort of felt sorry for them.  They seemed like decent enough young men and yet here they were wasting their time day after day on that ridiculous flying machine.  So, the only newspaper, the only journalist to cover the Wright Brothers’ first flight did it out of sympathy for these poor kids. 


    After Kitty Hawk, the Wright Brothers went back to Dayton, Ohio where they were from and this is where they truly mastered flying.  They mastered the two most difficult parts, which were turning and landing.  David McCullough wrote a great biography of the Wright Brothers during this time in Dayton and he wrote, quote, no one seemed to notice the miraculous thing happening right in Dayton’s own backyard.  There was no sense of wonder of them – of the miraculous thing happening right in Dayton’s own backyard. 


    So, look.  In due time the Wright Brothers got the credit that they deserved, the recognition that they deserved.  But it took decades.  It took about five years for the Wright Brothers to build the airplane and another six or seven years for them to get any credit for what they were doing.


    And look, when we think about the traits of successful entrepreneurs, we might think of things like ingenuity, their engineering ability, the creativity.  Rarely do we think of patience and time horizon as a competitive advantage.  But for the Wright Brothers it absolutely was.  And to the extent that we do think about patience and time horizon as a competitive advantage, we often massively underestimate how much time is needed to put the odds of success in your favor.  And that is also true in investing.


    Let me show you what I mean.  This shows the maximum and minimum annual returns that you could’ve earned based on different time horizons going back to the 1870s for US equities.  What is the most you could’ve earned on an annualized basis and the least you could’ve earned on an annualized basis based off your holding period, if you held stocks for two years or five years or ten years? 


    And two things should stick out from this chart.  One is that it scales down perfectly over time, so that the longer you hold ... you are to converge on just a pretty good return.  The second thing that should stick out that’s really important here is that it is not until you’ve been holding stocks for between 10 and 20 years that ... positive return. 


    Now, most investors that you ask will tell you that they are long-term investors.  Most investors think they are long-term investors.  But if you actually ask most investors what is your definition of long-term, some of them will tell you one year.  That’s a long term.  Three years, five years, that’s definitely the long-term.  Historically, I think a pretty good definition of what long-term investing is, that definition being just every holding period finishes with a positive real return, is something between 10 and 20 years. 


    Something else that’s important on this topic is just how counterintuitive the power of compounding can be.  This I want to show you is Warren Buffett’s net worth throughout the course of his life based off of his age going back to the time that he was a teenager.  And something that’s really interesting that should stick out from this chart is that 99% of Warren Buffett’s net worth came after his 50th birthday.  Ninety-seven percent of his net worth came after his 65% birthday. 


    That is just how compounding works.  It’s not something that takes place in years or even decades but literally lifetimes and that is so easy to overlook if you don’t understand how much time is really needed to have incredibly good investing results.


    Two takeaways from this is that we should realize that when progress is measured generationally, results should not be measured quarterly.  And I think the single biggest, the central problem that investors have with investing in stocks is underestimating the amount of time that is necessary to put the odds of success in your favor.


    Now, the second story that I want to talk to you about today is that risk is what you don’t see.  And this too is a story that has nothing to do with investing.  I want to tell you a story about Harry Houdini, the famous magician that did most of his work in the United States about 100 years ago. 


    Houdini was, of course, known for his escape acts.  He would tie himself up in chains or a straitjacket.  He would throw himself in a river and escape and the crowds would love it.  That’s what he became famous for.


    But Houdini actually had another trick that he played on stage whenever he performed.  It was the last trick that he performed during every show, which is that he would invite the largest, strongest man in the audience onto stage and he would tell that man to punch him in the stomach as hard as he could.  Harry Houdini would stand there, and he would let people punch him in the stomach as hard as they could.  His claim to fame was that he could absorb any man’s punches, no matter how big or strong that man was.


    One day in 1922, Harry Houdini had finished a show in Canada, and he went backstage after the show and he invited a group of students to come backstage and meet him.  One of the students was a guy named Robert Whitehead and Robert Whitehead walked up to Harry Houdini and started punching him in the stomach as hard as he could.  He didn’t mean any harm.  He wasn’t trying to fight.  He just thought he was performing the same trick that he just saw on stage.


    Harry Houdini was not prepared to be punched.  He didn’t know this was going to happen, so he was not prepared.  He was not flexing his solar plexus.  He fell to the ground in pain.  He said what are you doing?  I’m not prepared to be punched right now.


    Harry Houdini woke up the next morning, doubled over in pain.  His appendix had ruptured, almost certainly from Robert Whitehead’s punches the day before, and Harry Houdini died later that day.  This was how he died.


    And what’s so interesting to me about this story is that Harry Houdini could survive almost anything as long as he was prepared for it.  Wrap him up in chains and he set himself up in chains, throw himself in the East River.  He could survive that because he was prepared for it.  He had a plan.  He knew what was coming.  The one thing that he did not see coming, just a college student jabbing him in the stomach, literally killed him. 


    So, I think one of the big takeaways for this and for a lot of fields is that risk is what you don’t see.  In almost every field, how risky something is depends on whether you are prepared for it, not how big the event is, not how traumatic the event looks is, but just whether people are prepared for it or whether they are surprised for it.  And that is also true in investing.  It’s also true in the economy.


    The biggest risk to the economy is what no one is talking about, because if no one is talking about it, they are not prepared for it and if they are not prepared for it, its risk will be amplified when it arrives.  We learned this firsthand in kind of blunt force terms in 2020 when the biggest risk was something that no one was talking about until it arrived. 


    You know, we spent, the whole industry spent the better part of the last decade talking about what was the biggest risk to the economy.  And we tend to personify these risks.  So, people talked about for most of the last decade was this the biggest risk to the economy?  Was it Barack Obama and the stimulus packages, the tax hikes of 2013?  Was that the biggest risk to the economy?  Maybe it was this guy.  Was it Ben Bernanke?  Was it the money printing after the financial crisis?  Was he the biggest risk to the economy?  Was it this guy?  Was it the trade wars and the policies the last four years?  Was Trump the biggest risk to the economy?


    We now know that the answer was none of those three things was the biggest risk to the economy.  The biggest risk by far was this guy.  It was a virus that no one was talking about until it happened, caught almost everyone off-guard and became by far by order of magnitude the biggest risk that we had dealt with in the last decade, if not during our lifetimes. 


    And I think if you look historically, this is almost always how it works that the biggest risk in hindsight is the thing that no one was talking about until it arrived.  It was never in the newspapers.  It was never in – it was never discussed until it arrived.


    You know, if you look historically, the risks that people talk about as investors are things like trade wars, next quarter’s earnings, budget deficit forecasts, the election.  It’s not that these things are not risky.  It’s that people know they’re coming.  They by and large have some insight into what might happen.  They can weigh the odds of what might happen so when it happens it’s not necessarily a surprise.


    But if you look historically at what has actually moved the needle in investment markets and in the economy, it’s things like COVID-19.  It’s things like Lehman Brothers couldn’t find a buyer in 2008 that started the great financial crisis.  It’s things like September the 11th and Pearl Harbor. 


    The common denominator in all these is that no one was talking about them until they occurred.  They were not on anyone’s list.  They came out of the blue.  So, we were not prepared for it. 


    Now this can kind of be disheartening for investors to hear that the biggest risk always is what no one is talking about.  It kind of feels like you’re taking a fatalistic approach to investing in the economy.  But there’s two things I think that people can think about to help themselves in this situation. 


    One is to think about risks the way that Californians think about earthquakes, which is the idea of having expectations rather than forecasts.  Look, if you live in California you know that earthquakes will be a big part of your future.  There’s no way around that.  But you don’t know when it’s going to occur.  You don’t know when the next earthquake is going to be.  You don’t know how big it’s going to be.  You don’t know necessarily where it’s going to take place.


    So, rather than forecasting the next earthquake, they’re just prepared for one to occur at any given moment.  It’s just part of their baseline expectations all the time.  And I think thinking about economics and investing risk in the same way can be a good way to get around this world where the biggest risk is what we don’t see.


    Look, if I were to say hypothetically the next recession will occur in Q3 2024 – again, I’m just making that up – that’s a forecast.  But if I were to say historically there have been two recessions per decade and I expect that to be the case going forward, that’s an expectation and I think it’s a much more reasonable way to think about risk as an investor.


    The other thing to think about here is the difference between getting rich and staying rich.  They are two very different skills that I think need to be nurtured on their own.  Getting rich requires taking a risk, being an optimist, you know, being really optimistic about the future as an investor.  Staying rich requires almost the exact opposite.  It requires a certain degree of paranoia and conservatism and a realization that historically the short run is almost this continuous chain of bad news and bad – and surprises that are going to hit us, a continuous chain of bear markets and recessions and pandemics that we need to be able to survive long enough financially so that we can enjoy the long-term compounding that comes from our optimistic side.  So, that’s the second story I want to talk to you about today. 


    The third story is that you can be wrong half the time and still do great.  And this is a story about baby brain development, again nothing to do with investing but this will all come back around.  If you are a parent, you know that the amount of growth and development that takes place inside of a newborn baby’s brain in the first few years is absolutely extraordinary. 


    The average baby is born with about 100 billion brain neurons.  Each one of those neurons has about 3,000 synaptic connections, which are these connections to other neurons that forms this web of intelligence inside of a baby’s brain.  Maybe when they’re born, that web looks something like this.


    By the time the average child is six months old, that has increased from 3,000 to about 6,000 synaptic connections, so a lot of growth in the first few months that’s creating this web of intelligence inside of your brain.  By two, by two-years-old, that has increased from about 6,000 to 10,000 synaptic connections.  So, in the first two years of life just a lot of growth that’s going on inside of your brain.


    And then after two-years-old, something very interesting happens which is that the density of synaptic connections in your brain, the number of connections doesn’t just plateau, it starts to decline.  By the time the average child is four years old, they’ve already lost about one-fifth of the synaptic connections that they had in their brain when they were two.  By the time the average child is six years old, they have lost about one-third of the connections that they had inside their brain when they were two.


    This keeps going on throughout childhood into adolescence into early adulthood.  By the time the average person is 25 years old, they have half of the synaptic connection density that they had when they were two.  Why does this happen?


    Well, it turns out that a lot of the growth and development taking place inside of your brain in your earlier years in life are connections inside of your brain that are redundant, that are not necessary, that are inefficiently wired.  Sometimes, these connections in your brain are just completely mis-wired and there’s evidence, particularly in the first few moments of a child’s life, that some babies can smell colors and hear colors because the part of their brain that is processing that information is completely mis-wired.


    And so, you go through your early years of life getting rid of ... inefficient and unnecessary connections in your brain.  But what’s important about this is that even though what’s going on inside of your head is chaos and loss and destruction of synaptic connections, you’re still getting smarter.  A four-year-old is smarter than a two-year-old and a 20-year-old is much smarter than a four-year-old most of the time.  We all know a few exceptions.


    But this idea that what’s going on inside of your head is chaos and loss and destruction even though you’re getting better is not very intuitive, because you can imagine if you were a parent and you could look inside your child’s brain every day and see that they were losing synaptic connections, you would panic.  You would say this doesn’t feel right.  Something feels broken.  This can’t be how it’s supposed to work, even if that is the normal path of growth over time.


    The idea that something can improve while what’s going on inside is chaos and loss and destruction is not intuitive, but we see it in a lot of fields.  And one of the fields we see it very often is in investing.  Let me show you what I mean.


    This is the Russell 3000 Index going back to 1980 and this, look, for a large nation’s economy this is about as good as it gets in terms of returns.  Average annual returns of about 12% per year.  If we can repeat this over the next 40 years, that’s as good as anyone can expect.  This is a great return for an index.


    But if you look at what went on inside of the index during this period, how these 3,000 individual components performed during this period, you get a completely different view.  What you’ll see is that the median stock in this index underperformed the average by 54 percentage points.  Forty percent of the components during this period, 40% of Russell 3000 components over this 40-year period lost money.  The majority of those lost all of their money.  They went to zero.  They didn’t merge.  They didn’t get bought out.  They effectively went bankrupt, 40% of the components. 


    Virtually all of the index returns comes from 7% of components that had extraordinarily high returns.  So, here again, you start with the picture of success, an index that’s done very well, and you look at what went on inside of the index during this period and it’s a constant chain of chaos and loss and destruction and companies going out of business.


    This also has a big impact on how we think about volatility as investors.  This is the S&P 500 going back to its inception in 1957.  And again, this too is like the picture of success for a large nation’s stock market.  If we can do this again over the next 60 years, no one can hope for any better.


    But this I want to show you is when the index was down about 5% from its previous all-time high.  Let me see if I can get it here.  Let’s see.  It looks like it’s not advancing for me here.  There we go.  That’s when the index is down 5% from its previous all-time high.


    Trying to advance this here, sorry.  One moment while you bear with me.  There we go.


    That’s when it’s down 10% from its previous all-time high and that’s – this is when it is down 20% or more from its previous all-time high.  So, you start with the picture of success, as good as it gets, and then you layer on the nuance of what happened during this index, to this index during this period and it’s a constant chain of chaos and loss and destruction. 


    This is, of course, accentuated if we are talking about individual stocks for a stock picker.  This is Netflix returns going back to 2004 and this, again of course, is like the picture of success for any large company.  Netflix went up four hundredfold during this period.  This is truly as good as it gets for any large cap company.


    But these are the losses that you had to endure in percentage terms to achieve those returns over time.  And this is why the percentage of investors who have actually held Netflix stock over these 16 years rounds to zero.  It is not intuitive to think that on your way to making 400 times your money you’re going to lose 70% of your money three separate times.  You’re going to lose 50% of your money on six separate occasions.  It’s not an intuitive thing to think about, even that is a normal path of growth over time.


    And so, look, I think, you know, one of my favorite quotes comes from Dwight Eisenhower, the famous General and President, who was once asked the definition of a military genius.  And Dwight Eisenhower said a military genius is the man who can do the average thing when everyone else around him is losing his mind.  And I think it’s the exact same in investing, that good investing is not necessarily about making great decisions.  It’s about consistently avoiding mistakes, consistently not – consistently not screwing up and consistently not reacting to the chaos and the loss and the destruction in the short-term that is likely to pull you away from a long-term investing strategy that will earn the highest returns.


    Charlie Munger has a great quote that I think summarizes this where he says the first rule of compounding is to never interrupt it unnecessarily.  And so, if there’s a common denominator from these stories, it’s that when people tend to think about risk, they usually think about what the market or the economy is going to do to them.  What’s the stock market going to do to me?  What’s the economy going to do to me as an investor?


    I almost think that the best, a better definition of risk is just what you do to yourselves.  It’s your own biases.  It’s your own misconceptions, your own impatience anchoring to your own unique history that tends to pull you away from a long-term investing strategy.  And that can be kind of disheartening for investors to hear that you are your own worst enemy in investing but I’ve often thought is actually one of the most optimistic realizations as an investor, because of course we have no control over what the stock market’s going to do next or the economy’s going to do next.  The only thing we have control over as investors is our own behavior and when you realize that the only thing that you can control as an investor is also the most important aspect of investing, that’s actually a pretty optimistic realization. 


    So, I want to end my remarks today with a quote from one of my favorite investors, Bill Bonner, who says that investors do not get what they want or what they expect from markets, they get what they deserve.  So, thank you for listening to these remarks today.  Sorry we had some technical issues there.  But I’m happy to have a conversation with Mark now and talk a little bit more about the psychology of money and what we as investors can do during these crazy days when so much has changed in the last year.  So, thank you.


    MARK PETERSON:  Morgan, thanks so much.  Agree, stories are such a great way to communicate with clients, especially around behavioral challenges.  With the few minutes left that we have, I thought we’d throw some questions at you.  First off, with, you know, I mentioned time of the book.  Last year it was published.  Anything that was surprising in the reaction?  I’m sure you get all – reactions all across the board.  But was there anything surprising in the reaction to the book last year?


    MORGAN HOUSEL:  You know, I finished writing the book in January of 2020, so just as the world started changing with COVID.  And the publisher came back and said do you want to update this to include parts about COVID?  And I said no, because I wanted what’s in the book to be timeless.  I wanted it to be as relevant 20 years ago as it’ll be 20 years from now. 


    So, there’s nothing in the book on COVID.  But a lot of what’s in the book, and I talked about this today in the remarks, is that the biggest risk is what you don’t see.  And I wrote about that in the book and I finished writing that in January of 2020 without knowing that at that very moment there was a virus just starting to spread around the world that virtually no one was talking about back then.


    So, that was kind of, you know, that kind of reiterated the point in ways that I did not attend.  But I also think that particularly what happened last year in terms of the market falling 35% in March and then not just rebounding, not just hitting a new all-time high, but surging if we’re talking about tech stocks, to new highs that look like something out of 1999, which was such emotional whiplash for investors last year that we went through. 


    You know, and I was joking last year that 2020 was like a combination of 1932 and 1999 at the same time.  And I think that whiplash for people was just hard to wrap your head around.  Going from panic to euphoria in weeks or months was really difficult and just kind of reiterated how much our own mindsets and our own views about money and risk and investing returns really matter all the time, but especially in a year like 2020.


    MARK PETERSON:  Yeah, absolutely.  Another thought and question as I read through the book is and I know a lot of advisors would love to put their own stamp on stories.  Like, you do a great job coming up with the stories and the book has a ton of them.  Any tips or any insight on your process on how you come up with these stories and how you connect them back to investing topics?


    MORGAN HOUSEL:  I think what’s true is that if something is true in one field, it is probably true in other fields.  And if you can find a story of human behavior that you see pop up in many different fields, you see this thing happening in military history and politics and all these unrelated fields, that’s probably – you’ve probably uncovered something that is just fundamental about human behavior and, therefore, it’s also going to apply to investing.


    I think it’s important for, you know, what’s been important for me as an investor is just this realization that investing is not the study of finance.  It’s the study of how people behave with money.  And since it’s a topic of behavior, it – you know, there are lessons that we can learn about investing that come from all different kinds of other fields that also are behavioral fields, like psychology and sociology and political science and military history, all these other things that have nothing to do with investing.


    If you can gain insight into how humans think about risk and scarcity and opportunity, then you are gaining something, you’re learning something that is really fundamental to successful investing over time.  So, I think if you are only looking at investing and economics through the narrow lens of finance or economics, you’re missing a tremendous amount of what is important out there.  And it doesn’t seem like if you are a professional investor, you want to learn about investing and you’re reading a book about political science or biology or physics, you don’t think you’re learning about investing.  But I think if you open your mind and realize that investing is just the study of how people make decisions with their money, then there’s so much that you can learn about investing through the lens of other fields and I think that’s where a lot of these stories come from.


    MARK PETERSON:  Great.  Thank you, Morgan.  That’s great stuff.  Appreciate the time today.  I’m sure everybody found it as interesting as I did and helpful and timely.


    We here at BlackRock he a lot of support for advisors and their clients around a variety of investing topics and investor behavior resources.  I’ll highlight three for you today. 


    First off, we have a client approved seminar on the Psychology of Investing, so a little bit different title.  But the Psychology of Investing, which is really the beginning course on behavioral finance.  And we did it probably more than I’d like to admit last year, but very well-timed as well, very helpful.  We got great response from advisors and clients across the country.


    Number two, we have our Student of the Market piece that my group puts together that looks at historical observations on what’s happening with the markets, what’s happening with flows, what’s happening with behavior.  It often has a behavioral tilt to it.  And that comes out monthly, something that is client-approved, so something you can share with your end client.


    And third and finally, a lot of our client-approved one pagers and certainly folks have this across the industry.  I have some on my bulletin board here today that you can see.  Normally I have more pasted up, but that looks a little bit hacky.  But a lot of these on pagers do have a behavioral tilt to them, help you tell the stories tied back to the markets and how clients might behave or at least behave wrongly over time.


    So, all those things can be resourced or found on the BlackRock website, of course, or in the Resources tab in the webinar environment.  So, with that, let me turn it back to Martin.  Thanks, everybody, for the time today.  Appreciate it.


    MARTIN SMALL:  Morgan, Mark, thanks so much.  That was a really, really terrific session.  Those stories are great.  I am trying to make sure that nobody punches me in the stomach unexpectedly, as they did Houdini, and as I move through 2021 that’ll be a real victory.


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