On Episode 20 of The Wealth Cast, Apollo Lupescu joins Chas to discuss 2020 financial wildness. Apollo stresses that having a financial plan based in solid, rational principles was the key to coming out of 2020—a year that ended up being a net gain for the financial markets. Apollo highlights the importance of having an advisor who is not merely a financial facilitator, but will actually keep a consistent message and theme even in the face of a crisis like COVID, in order to help their clients achieve the best outcomes possible.
Hello, and welcome to The Wealth Cast. I’m your host, Charles Boinske. On this podcast, we give you the information that you need to know in order to be a good steward of your wealth, reach your goals and improve society. Today, I am delighted to have as my guests Apollo Lupescu, from Dimensional Fund Advisors. Apollo is the chief of explaining stuff at Dimensional and has a great way of explaining complicated subjects, particularly around finance and economics. So really pleased to have him join me.
Apollo, welcome back to The Wealth Cast. I’m so glad to have you join me again.
Chas, it’s so good to be back. Thank you so much for having me.
You’re quite welcome. A lot’s transpired since the first time you were a guest on the show last year. 2020 is going to be a memorable year for lots of reasons—most importantly is just the human suffering of COVID. But from a financial standpoint, it was very interesting as well. And I thought it would be helpful, perhaps, for you to share with the listeners some of the perspective or some of the experiences that we had in 2020. And maybe what we can learn about, or learn from them, and what they may reinforce—what concepts were reinforced by the experience, perhaps, in 2020.
And I think you put it well: it was almost like a bull market for the stocks, and it was a bear market for humans, because there was so much suffering. And you know, our hearts go to everybody who was impacted by this pandemic. But I think you put it right. Rather than look back at 2020, let’s just do a play-by-play. What are some of the key lessons that we learned and what would be useful to advisors and clients going forward? I think that’s a great way to look at it.
And to me, the first lesson that sticks out of mind is that it is really impossible to try to predict the markets, even if you have a crystal ball, even if you have a fairy godmother who, you know, came and told you January 1, 2020, “Listen, you know, Chas, we’ll go through a pandemic, we’ll have you know, more than a quarter of a million people dying, we’re gonna have the economic shutdown, we’re gonna have, you know, a civil movement during the year, we’re gonna have an incredibly polarizing election.” You know, if you had that knowledge, what would you have done? What would most people have done with that person’s foresight? I can tell you that so many folks are telling me “Well, I would have pulled the money out of the market, that was no place to be investing in the market.”
And what’s remarkable is that with all this going on, the market for 2020 was actually up, not only in the U.S., but around the globe. So to me, one of the first key lessons there is the importance of a consistent, disciplined approach to investing. So that’s a key lesson is that you have to have the consistency whenever you invest your money. That is absolutely crucial to a successful investment experience.
Is that as important in your view, as having the quote unquote, “right asset allocation” or the “exact sub-asset class allocation” you’re looking for? Is it more important to be disciplined, given the structure that you’ve chosen?
Yeah, that’s a great question. Because when I talk about discipline, it has to be in the context of a plan. And I know that you and I have talked over the years, and probably one of the most important things is to have the right plan—a plan that is diversified, that’s balanced between different asset classes. And once you have that, then the discipline falls into place, and any allocation changes should be based not on what happened in the world, but much more on your personal circumstances.
And even what happens in the world, I think there was a good lesson—that when something drops in value, and this is of great value of the advisor, when something drops in value, that doesn’t mean you’re just gonna sit there. If there’s a threshold met, perhaps there’s a time to rebalance, perhaps there’s a time to maybe trim some of the gains, and then go buy some of the asset classes with a better valuation.
So discipline has different formats. I think that this supplement doesn’t mean you have to do nothing. Once you have an asset location, you do have to preserve it. And I know that you are—over the years, you’ve been a big proponent of paying attention to taxes, but also the rebalancing piece, which is hugely important. So to me, discipline means, “Let’s not panic and make emotional decisions with our money.” Because what it is, you’re in the middle of something that seems unprecedented, it’s different. But of course, this is bad news.
Discipline breaking means to me a lot more like, “Well, let’s deviate from the plan that we have.” So to me, discipline is about sticking with the plan that you and the team have put together for the client.
Well, what do you think of the idea that perhaps it’s better to have a suboptimal portfolio that is rigorously enforced, versus an optimal portfolio that’s occasionally right? If you know what I mean—in other words, if you pick a really good portfolio, or choose a very good portfolio, that turns out to be a good portfolio, xut if it was not rigorously enforced… In other words, you varied from that portfolio at the wrong moment.
It’s probably a worse outcome than having a portfolio that was not optimally allocated, but was disciplined in its rebalancing, and its tax management, etc.
Absolutely. You’re absolutely right. Because what that lack of discipline basically tells you is that the plan has no value. If you’re going to deviate willy nilly from that plan—if you’re just going to make moves—then why even bother with it?
Right, that makes sense.
The whole idea of a plan is that you plan. In other words, you look forward, and you look to see what is most likely to give me a good outcome. So if you’re not going to stick to that, then absolutely, it’s meaningless. So I agree with you, I absolutely agree with you: A plan that is not enforced, a plan that is not stuck with, it just doesn’t have much value to an investor, because it becomes like a hodgepodge of, you know, emotions, and how do I feel in the moment.
And that’s not the right way to accomplish your financial goals, because ultimately, that’s what you’re trying to do. You have goals in the future, and if you’re going to change course all the time, it’s going to make it very hard, very, very hard.
Well, certainly 2020 was a test to anyone’s fortitude in terms of sticking with a plan given, you know, what you just described as the events that occurred in in 2020. But it’s often during those periods of time, when sticking with the plan is the most valuable—is at its most valuable. How does an investor take that lesson? Let’s imagine they had a poor experience in 2020, because of their underlying decisions. How do they recover from that? What do they learn about that, or learn from that for the future?
The first lesson that I would look at is what happened around you know, late March, when the market within a few weeks, you know, five, six weeks like that, it dropped almost a third in value, if you look at the S&P 500. And it’s roughly similar to what happened in the whole of 2008, so it was a tremendous drop in the market. And what you saw is, when you look at cash flows across all investors in the US, you saw a huge inflow into money market funds, which are reflective of somebody running away from the stock market, and trying to find safety in those money markets. And it was in the hundreds of billions of dollars. We’re not talking about petty cash. This is a lot of investors just basically got scared, and they jumped out.
The lesson to me is that when the market started to recover, well, we saw in the same data of cash flow is that these investors continued to stay in these safe money markets, and in other words, what they’ve done is they sold at the bottom, and they never got back in. So they’re there for the risk, but they never stuck around for the return, and I think that the lesson that I took out of that it is absolutely understandable why an individual investor without an advisor, might be driven by emotions to do certain things, because emotions is what makes us human—there’s nothing wrong with the emotion. The thing is that the advisor was the backstop.
A lot of times what we’ve seen over the years over and over is that a good advisor is the backstop—almost like helping and coaching clients from making mistakes with their money. And the value of an advisor was once again incredibly reinforced, because you know, folks like you—and I know that you and I have done the WebExes and the Zooms over the years—this is what helps somebody stay disciplined. Your efforts that you put in, not just at the moment, but years before, are going to pay off in times like this, when somebody will not make the bad choice of getting out and staying out when the market recovers, but having the disciplined approach.
So to me, the big lesson there was the value of an advisor. And you know, I’m not sure how many other folks on the call have had experiences with other advisors, but I can tell you that I’ve met tons of advisors who are actually not real advisors, but more facilitators. If the client comes and says, you know, I’m not feeling comfortable with this market, the advisor might say, you know, this is your money, if you want to sell I’ll help you sell. Well, that’s more of a facilitator rather than somebody who is really there to coach the client for these tough times.
So to me a huge lesson in this was, you know, looking at the data, not just opinion, but looking at data to see the value of an advisor who had a consistent, disciplined approach to investing and to me that was really reinforced, you know, back in ‘08, when we had kind of very similar conversations and twelve years later, once again, we saw almost the same idea, just a different type of an incident. But a similar concept of the market being scary, the economy being scary, but sticking with the plan and having an advisor who would help you through those times, it was incredibly valuable.
Yeah, I think we talked about this a little bit last year. It is understandable that investors would become particularly, you know, uncomfortable in 2020—particularly in the March timeframe, because you had a situation where there were two threats. There was the financial volatility threat, and there was a threat to their health. And normally in bear markets, you know, we have one, but not the other. And so it was a double dose of stress.
And it made it even harder to maintain the discipline in that kind of environment. So every situation is different. You have to look at each individual client, investor, they need to look at their own circumstances to determine what the best course of action. But by and large, I would agree with you that being disciplined and sticking with the plan is more important than almost anything else.
Absolutely. And it’s hard to tell somebody, “Hey, stick with a plan and don’t do it,” if that’s the first time to hear it. I think what I’ve always appreciated with you is that from day one, and I’ve been in some of the meetings—clients hear from you the same message. It’s not that you’re changing messages every minute, and we’re kind of like, you know, going and moving in whatever direction the wind blows. This is a very consistent, steady message. And I think that’s what gives clients the confidence that really, “The advisor really has a plan for me, and I’m better off sticking with this plan.”
So it’s not just saying in the middle of the situation, but having heard the same consistent message, even when times are good. Because at that point, you know, “We’ve talked about this. We knew this might happen, so it’s not taking us by surprise. We knew things like this could happen. And then we have a plan for this and you’ll be able to withstand it.” And I think it’s hugely important to that education that you’ve done over the years with clients. I think it’s incredibly important.
When it comes to the capital markets themselves, you know, we didn’t seem to have the same sort of stress in the system that we had the last time we had a major recession. What did we learn about the functioning of the capital markets as a whole?
Yeah, the markets were incredibly resilient. I mean, I think that’s kind of one thing that I learned. And the more I thought about it is that, the markets are resilient because companies are resilient. And companies are resilient because us as individuals, we are resilient. And as you said, you know, we had the pandemic, and the economic downturn, and the civil movement, and all these things that were happening at the same time, and yet, all of us were still showing up for work for the people who have a job. And, you know, we are doing our things. We’re taking care of our families, and we carry on life.
And because of that, companies are also resilient. And we saw this resilience in how airlines were able to adjust to the degree that they could. We saw it in the way that everything around us kind of transformed, and then entrepreneurship, to try to make it work even in times when everything looked very dire. And to me that resilience and entrepreneurship of companies, is what got us through.
Free markets got us through because they’re able to adjust and adapt. You look at AirBNB, which is a good example. I mean, they figured out soon enough, boy, people don’t want apartments in big cities, they want bigger houses in more secluded areas, and their search algorithms changed. So right now when you know when you go on their website, what you see is not the New York condo, but you see, you know, maybe somewhere in Idaho and that spirit basically allowed them to continue to operate.
You had movie theaters operating in the parking lot, just so they have some revenue coming in. And to me that resilience of companies translated into a broader resilience at the stock market level. There was a big lesson about capital markets—is that people are resilient, and that’s going to help companies stay resilient. And when companies are resilient, the market as a whole will be resilient. And it was absolutely evident in 2020.
One of the things that you know, was discussed in 2020 was sort of the concentration and in some of the returns of the market in, you know, the big technology companies, etc. Was there anything really different about that than what we’ve seen in other years, or was that really unique?
In my view—this is my personal opinion—it was a bit unique. Because when the pandemic shut down small businesses, and we were not really capable of going to our local stores, and I love my neighborhood stores, I love my little restaurants and my shops and I love local businesses that I really want to support them. But when they start shutting down, and not being able to go there, I change to some degree, my consumer behavior. And I think a lot of us have, because all of a sudden, you couldn’t go to local, “Well, where am I going to get my stuff?” And also, there is the scary thing of even going into a grocery store.
So you saw a lot of these big players, by virtue of their scale, and by virtue of their ability to adapt, and negotiate these times—they capture some market, at least from my personal respect, they capture some of the market share of local businesses. And at least for the moment, some of this went to these large players, because they had the scale and the ability to adjust.
And we saw in the beginning, it was a little clunky, and then eventually, they worked it out, because they do have the scale. It’s probably a lot easier when you have, you know, an army of engineers kind of working on these algorithms, rather than you’re a small business that have two or three that you have to deal with fifty different things. So to me, in some ways, these companies responded to a social need that we had at the moment.
In my view, I wouldn’t plan to demonize them, because I do think that they feel the need. I’m talking more like the people who have helped us stay safe by bringing groceries to our house. Now, when we talk about Facebook and social media, I’m not sure that they—I mean, they probably kept, at least on my kids, kept them sane, because they’d be able to connect with other folks. But the reality is that there was a shift in the way that we consume either goods or services, and it was a move towards these companies, and it got reflected in the stock price.
It seems like we’ve been getting a you know, a box from an online retailer every day. And there was one day when they didn’t show up and the UPS driver knocked on the door. Hey, are you guys okay?
Right! Exactly. I know the feeling.
So when it comes to markets—you said markets functioned really well. And there’s an example: they just rewarded those companies that, due to their positioning, were able to adapt quickly to the pandemic. As we return to normal, you know, hopefully over the next year or so, as the vaccine is distributed, would you expect that there will be further adjustments in the capital market to reflect that as well?
Absolutely. And I think the big one that is out there, that nobody really has an answer, and I certainly wouldn’t pretend to have one, but I have an opinion, I have a thought about it—and to answer your question, I do think that the big one is going to be how the supply side of the economy, not just the way consumers spend money, but the supply side of the economy will respond to a post-pandemic period.
Because, you know, you look at the data, and there’s a lot of money that has been deposited into bank accounts, or investment accounts over the course of 2020—tons of money. And a lot of economists are looking and saying, “Well, this glut in saving, eventually it’s going to create a pent up demand for all these goods and services once we get out of this.” And the trouble is, if you have everything going out at the same time, and everybody wants to book a restaurant reservation, just because “I haven’t been out in the restaurant for so long, so I’d like to go out”—well, the trouble is if you have some restaurants are out of business, and the other ones are overwhelmed, one of the scenarios might be that in the short run until the economic forces—until the Invisible Hand brings back equilibrium—you might have some short-term inflation, because you have a lot of savings, a glut in savings, pent up demand, and then you go in against the supply that is more limited by the devastation that the Coronavirus did on restaurants and supplies, and even airlines for that matter. They’ve been cutting down service.
And if people want to fly it, everybody decides I’m vaccinated now I need to fly somewhere because I’ve been home for too long, well imagine, you know, in the world of supply and demand, what would happen? You have this huge demand, the supply is quite restricted because they haven’t been able to put all the planes back in service, and that’s going to lead to perhaps a short term imbalance.
So that’s kind of what is a possibility that if it happens is to be expected. And there’s nothing really outrageous if we do see some short term price increases, or you see some imbalances there, you know, I think that that would be a perfectly normal outcome in certain areas, because of the fact that that we’ve been stuck at home for so long. The economy is the whole, the people in the economy have saved a lot, and the supply might not be quite where it was before the pandemic started.
Yeah, that makes sense. You know, one of the things that we witnessed in 2020 was a sort of a continuation of the underperformance of the value in smaller sectors of the capital markets. And that’s, as we’ve discussed before, it’s not to be unexpected or not unexpected that that occurs from time to time. But it was particularly, I think, accented by the COVID crisis, right? Would it be rational to assume that as things return to normal, there may be some sort of reversion to the mean for those types of sectors of the capital markets?
Right. So as you said, you know, small company stocks and value, particularly have not kept up with their counterparts—the largest stocks and growth. But what’s interesting to me is that, you know, when you look at the underperformance, and we talked about underperformance, it’s not like there was a disaster, that you lost a lot of money in small companies and value stocks. You know, they just didn’t do as well as their counterparts. But if you said, I mean, this is a very unique situation where a handful of very large companies have done incredibly well, and that has driven, for example, large growth, to have performance that is, you know, above the historical average.
So to me, to reframe the question a bit, what would I be more afraid of? Something that has done positive returns, but perhaps not as well as another asset class, like large growth, who has done exceedingly well? So a bit of the reframing here is that it is the anomaly here, rather than being value on the performing could be how well growth has done.
And that’s kind of, it’s a different way of looking at this issue. That it’s not that value was absolutely terrible, and small was absolutely terrible. No, perhaps it’s the idea that growth has done exceedingly well, perhaps, is an anomaly versus the long term trends.
So in that respect, my personal belief is that the reasons that we chose to emphasize those asset classes to begin with, it’s still there. Absolutely. I do believe that price matters, I absolutely 100% believe that price matters. You know, I’m going to give you an intuitive example, Chas—this is not exactly what we do. But just to kind of give an idea.
The value means, how much are you paying to buy some fundamental accounting measure from a company? And we use book value. I think in the more intuitive level, I might suggest, perhaps, earnings. So how much does it cost you to buy $1 of earnings from different companies? And you have companies that have relatively low price—let’s say in the range of $10, to $20, to $30, and you have companies that are over $200, and over $1,000. So to buy $1 of earnings, you’d spend over $1,000.
And you mentioned one of these companies, as you know, lately, one of these is is a car manufacturer that that people are really enamored with, but when they’re looking at what they’re buying, it’s incredibly expensive. So we still believe that paying attention to price is a better way to go than just, let’s just buy irrespective of price. So I’m a 100% believer in that theory.
Smaller companies, as we know, they have more room to grow, their cost of capital has to be a little bit higher, because they’re not as mature as the bigger ones. So intuitively, both of these are there.
Now, what’s interesting to me is that the price of admission for the long term premiums, which premiums means like that small, for example, outperform large, and value had higher expected returns than growth. The price of admission is the fact that it’s not there every day, it’s not there every week, it’s not there every year. And we know this, we know that even after ten years, there is you know, probably like a one in six chance, if not more, that value, for example, might not beat growth.
So we know these things are not 100%. So what we’re doing is, it’s almost like an evidence based one, we know that these periods will happen. But invariably, what we’ve seen in the past is that premiums, we expect them to show up.
Now, what’s also interesting is how fast these things can turn. I mean, that’s the remarkable thing. We had a very similar experience in 2000, where after the 90s, when all these large tech stocks were basically shooting the lights out, and I don’t want to draw too many analogies. I mean, history might not repeat itself, but it probably could rhyme.
What’s interesting to me is how quickly things turned around. Back then I remember in March of 2000, if I remember correctly, it looked like an index of large value, underperforming an index of large growth. Going back to the inception in ‘79. We’re talking about the Russell indices. And not only since inception on the performance, but I think the five-year number was more than 10% of the performance—it was greater than 10% on the performance.
And people wondered, “Well, has everything changed? How long can it possibly take for these indices to kind of go back to being a positive premium?” Well, it took less than a year. You know, within 11 months, all these numbers flipped. And to me what’s interesting is, I have no idea what’s gonna happen tomorrow. Nobody does. But what we saw in Q4 last year was a glimpse of how fast these premiums could show up. And if you’re not there to capture them, if you said, “I’m giving up on this,” that’s actually the time when you might be missing this out and you might give up on the philosophy at exactly the wrong time.
So it is something that it’s a cautionary tale, because as we talked about, this is par for the course. You know value is not going to perform every day, but when it gets comes, you want to be there. You want to be in your seat to capture these premiums.
That’s right patience and discipline, right? That’s a great synopsis of what transpired over the last year and some of the lessons that we learned. I know it’s been a stressful year for those of us that have advised clients. I know it’s been a stressful year for clients as well. And I’m cautiously optimistic that things will get better in 2021, and I hope that you’ll be able to come back with us as things develop, to come back and periodically review where we are and continue the conversation through 2021. And I really appreciate the opportunity to chat with you, and your perspective.
It is always so much fun to talk to you, and every time I feel honored for the invitation. So it’d be my pleasure to come back and chat about whatever might be going on in the world, hopefully it’ll be good things.
Yeah, hopefully it’s good this year. Think good thoughts. So thanks again, Apollo. We will talk again soon, I’m sure.
Thank you so much for joining Apollo Lupescu and myself today. For a discussion about the financial markets during the COVID crisis. Please see the show notes for additional information about this podcast and about future and past podcasts as well. If you’d like to access past podcasts, please visit us on any of the podcast sites. Thank you so much for listening, and we’ll look forward to the next time. Thanks a lot.
Dr. Apollo Lupescu serves as Vice President at Dimensional Fund Advisors, whom he has been with for over 17 years. As part of the Dimensional Investment Strategies Group, Apollo worked directly with financial advisors in the Northeast area assisting in the development of their business, while managing the internal Client Services team, providing broad analytical support. He then oversaw the firm’s national advisor retirement business.
Apollo is now Dimensional’s “secretary of explaining stuff,” as alluded to by Chas in his introduction. In this role, Apollo frequently presents around the country and the world at financial advisor professional conferences and individual investor events.
Prior to joining Dimensional, Apollo ran his own consulting firm, which provided services to the US Department of State and the White House. His interest in finance and investments led him to teaching engagements at the University of California, Santa Barbara, where he’d earned his PhD in economics and finance in 2003.
Apollo earned his BA from Michigan State University, where he was involved with the water polo program both as a player and coach.
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