Q&A with Scott Boswell

July 2021

A roller-coaster of a year for investors has produced some shifts in investment strategies, says Commerce Trust Co.’s regional president, But the power of time and asset allocation endures.

Q: What has been the impact of COVID-19 over the past 12-18 months with regard to overall investment strategies? Was it a game-changer with respect to where yield can—or should—be best pursued?

A. That’s the million-dollar question, and the answer is yes, I do think there was a shift. Last year, we talked about the investing environment heading into COVID, and now that we are on the other side things look a lot different. Unprecedented action by the Federal Government and The Federal Reserve have driven interest rates to extremely low levels and incented investors to invest in riskier assets driving prices higher.     The primary decision as an investor is to understand the desired after-tax return, net of inflation, vs. the risk you are willing to take. The investor needs to create an asset allocation that meets that need. Investors shouldn’t chase short-term market movements; that becomes a game in which very few in this world do well.


Q. Did you have to do a lot of hand-holding during the sharp market declines of March and April 2020?

A. The majority of people need a well-trained disciplined adviser to help during times like these, 1) because they don’t  necessarily desire to acquire the expertise to drive their investment decisions, and / or 2) because they need someone to take the emotions of investing out of the picture. Investors who did that fared fine. What we saw that was different is the expected returns of asset classes have changed. That has required people to adjust their personal risk-return preferences.


Q. In what ways?

A.  One example is historic returns for money-market funds have typically been around the rate of inflation. If you invested in cash, you may have no real growth in your portfolio over time, but the actual return kept up with inflation. If you want a return on top of that, you could reach for a modest return in bonds. With bonds, though, values change over time—as rates fall, prices rise, and vice versa—but in general, you expected a return a couple of  percentage points over inflation.


Q. Not the ideal return for most investors. Is that what’s fueled the stock markets’ rebound?

A. With equities, you can expect anywhere from 5 to 7 percent over inflation, over time. If you’re building a portfolio today from scratch, the risk-return tradeoff has changed with bond yields on the 10-year at 1.4 percent. You probably don’t want to own bonds with maturities longer than 10 years because you risk bond prices falling. The interest rates on money funds is close to zero.  If you assume long term inflation of 2 to 3% and subtract that from bonds or money market funds you have a negative real return.


Q. Some of the implications of that?

A. Historically, if you’re a young investor, you should be taking more risk because of your longer investing horizon. You hope to sustain your income needs with increased earnings and allow your investment to grow, vs. retirees, who in theory would want to take more risk off the table because of their reliance on their investments as a source of immediate income. Now retirees who have longer life expectancies and are faced with two asset classes that have a negative real return may need to be more aggressive in their asset allocation.


Q. The Dow is up nearly 20 percent from August of last year—after it had already staged it’s Covid Comeback in the spring—and NASDAQ up even more, at 41 percent. Can you give a little more detail about the implications of that kind of success for folks with various investing horizons?

A. First, I think we need to discuss those that, because after the waterfall decline in March and April of 2020, sold and missed out on the rise or were never in equities.  To be fair, we have never seen anything like it. The government and Fed responses were unprecedented. As you point out those that stayed the course did very well.  As for investor demographics, Boomers’ life expectancy is longer than previous generations. I was walking with a friend this morning, talking about just that. We’re both in our mid- to late 50s. Our parents would have retired around ages 62-65, some even at 60, and would have shifted their portfolio to Bonds providing a good income stream. Now, if you retire in your 60s, you have a life expectancy approaching 30 additional years. I think investing for Boomers and their risk tolerances will look very different because of life expectancy and lower returns on non-equity asset classes.


Q. So they’re not becoming more conservative as retirement beckons?

A. We have not seen them becoming more conservative. As I mentioned in an earlier question, we hope with good sound advice, they are setting the right allocation strategy based on their needs and risk tolerances. They understand that if they must get a net return that’s positive, after inflation, they’re going to have to keep risk in their portfolio.


Q. Speaking of inflation . . . 

A. Inflation is running high right now.  It has moved past 5 percent, and, frankly, may rise to 6 percent next month, then start to stabilize and come down. If you invested in a money fund, you had a negative real return over the past 12 months. If you’re in bonds, you had a similar negative return with the 10-year at 1.4 percent. Equities were the only place that produced real return. Gold as a typical  inflation hedge did nothing for you. It had a negative 2 percent return. Large cap equities provided a dividend yield that has been similar to bond yields.


Q. What kinds of trends are you seeing from the Millennial investors? They have, during the comparatively short investment histories, been exposed to the Great Recession and the pullback there, and now the COVID-19 downturn. Did that scare them away from the markets?

A. Although we do have the privilege of working with entrepreneurs and young business people who have created significant wealth and clients who have inherited wealth, due to the time to accumulate wealth we have a smaller  sampling of  Millennial and Gen-Z investors to draw conclusions. Many in this cohort have now experienced the second economic shock having lived through the great recession and the pandemic.  Assuming they focused on the right asset allocation and stayed the course, their asset values are higher than prior to both events.  Our experience is that those that demonstrated investment discipline did not have a reason to be scared away.


Q. What about a home’s investment value?

A. Housing is interesting. After the Great Recession, many people moved away from counting on their home as being an investment nest egg. Some  may have  chosen  to  rent instead of buy because of housing downturn.  That was not necessarily bad if they took what they would have spent on a home and created a broader portfolio. However, look at the housing inventory and prices today. The Great Recession was an economic event-driven situation. We had a bubble back then, a housing bubble created by loose lending policies and practices. COVID, unlike the Great Recession, is a heath crisis that had significant economic impact.


Q. Why is that distinction important?

A. During the COVID crisis people invested in their homes as a place to live and work. It was their nest not necessarily their nest egg. Very low interest rates made home ownership more attractive. The supply-chain shock caused  by the pandemic added to the scarcity of new homes thus driving prices even higher.


Q. So there has been a shift, at least among average investors, away from the home as a piggy bank for retirement?

A. Historically, residential real estate has not been a great investment; it has returned less than a bond portfolio over the same period. However, everyone needs housing, and government policy makes it attractive to buy a house. For many, it became the largest investment because by paying your amortizing mortgage you are dollar cost averaging into the purchase of the home. If you had invested the same dollars in an equity portfolio over time, you would have made more money. With housing being a primary human need, people tend to put money there before something less tangible to them such as an investment portfolio.


Q. In terms of wealth creation and Boomer-age business owners realizing the return on a life’s work, are you seeing new clients from that space?

A. Yes, we have seen significant growth in our private client business by managing the proceeds from the sales of our client’s businesses. The Boomer cohort capturing the return on their life’s work has been accelerated by buyers of business having access to capital due to liquidity in the system and the historic low borrowing rates. 


Q. How bad was that cohort of Boomer/Owners hit over the past year, in terms of the values of their enterprises?

A. We saw significant differences to the impact on the value of the business based on industry. It was an environment of haves and have-nots. COVID negatively impacted industries such as travel, entertainment, hospitality, restaurants, hotels and industries that supported those companies.


Q. And the haves?

A. Other enterprises, especially tech, did extremely well. There were a lot of positive things happening in the economy, even with COVID. Both the fiscal and monetary stimulus had a positive impact.  Businesses in general cut expenses where they needed to, invested in new equipment, and a lot of businesses maintained pricing power as evidenced by the near term spike in inflation.


Q. Anything else in your world keeping you up at night or filling you with unbridled optimism?

A. There is a lot of discussion about the positive returns on stocks which has raised questions about whether stocks are overvalued right now. The counter to the thought of stocks being overvalued is although stock prices have risen, so have corporate earnings and earnings growth is accelerating.  In addition, with low interest rates creating a low expected return on bonds and money funds, the investor seeking a return is still motivated to invest in the stock market.  We believe stocks still have room to grow.