Untucked Episode 85 – Debt ceiling & international diversification

Click here to listen to our Coach’s Corner segment on the debt ceiling and the importance of international diversification.

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Untucked Episode 85 – Debt ceiling & international diversification

Meghan Tait: [00:00:00] Um, so we figured we’d get started. We’ll, we’ll do a Coach’s Corner article in a minute, but just, um, being that the debt ceiling, um, topic has been one, um, we’ve discussed a lot with clients. We’ve figured it would make sense to maybe talk a little bit about how we’ve been handling some of the questions and concerns that have, have come our way.

Jeff Mastronardo: What do you got, Jeff? I just have a problem with the whole debt ceiling discussion. And, and I guess what I mean by that is, It was on the news like every night. It’s all people were talking about. And I look at that situation and I’m just like, don’t we know that they’re going to raise the ceiling or they’re going to do something so that the government doesn’t default, so the treasuries don’t like, don’t we know that that’s going to be the eventual outcome?

So number one, like why is it a news story every night? Why is everyone talking about it? Why [00:01:00] is everyone upset about it when, especially like, you know, you can’t do anyth. Like if you’re gonna sit there and watch the news all weekend, which my father-in-law did on Memorial Day weekend, and he wasn’t hot about it, but he was certainly like into it.

I mean, he is in his seventies. You’re in your seventies. Like what? Why do you care? You can’t change what’s going to eventually happen, which is most likely gonna be they’re gonna raise a dead ceiling. We have this talk every two years or every time this comes up, like why do we care so much when we know it’s eventually they’re gonna figure it out?

It may end up in something bad happening, it may not, but in the end, 5, 6, 7, 8 years from now, it’s going to be meaningless in the grand scheme of things. I just don’t understand why people care so much.

Meghan Tait: I, I feel like that’s the tact we’ve taken in a bit of a different way with clients, right? So the concerns that our clients are bringing to us are the big ones related to.[00:02:00]

Well, if they don’t raise this debt ceiling limit, then our Medicare can possibly go away, or our social security payments could, could go away. So I think our job is to, like we’ve talked about in past episodes, kind of about empathizing with people in those situations is listening to them and hearing them and then reminding them, as you said, Jeff, that you know, um, there’s not a lot we can do or to, to, to kind of force or change this outcome.

I feel like most things now, it’s inherently political and people get worked up and upset about it because they feel strongly one way or the other about the administration in place, the people making these decisions. So I don’t know that like the actual debt ceiling beyond those men, those mention I just made about Medicare and social security, like I don’t think anybody really, truly understands.

How it works, what it means. I just think it’s another reason for people to [00:03:00] either voice their support of a co, a political point or, and more, you know, probably more frequently, um, voice their opposition of it and it being used as an excuse for people to criticize the government very, very generally. So, um, I think I agree with you completely, Jeff, in that it’s, it’s.

Not even on my radar a little bit in terms of something I think about care about or am remotely concerned with, but our job is to help alleviate some of those concerns in whatever way we possibly can when they’re presented to us. And that’s kind of what we’ve been dealing with over the last few weeks.

Yeah. Meg,

Mike Traynor: you’re a hundred percent right on the political angle because you know, There’s people who feel very strongly about where the money is being spent that actually like adds to the debt, whether it’s Ukraine or subsidies for this or that, or entitlement, [00:04:00] whatever. Um, and lots of people are incredibly, always incredibly worked up about that.

Yeah. Um, so, um, but I do think. You know, Jeff, your point is right, it’s two years from now, we’re gonna be talking about it again, because that’s what they did is they put it out to 2025. Yeah. And um, and yeah. And at that point in time there’s gonna be a, a, a resolution to it and people will be, but, but you know, remember, like the financial news has to yell and scream about whatever is going on.

And this is the front and center issue. Or has been the front center issue in Washington for the past whatever number of weeks because of the deadline and everybody fighting with one another about how best to deal with it. And, and, and the people on the on TV have have to have something to talk about and, and get everybody riled up about.

You’re right. Yeah.

Jeff Mastronardo: It just drives me crazy and I have to, I have to [00:05:00] live two lives, right? I have to be empathetic with our clients. Mm-hmm. Which I am. Yes, you are. Like, I’ll say to them, whether it’s the debt ceiling, whether it’s money markets, g breaking a dollar, whether it’s uh, Donald Trump getting reelected or, or whatever the heck is the, what do they call the apocalypse Dejour, I have to say.

Look. You know, there, there really is no correlation between which, which party gets elected president and what the market’s gonna do. Um, I understand that like you’re struggling with this right now, and what we’re gonna do is we’re gonna just kind of make sure that your plan is still rock solid and we’ll make any appropriate changes based upon what happens if we think that has to happen.

Personally, I’m like, The other way. Yeah. Like when I’m at a cocktail party, I’m like, you can’t do anything about it. It’s never gonna happen. Like I’m a, I’m a, I’m an r nothing guy. I’m always like, it’s never gonna happen. Yeah, right. Like the debt ceiling like that, that they’re never gonna not raise it. [00:06:00] Um, the, the, the money markets are never gonna break a dollar.

Like, I’m like, that’ll never happen. Which I know isn’t the right way to phrase it, because of course, like anything can happen. Yeah. Yeah. Yep. But even though anything can happen, when that anything does happen, we’ll figure it out. It may not be comfortable in the short term, but long term, like the world economies, they’ll figure it out.

Right. And it may not be like next month, but like it may be like two or three years from now,

Mike Traynor: there’s a lot of collateral damage when something major happens though, and that’s facts,

Jeff Mastronardo: and that’s when we adjust the plan or that’s when we make changes. That should be done.

Meghan Tait: But, but, and, and I, I, I’m, I agree. I operate the same way that you do.

I think it’s, it’s elements like this, you know, where there’s so much talk about it that people feel like, well, we know it’s coming, right? Like, shouldn’t we be doing something ahead of it? Right. Like [00:07:00] that, that’s, it’s not this surprise thing that drops down on us, right. The news cycle has been, Talking about this ad nauseum for however long.

So that’s where I think the concern comes in. It’s like, but why wouldn’t we do something? Right? Even if they’re going to certainly raise it, or even if there’s, there’s no precedent for that not happening, right? But what if this is the time? Right? That’s what people just keep coming back

Mike Traynor: to. Uh, one thing about the, so people have been talking about, The debt for so long.

Yeah. Because it has skyrocket whatever it is now, 30 trillion, right? The numbers number stupid. Maybe it was 15,000,000,000,010 years ago. I, I’m something like that. So, and yeah, it’s been, it’s ballooned because, you know, covid and, and the last three years specifically just been stupid. Um, I do, I will say, or reserve that when you have like x amount of dollars in debt, At one and a 5% [00:08:00] interest that the debt service is like pretty cheap.

That’s not a big deal. Now it’s a big deal. I’d say like at 5%, um, versus one and a half. It’s like any homeowner who has a 7% mortgage versus three. Um, it’s a massive difference and I think the concerns should be around the cost to service the debt going forward. Not the absolute level of it, but again, What are we gonna do about it?

What are we gonna do about it?

Meghan Tait: Right? And then what we’ve always done, which we actually talked about this in a pod like three years ago, which was crazy. Um, and it, it was maybe a little more of the technical explanation. Like, as long as our country continues to produce numbers that outweigh the debt servicing, then.

That’s balance, for lack of a better word, right? And like that’s what has continued to happen. And it’s what we as investors and probably more optimistic people believe will continue to happen. [00:09:00] And again, of course there’s a chance that it doesn’t and there’s a chance that there’s a circumstance that it implodes.

But h. We’re never, and we can’t predict it in the meantime. Right. The,

Mike Traynor: the arguments about where it’s spent are, whether it’s defense or entitlements or IRS funding, whatever, will continue to go on. Yes. Just like in a household, the arguments about where you spend your money on vacations or discretionary or, or, you know, hockey.

Yeah. Go on. It’s, it’s, it’s the same thing, but on different scale. And again, what you can do about it. Just go vote in the person you think is gonna change that and you know

Meghan Tait: that that’s it. Because I’m sure the person who says they’re gonna balance the budget is really gonna be able to do it, like, which we probably don’t want to get into right now.

Okay, so now we’ll get into Coach’s Corner. Um, The case for international diversification. This is an article from Ben Carlson, uh, who writes the blog, A Wealth of Common Sense. [00:10:00] Ben’s article covers the topic we discuss quite often with clients, why should one own international stocks? Most Americans suffer from home team bias, which makes us question why we would invest outside of our country.

Recent memory would confirm those thoughts because of the outperformance of domestic stocks since 2013, as stated in Ben’s article. Um, But it does. He does a nice job of reminding us that over longer timeframes, the returns of US stocks compared to international stock stocks are far closer than one might think.

Jeff Mastronardo: So two questions I’ll let you guys answer just to make sure I understand this clearly. So you say most Americans suffer from a home team bias. What that means is most Americans when they invest, they invest in America, in the United States, predominant United

Mike Traynor: States domiciled company. Yes. Predominantly just like French people.

Over invest in

Jeff Mastronardo: French. That was my next question. And that happens in every country. Yes. Every country, every person suffers from a home team bias. I,

Meghan Tait: I think that’s for the, probably fair. Yeah. Yeah. [00:11:00] And then

Jeff Mastronardo: the case for inter international diversification is basically the same case for diversification period.

Right? Period. Like, I shouldn’t invest all my money in large cap stocks. I should invest in large cap, mid-cap, and small cap. Because in theory, They’re going to perform differently. I will have the same, if not greater return, with taking less risk. Isn’t that like kind of the theory behind it?

Mike Traynor: Yes. Boiled down.

Yeah. Okay. Um, yeah, and, and it’s, it’s, to me it’s basically why in the world would you want to exclude, you know, Taiwan Semiconductor or Nestle or any company that is. Not us based. Like, why would you do that? These are, these are, there are plenty of successful companies that are going to do their thing. Um, and, and [00:12:00] it’s funny because like Bogel at Vanguard made an argument years ago when he was still alive that you don’t need to own non-US based companies.

Why? Because so much of the sales of most typical companies occur. Globally outside the us Sure. So you’re, you’re getting that diversification just by nature of owning, you know, Coca-Cola or whatever. Um, plenty of people argue against that, and I, I would, and, and, um, for the reason we just said, which is that there are certain periods where US stocks are going to underperform non-US stocks.

And why wouldn’t you want to have that? As part of your investment approach? Um, just like diversification. Jeff, like you said, Jeff, just, it’s the principle of being diversified, period. Um, and the same goes for bonds. You know, we, it’s not you, you shouldn’t just own US bonds. You should own bonds issued by non-US countries and, and we do that.

So, [00:13:00]

Meghan Tait: yeah, I felt like this, the reason I brought this article up is because, um, I’ve gotten this question more so with our younger clients. So people in kind of the, call it like 30 to 40 age range who have less investing experience, obviously than most of our, you know, retired clients and have experience in most of their investing.

Success, I’ll say, um, the outperformance of international or of domestic stocks just relative to the timeframes that Ben kind of outlines in this article. So it makes sense why they feel the way they feel, um, because their experience is short and it’s anchored to your stocks doing

Jeff Mastronardo: better. 2008 through 2021, the s and p did 11.

And internationals were 3.6. Yeah. So, so that’s a timeframe they’re living and investing it. Exactly.

Meghan Tait: So it, it makes sense why people are asking about it. And I just thought this was a good reminder of [00:14:00] why all of our portfolios maintain international stocks. Why we try to, you know, encourage people to invest internationally in 401ks or brokerage accounts or whatever opportunity they have.

Um, cause I do feel like it’s something younger, newer investors just don’t have. The longer term experience to feel confident in making those

Jeff Mastronardo: decisions. Yeah, no, I thought the chart that he pu that he published in that article where he shows the disparity over these different timeframes between 1970 and 2023, how inversely correlated, for lack of a better terminology, like when, when, when international’s up, domestic’s down, when domestic’s up, international’s down.

Like, and in and in and in big differences too, like they were like, Widely separated. So I thought that was really interesting to see. Um, and then showing that over that same period, like they performed the same, both asset classes perform 9.7 versus 9.6, so you’re get in the same return, but if you have different things doing well in different [00:15:00] timeframes, it’s gonna kinda level out or smooth out your ride a little bit.

Is there a kind of, so, so let me back up and say, we don’t ever just kind of think. Well, I think international’s gonna do better in the next three or four years, so let’s overweight that. No, we just decide we wanna add it to the portfolio. Is there like a magic number that you want to put as a, as a percentage of your port?

Let’s say you’re an all stock investor. What percentage of that portfolio should be international?

Mike Traynor: We kind of rule a thumb where around say 20%, roughly 20, 25% of whatever you have in stocks overall should be non-us.

Jeff Mastronardo: So, so if I, if I have a hundred percent stock portfolio, I want 20 to 25% of my international.

Mm-hmm. If I have a, if I’m a 50 50 person, that 50% what, 10% of that should be international. Yeah. Is that the right math?

Mike Traynor: That’s about right. Okay. Mm-hmm. You know, the other aspect of investing internationally is currencies. So currencies, um, [00:16:00] fluctuate obviously against each other all the time. And one of the big reasons, you just pointed out some stats about how, um, international maybe.

Way underperformed us in a time period. A lot of that has to do with like, the US dollar is strong relative to whatever other currencies are out there. Because remember, you sell a product in, you know, in Europe and, and it’s a US domicile com company. It has to be converted back to dollars to, to hit the p and l and based on what the currencies are doing relative to one another will have a huge impact on, on, um, the, the actual sales or whatever you wanna call it.

So, There’s a lot going on there, like underneath. But, um, we don’t, we don’t get into the weeds on that at all in terms of predicting or, or whatever, but it’s just a fact of international investing. You’re getting, you’re also getting currency diversification along, along with like company diversification that’s important.