Investment Clues for Long-Term Thinking


The impact that inflation is having on consumer costs can’t be overstated, and it is affecting the daily lives of Americans everywhere. 

In today’s episode of Retire in Texas, PAX Financial Group CEO and Co-Founder, Darryl Lyons, explores the intricacies of the current economic landscape, providing valuable insights on navigating investment strategies amidst rising inflation and market uncertainties. He discusses the importance of diversification, analyzes the performance of stocks, bonds, and cash, and introduces the concept of a “core-satellite portfolio” for optimizing risk and opportunity in today’s dynamic market environment.

Today’s show highlights include:

*Why the economy in early 2024 was focused on inflation, influenced by rising costs such as auto insurance and repairs.

*The current trend of rising prices leading to automation, as seen with McDonald’s introducing fully automated restaurants to combat labor costs.

*Why bonds were expected to perform well due to lower interest rates, but how the Federal Reserve’s delay ended up impacting returns negatively.

*A breakdown of the “core-satellite portfolio” strategy.

If you enjoyed today’s episode, be sure to comment and share it with a friend!


Hey, this is Darryl Lyons, CEO and co-founder of Pax Financial Group. Thanks for tuning in to Retire in Texas. Remember, this information is general in-nature only. It’s not intended to provide specific investment, tax or legal advice. Visit PaxFinancialGroup.com for more information.

Also, if you haven’t met with a PAX advisor, go to the website, click in the upper right hand corner, connect with us or contact us, excuse me. From there you’ll meet with an advisor for 15 minutes. No cost, no obligation. They do have hearts of a teacher to see if it’s a good fit, so consider doing that today. 

Okay, so those that know me by now, one of my favorite comments is “Thank you for making this show – thank you for dumbing the show down.” And I love that comment. I don’t dumb it down at all actually. There’s a lot of research that goes into it. What I do do that’s a little bit of a hack that’s different from nearly every other financial show. Is I don’t use numbers. Rarely do I use numbers because I believe that you can take these themes and research it on your own.

And, everything that I say is supported by research. Oftentimes, I’ll put the salient, research notes inside the show notes or their links, so you can dig in yourself, but I don’t think adding numbers benefits you. If you really want to know those numbers, you can find out on your own. 

But how am I going to do that with this topic today, which is discussing the current state of the economy and the stock market in general, reflecting on what’s going on the prior quarter of 2024? Well, let’s see if I can pull that off. I want to start off with, thinking about diversification and my history with diversification, because it has been a love/hate relationship.

I certainly studied it when I was undergrad at Saint Mary’s, what it meant to be diversified using something called modern portfolio theory. And, and it’s all good. But, I had a little bit of like a, like what I would refer to as behavioral finance challenge that I didn’t recognize was a challenge. And here’s what it is.

When you diversify as an advisor from where I sit, hear me out. You’re always apologizing for something. You’re always apologizing for something. Because in a diversified portfolio, there is something that is not working. Now, I am generally a perfectionist in a lot of areas. There are some areas I’m not. But generally speaking, in this business I’m a perfectionist.

So you can imagine the challenge I had over multiple years communicating with clients, a portfolio construct, only to feel myself internally backpedaling because of this discomfort of something inside of a diversified portfolio that wasn’t working. And then eventually one day, either through maturity or through research, or through client experience and advisor experience, it dawned on me that it is okay to have something not work in a diversified portfolio, because that is the very essence of diversification.

Well, can you imagine the relief I felt when I learned that truism? And all of you guys out there saying, “Well, that’s, like a – you should know that Darryl”. It just took me a little longer to accept it. I think I was trying to fire on all cylinders when it comes to diversification, and obviously that’s impossible. And that’s why I’m talking about what worked and what didn’t work in the first quarter of this year is very important. 

Now, thematically, the majority of market participants were hyper focused on inflation and rightfully so. And a subset of that, not much of a subset, but I would say a subset of that theme is the Federal Reserve’s approach to whether or not they were going to lower interest rate and the timing of those interest rate lowering. Did I say that right? The timing of it. 

So, that the market was hyper focused on those themes and we as consumers are feeling it. Look at your auto insurance premiums, if you pay it annually or monthly, check them out. They have gone up. And the local news station asked me to comment on this recently. And if you look at why they’ve gone up, certainly there is a lagging effect of the cost that insurance companies have to absorb whenever they repair a vehicle. There’s a lagging effect before that is calculated, and it has to go through a Department of State before it hits our insurance bill. And that’s what’s happening. 

And so the cost of new cars and repairs and even specifically, I shouldn’t discount that the labor associated with these repairs has gone up and the homeowner’s insurance has gone up. We’re feeling that. But, you know what is an antidote to these rising prices? This is important. The antidote to rising prices is rising prices. 

So, this is not going to be an acceptable environment for Americans. Let me give you a clue. And I’m going to use that word again later. So I don’t want to overuse it. But let me give you a clue of why there’s pushback or a clue of how pushback occurs. McDonald’s in Fort Worth, our, introducing a fully automated restaurant. Why? Why would they introduce a fully automated restaurant? And you are listening to this going, well, that makes total sense. These labor costs are not sustainable. That is the antidote to rising prices.

And we will see that. And I have a lot to talk about that, but I would just want to tell you the antidote to rising prices is rising prices. If you want to, if you want to dive into a little bit more inflation, that’s two episodes ago. So, go back a couple episodes, get some thoughts from me on inflation. But that was the major area of focus by most market participants going into 2024, and it continues to be. 

So how do we look at our investments in that context? Well, when you look at your investments, you have something called a recipe, and then you have the ingredients. So the recipe, often known as asset allocation, includes three components: stocks, bonds and cash.

So, we’re going to talk about the recipe first. Let’s dive into stocks because that’s the one that gets a lot of the headlines. And for some of you guys, it is a significant portion of your overall portfolios. Usually that minimum 30% and at most 100%. So the stock market, some economists, actually many economists, would suggest to you that it’s in bubble territory.

But if you peel it back, it’s not really in bubble territory. Most of the returns in this year so far have come from, like last year, like the first part of last year, only from a handful of stocks, such as Nvidia or Meta or Microsoft. Now, I will tell you, Tesla is no longer in favor, nor is Apple. But that’s a different, that’s a side conversation. 

I just want to say that the majority of the stock market returns have come from these big, big names. So, if the S&P 500 or the 500 largest companies, there’s a small little handful of companies that are driving it to bubble territory, and the rest of the companies in the market are generally, generally speaking, fairly priced.

The problem is, is if this bubble burst, it’s like, “Hey, these companies sneezed and the whole market caught a cold.” So could this bubble burst? Yes. I think it’s always healthy to just prepare your gut for those types of events. I believe that it could happen any quarter now, and I just sit around, wait for it to happen and the market kind of recovers itself.

It’s just a healthy kind of a reset in the market. But is it in bubble territory? There are certainly companies in bubble territory, but not all. And I’ll talk more about that in just a minute. What about that second piece, the bond piece? That’s my problem with the bonds. I actually really liked bonds going into this year because we’re getting a nice coupon, nice interest on it.

And here’s an important economic truism. If interest rates go down, which we expected them to go down this year, then bond prices go up. So there was like this nice tailwind for bonds. We’re getting a nice coupon from them. And then we’re getting this potential nice growth. But what we would call capital appreciation in bonds. So, there was this nice environment set up.

The problem is this. Here’s the problem. We all thought the Federal Reserve, we all thought that they were going to lower interest rates relatively quickly and they’ve been taking their time. And so if you look at your statement, the bond piece, some have done better than others. The bond piece has been a little drag on your portfolio. They haven’t given any of us the returns that we were hoping for. 

Does that mean you abandoned bonds? No. Absolutely not. Just don’t have expectations if you’re a PAX client or a client anywhere else. Frankly, for that matter, if you owned bonds, don’t have this expectation that your portfolio is going to equal the S&P 500, because that bond piece is diversification and it just didn’t provide the returns in the first quarter. But abandoning them now doesn’t make sense. 

Now the third piece is cash. And I think we’ve all been enjoying a nice little 4 to 5% return on our cash versus the prior ten years, where we were getting 0.2% on a CD. So those cash positions have been very attractive. I like to look at investments through a risk reward profile, because if you look at cash, not a lot of risk and a nice return. So those are the three elements that make up the recipe for a portfolio: stocks, bonds, and cash. 

Now let’s go a layer deeper and look at the ingredients. And that’s where we look at what’s inside of those stocks. So we kind of peel back the onion and say, “What makes up those stocks?” Now we typically think about stocks in different categories and the market calls one category value and the other one calls it growth. You can look that up on your own. 

But value stocks have done better this quarter, which is good. But some other pieces have done interesting specifically in March, and you know this already because all the commercials tell you, gold’s actually done pretty good and inside of many portfolios are not necessarily gold physical bullion or coins, but gold mining stocks.

So, those have actually done pretty well. Gold in general. It seems to be very attractive right now, trending real well. I’m not going to dive into my commentary on gold. You can visit the previous podcast on that commentary. But obviously, if you look at some of the ingredients inside of your stocks, there has been pockets of nice little, I guess, trending well. And we call that technical analysis in our world. 

Now, also the international piece has been interesting. You always want to make sure you don’t have too much international. In, I’m trying to think, 2005 maybe we, most market participants had about a 50% U.S. and 50% international. That’s a lot. If the market starts trending that way will shift.

But today. Hear me out. Just a nerd for just a second. The United States dollar. I know you think it’s crashing. It’s not. It’s going up. It’s still the best, currency in the entire world. I know you, I know, look, I know there’s threats to it, but as of today, it’s going up. So, if that’s –  if the dollar’s going up, that actually hurts our returns investing internationally. 

So you don’t want to abandon international. Just know that you’ve got this challenge in front of us and also China, China is a big catalyst in the international markets. Trade partner with a lot of peripheral, I say peripheral countries, but just not some of the big ones. And, they’ve been not not contracting but not growing as fast.

And so that’s kind of hurt some of the international growth. But there have been pockets of good international returns. It’s just that the United States dollar going up, hurts a little bit. But do not abandon your international peace. I would suggest that you just check with your advisor and just kind of wrestle through it a little bit.

It’s a lot, a lot to digest. Can I switch analogies? That’s always dangerous. Like, okay, I talked about this recipe and ingredients. Now I’m going to shift analogies. So, I just want to get your mind, like I hate using multiple analogies. Like if I sit down with somebody, they give me like four analogies. I’m like, man, I can digest one. But you gave me four.

Okay, but I’m going to at the risk of giving another analogy and throwing it off, let me give you another analogy. So a lot of times, at least at PAX we like to use something called a core satellite portfolio. Core satellite. I have spoken about this before. I don’t know which podcast, but the core is the that when we look at the recipe, that’s the stuff, that’s the components, the amount of stocks, bonds and cash that evidence and history have guided us to give us confidence that the probabilities of that core portfolio will help us achieve our goal.

So, we’re using evidence. We’re using a framework that has a very strong academic appeal. I sat appeal, for lack of a better word, academic validation is probably a better word, strong academic validation. So that core is usually represented by okay, I have 60% stocks and 40% bonds and some cash. That’s what we call core.

But, oftentimes we satellite that core with inflection points in the marketplace. or strategies that the advisor and the client, a very personal relationship, find that it would be in their best interest. What we have seen lately is a more of an appetite to add a satellite, a Bitcoin. Interestingly enough, now we’re probably the only advisory firm that has cold storage Bitcoin, in San Antonio. May, may or may not. And I don’t know how many in Texas, but we actually have cold storage Bitcoin. We don’t do a lot of it. We don’t promote it. But if you’ve seen the returns lately, it’s been unbelievable. 

So sometimes advisors, I’ve seen these trades go through, will satellite their core portfolio with Bitcoin. We’ve also been satelliting, that is a verb, with alternatives that because the marketplace is providing some good, hear me out, some good risk reward opportunities, what we might consider in alternatives that would include, as an example, private debt and private equity. Now, you have the public markets things that are traded. There’s a degree of volatility there that we understand.

But the private markets think H-E-B, H-E-B is not publicly traded, but they’re privately held. I think many of us would have enjoyed being an owner of H-E-B in their growth cycles and they continue to grow. And so not to say H-E-B is in our portfolio, but it’s an example of us tapping into the private stock market. It’s also called the private equity market and the private debt market where we lend money to H-E-B. 

Those satellites are helping us create a portfolio that makes sense in this next iteration of the market. So, there’s two analogies for you, but one, to give you an idea of how things are being constructed today. So what do you like, what do you do with this information?

So I gave you a lot of information. I did my best to stay away from a bunch of numbers. Here’s what you do. It’s a clue. They’re clues. They’re just clues. They’re just clues. Take the clue. Put it in your pocket. Pull it out. When you chat with your advisor, and, you may or may not make tweaks to your portfolio. You may or may not. 

You know, generally speaking, you don’t want to mess with it. I’ve been doing this a long time, and the stock market has a very strong track record, a very strong track record. The markets in general, all the markets, the bond market, the cash market, these alternative markets, Bitcoin, all the markets, grocery market for that matter. They all have a track record. 

This is why I say like don’t mess with it too much. They all have a track record of making very smart people stupid. So, for that reason it’s a clue. These are clues, put in your pocket, have a dialog with your advisor, and remember you think different when you think long term.

Have a great day!


13 Charts On the Q1 Stock Rally That Just Wouldn’t Quit | Morningstar 

Q1 2024 Fidelity.pdf 

McDonald’s unveiled an automated store. Some consumers aren’t loving it. – CBS News.

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