#696 Portfolio Construction For Young Investors w/ Liz Young

Liz Young is Head Of Investment Strategy at SoFi. In this conversation, we discuss macro monetary policy, fiscal policy, Portfolio construction, Bitcoin, and how young investors can get started in the market.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone. This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off.

• 0:11Speaker 01

  Liz Young is the Head of Investment Strategy at SoFi. In this conversation, we talked about monetary policy, fiscal policy, portfolio construction, Bitcoin, how young investors should start entering the market, and also how Liz looks at where markets are headed in the future. I really enjoyed this conversation with Liz, and I hope you do as well. I hope that you really learn a lot from this. And if you want more episodes like this, make sure that you tune into the Best Business Show every day from 11 a.m. to 1 p.m. Eastern on YouTube. All right, let's get in this episode with Liz. I hope you guys enjoy this one.

• 0:46Speaker 02

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 1:09Anthony Pompliano?

  All right, let's maybe just start with kind of your perspective on the monetary policy that we've experienced over the last 18 months. Give us a take on like what's happened and then what you actually think of the situation currently in terms of should the Fed continue? Should we taper? What's going on with the relationship to inflation, etc.?

• 1:25Speaker 03

  Well, I think it's actually longer than the last 18 months. You have to think back to the last financial crisis. We never really came out of that regime. So we're still in this space where easy monetary policy is a big reason why stocks have moved. Now, I think where we are is that the Fed and probably multiple central banks around the world, but the Fed in particular, is in a really tricky spot because number one, they're stuck between do we promote growth? Do we try to stimulate growth? Or do we try to control prices? And you can't use the same tools to do both of those things. So you have to pick which one you want more. And that's where they're going to be stuck towards the end of this year, early next year. The other piece that's going to be really tricky for them is that we've had such a run up in financial stock.

• 2:10Speaker 03

  Prices and they look at financial conditions. They don't want financial conditions to get out of whack. Policy affects that a lot. So they've sort of, they're stuck in a corner, to be honest, and they're not going to have an easy way to come out of it. I think that's what a lot of the conversation is about today. I mean, just look at what's happening with tapering, right? They had to signal tapering for months and months ahead of time. They still haven't said they're actually doing it. We've been signaling it for months. So we have to get people so prepared in order for the market to actually be able to digest any changes in policy. And that's an interesting place to be. It's a place that we haven't seen in a long, long time.

• 2:47Anthony Pompliano?

  So we saw this morning Paul Tudor Jones went on CNBC and he was talking about inflation. It's going to be much worse than people think. It's not going to go away. It's not transitory. If you're sitting there at the Fed today, do you have the ability to actually counteract the inflation? Like, are they in a position? You said they're kind of put in a corner. Can they do anything or do they have to just let this run? And as an investor, you just know that. And so you've got to position yourself to benefit from it rather than suffer from it.

• 3:11Speaker 03

  Well, first of all, I'm not going to pretend to be able to be a Fed official. However, if I were, if I were sitting at the Fed today and you look at what the options are, tapering is really the first option that they have. I don't know that that's going to be able to combat inflation. And without getting too granular here, the inflation that we're seeing right now is because of a supply side issue, right? It's not because of a demand side issue. So some of the things that the Fed would do to combat inflation, things like raising rates, pulling liquidity out of the system, that would be to combat a demand side issue that's causing inflation. So if you want people to pull back on their demand because there's not necessarily enough supply out there to fulfill it, then you would raise rates, you would kind of slow down an overheating economy.

• 3:54Speaker 03

  I don't think that's where we're at. I don't think that this economy is overheating. In fact, you're seeing growth expectations be reduced through the end of the year. We have a jobs market that hasn't recovered as quickly as we'd hoped. So I don't think we're in an overheating place. I actually think we're running the risk of getting slow to the point where then we talk about stagflation as an issue. So the tools that they would be able to use, yes, they could control inflation. If they started to raise rates that would control inflation, it would also really scare the stock market. So that's what I mean about them being painted into a corner. They don't necessarily have to do anything today to control inflation because as far as I can tell, we're absorbing it reasonably well. But something that I brought up last week in my weekly column,

• 4:37Speaker 03

  I don't know how much stamina consumers have left to pay these prices. And I don't know how much stamina businesses have left to just kind of absorb those cost increases without passing it all through.

• 4:49Anthony Pompliano?

  So when we start to think about the actual asset kind of inflation that's occurring, everything is up materially. Obviously Bitcoin is kind of the big winner in most of these asset classes. But we've also seen stocks go up as well. Is this something where as long as they continue down the path they're doing, people just have to get out of cash, get into investable assets in general, whether it's commodities, equities, crypto, et cetera, and they're going to do okay? Or do you think there will be some level of decoupling between these different asset classes and they may not be all as correlated as they appear to be today?

• 5:17Speaker 03

  Well, look, the first rule of portfolio construction is to have asset classes that are not correlated to one another. And it's true that in this environment where we have high inflation, we have really low rates that cash is getting for being just held in let's call it a money market fund. Cash is really not a winning asset in any way, shape or form. It would just be there to sort of sit around and not necessarily lose money. But with inflation, you are technically losing money in cash. So yes, I do think that you have to get cash off the sidelines. The decision of where to put that cash is obviously up to the investor. Here's what I would say. There are three big components of portfolio construction. I use this all the time. The first being growth, the second being income,

• 6:01Speaker 03

  and the third being preservation. When you're trying to decide which asset classes to allocate that cash to, you have to decide what function they're going to play in the portfolio. Now, the problem and the conundrum that a lot of investors are in today, a lot of traditional investors as well, especially the ones that have followed the 60-40 guidelines, is that what do we use for preservation? Because we used to use bonds and we used to use cash. If we're in an environment where rates have nowhere to go but up, Probably don't provide enough preservation for the offsetting equity volatility that we have. Cash in an inflationary environment doesn't provide enough preservation either. So that's why you're starting to see a lot more interest in things like crypto.

• 6:44Speaker 03

  Gold has not been the preserver that we've wanted it to be either, and it's not the preserver that it's been in history. So you see this rise of different asset classes, new ways to do things, alternative investments much more available to individual investors. And I think that that's a benefit. You have more options than just a regular sixty forty portfolio.

• 7:03Anthony Pompliano?

  What is your thoughts on the sixty forty portfolio in terms of do we think that Paul Tudor Jones is right when he said this morning that that's kind of dead? Like you just can't have that portfolio construction in this environment? Or is there some room for that depending on what you're optimizing for?

• 7:17Speaker 03

  I don't know that sixty forty should be the starting point anymore. So what we used to talk about it as is you would start with kind of sixty forty as the base. And then maybe you'd make changes under the surface in that sixty forty. I think a better starting point probably puts an alternative asset class in there. So whether you're taking that depending on where you are on your time horizon, whether you're taking that out of the sixty, which is the riskier side or out of the forty, which is supposed to be the safer side is up to you. But I think there's probably a third component. So maybe it's more like fifty thirty, you know, something like that where you break it up a certain way. I don't think it's dead, but I think we're going to go through a period of time where the forty does not function like the forty used to,

• 8:00Speaker 03

  or the forty does not function really in a preserving way at all. So you have to take on other asset classes that are going to make more sense. Now, a lot of times I get the question of, okay, let's say I want to start investing in alternatives, whether that's, let's call it commodities, or basically anything that's not a stock or a bond. You could put crypto in that category too. Where do I pull the assets from? You pull the assets from the place that is not going to perform like you intended for it to perform, or you pull the assets from the place that you need the protection in. So let's say you're trying to protect against inflation, right? Inflation is bad for bonds traditionally. So I would pull assets from that bond allocation and put it into alternative assets if you're trying to protect from that particular risk. If

• 8:45Speaker 03

  you're trying to look for growth, and this is going to be a longer term holding in something like crypto or in something like commodities where you have some upside potential, although it's going to be more volatile, then you pull from that equity side and diversify some of the equity exposure, especially in an environment where equities have such high valuations.

• 9:02Anthony Pompliano?

  Talk to me about Bitcoin specifically in terms of one of those new assets that it feels like the world is kind of waking up to, starting to reprice, understand what it is. How does that fit into a portfolio today? Or how do you talk to various types of market participants that are thinking about putting in their portfolios?

• 9:17Speaker 03

  Yeah, look, everybody thinks about it a different way. I'm going to think about it just from an investment perspective today, not from necessarily a spending or using it as a currency perspective. From an investment perspective, I'll go back to that growth, income and preservation piece. If you believe that crypto is an asset class that is going to grow over time, that is going to expand over time, it's already seen tremendous growth, then it functions as the growth aspect or part of the growth bucket in your portfolio. And you have to, number one, have expectations for how long you're going to hold that, right? So if you're trading in and out of Bitcoin or in and out of crypto, it's not necessarily a growth component. That's something that you're going to, you're going to take on

• 9:59Speaker 03

  a lot of volatility. You're probably going to increase the tax component of your portfolio, and that's a completely different aspect. If you're looking at it as growth, you take it out of that equity portion and you hold it with the intention for holding it for the long term. You can also look at it, and some people do this, look at it as preservation. Now, that might seem counterintuitive because preservation typically has been things that have very low volatility, that don't have a lot of movement in the price from day to day. Obviously, crypto is not that asset class. There's going to be volatility. We're still in the adoption phase, which means we're going to go through a number of different phases of price discovery. Meaning we're going to go up, we're going to go down, we're going to try to figure out where the right price is.

• 10:44Speaker 03

  If you're using it as preservation, though, you may want to think of it as preservation against certain things that aren't working like they used to and certain things in this particular environment that aren't working like they used to. So I'm thinking in particular about maybe precious metals. Or if you're looking at fiat currencies, we talked a lot about cash already. Thinking about diversifying out that exposure if you want to look at it as a store of value.

• 11:07Anthony Pompliano?

  Joe and John, what questions do you guys have for Liz?

• 11:10Speaker 04

  Yeah, Liz, mine would just be about, it's kind of similar, piggybacking off what you were just saying. We have a lot of people on the show that are newer to investing, right, and younger in age. So how do you think they should be thinking about Bitcoin is like kind of a small hedge, right, to the portfolio? Versus something that traditionally would have been, you know, something further out along the risk curve? Is this something that you recommend to younger investors? Or you think that they should, you know, either be super convicted or stay away from?

• 11:35Speaker 03

  Well, I, yeah, I don't think you have to be all in or all out. I think that you can start to kind of dip your toes in the water. You can think of it, we call it dollar cost averaging, so you can put little bits in at a time. This is actually a point that Anthony made on my recent podcast that once you're invested in something, even if it's a tiny little amount, you pay closer attention to it. And I'll tell you what, you learn a lot faster when you lose money. So if you're invested in something and it goes down, you're probably going to pay even closer attention to it than you did when it was going up. And you're going to learn a lot about how the asset class behaves. If you're a younger investor, that means you have a very long time horizon. If you're the youngest investor out there, you have the longest time horizon out there.

• 12:15Speaker 03

  Which also means that you have the space, you have the time to put up with some of those bumps. And riskier asset classes are then more suitable for somebody who has a longer time horizon. So I think if you're at that phase and you're willing to watch some of the volatility, you're willing to stomach some of the volatility, and you're going to diversify your portfolio into other assets, including traditional assets, then yeah, I think it's, it's fine to start getting into Bitcoin, getting into crypto.

• 12:44Anthony Pompliano?

  John, what do you got?

• 12:45Speaker 05

  Yeah, Liz, thank you for doing this. Nice to meet you. I'm curious, so a lot of our audience is young. How do you suggest someone kind of get started? Is it kind of just putting $5 each month, dollar-cost averaging? How do you, how do you think about that?

• 12:58Speaker 03

  Yeah, so just investing in general, what I always say to people, it is sort of that dollar-cost averaging. But even if you don't know what that means, here's the idea behind it. We are psychological beings and it is very tempting when you start investing, even if you've been an investor for a long time. I still fall victim to this and fight this on a daily basis. It's very tempting to get wrapped up in your own emotions about it. And what I mean by that is, let's say you've chosen a stock that you want to buy, but you haven't bought it yet. Now, the next decision is, when do you do it? Right? And then you get into this sort of circular motion of, should I wait until it goes up a little bit more? Should I wait until it dips? What if you wait until it dips and it goes up another 10%? And then you missed that?

• 13:41Speaker 03

  So you get into this sort of mindset where you end up actually psyching yourself out. So if you average in on a very systematic basis, you avoid all of that completely. So what I would say is, first decide how much you want to put into the market, whatever the asset class may be. So pick the dollar amount and then split it up into pieces. Let's say split it up into 10 pieces. Okay? Take 1/10th every week, every two weeks, and only do it on one day of the week. So every Monday, invest 1/10th into whatever that asset class is. Maybe you want to spread it out longer, you do it once a month. I would say probably get it in faster, but do once a Monday, once every other Monday, and just put the same amount in on the same day

• 14:25Speaker 03

  and you completely eliminate all that psychological game you're going to play with yourself.

• 14:30Anthony Pompliano?

  Liz, when you start to think about individuals who early on started to allocate to assets, right? So especially last year, a lot of people, first time coming in, they're using SoFi or various other platforms and they're trying to get invested. They're buying stocks, they might be buying Bitcoin or cryptocurrencies, maybe even commodities or whatever. Those have appreciated significantly. How do you think about rebalancing versus not rebalancing? Should they just allow those assets to continue to grow? Like, what is your kind of thought process, especially for young people as they're just kind of starting their investing career?

• 15:00Speaker 03

  Yeah, for young people, I think rebalancing annually is perfectly fine. I still rebalance my own portfolio only once a year. Again, it gets you out of that habit of trying to time a rebalance. Now, you do want to take advantage of some of the momentum factors, which is another reason why I would say only do it once a year. If there's a big run-up in a certain asset class, or maybe last year, everybody was invested in tech stocks, right? You want to participate in that run-up. You don't necessarily want to cut it short. So a once-a-year rebalance, just to kind of get back to neutral and make sure that you're still diversified, is probably the most prudent way to do it. If you're thinking about how do you allocate in the first place? Now, there's different parts of the market that I think younger investors are more interested in than some of the more experienced

• 15:45Speaker 03

  or older investors are interested in. There is a bias, though, that we have as investors, as any human, where you end up much more interested in the things that you know more about. Okay? So I'll use a simple example of, let's talk about Houston, Texas. Okay? There's a lot of people in Houston, Texas, who are involved in the oil industry. They probably have gotten paid in oil stocks. They also are probably more familiar with that sector than most other sectors. So they have this tendency, perhaps, to invest more in energy than in other sectors. But as we all know, energy can be a very volatile commodity and prices that we have absolutely no control over at a lot of times. You don't want to fall victim to that. So let's say if you're a newer investor and you just happen

• 16:27Speaker 03

  to be more familiar with the tech space, more familiar with the crypto space, make sure that you're not over allocating just because you're familiar. Buy a couple of things that you are not that familiar with that are going to act differently, because that is the definition of diversification. And again, once you're invested in something that you don't know a lot about, you're going to pay attention and you're going to learn because it's your own money at work.

• 16:49Anthony Pompliano?

  Yeah. I appreciate the fact that you understand the kind of macro environment, the traditional asset allocation, and then you're very forward-thinking, kind of open-minded when it comes to Bitcoin and cryptocurrencies, which, you know, kind of hit or miss right now from people coming from more of the legacy world. What's your thoughts? I know you've got this idea around like Darwinism of the crypto universe. What does that exactly mean?

• 17:10Speaker 03

  Yeah, so survival of the fittest, right? I'll compare it to, let's say, micro cap stocks. You can buy micro cap stocks. Some of those are going to survive, some of them are not. It's a pretty risky space. The ones that survive, the the best story about a micro cap stock is one that starts as a micro cap, grows into a small cap, then grows into a mid cap, then becomes a large cap, right? That's a success story. Now, the failure rate on the way from micro to large, though, is pretty high. Right now, and you'll know the answer to this better than me, but I think there's like eight, eighty eight hundred cryptocurrencies out there.

• 17:44Anthony Pompliano?

  Yep.

• 17:45Speaker 03

  They're probably not all going to make it, right? So let's think about some of them, or a lot of the newer ones, as micro cap stocks. There are some, if if we're going to do it this way, we would consider maybe Bitcoin a large cap at this point, because it's the most familiar. It's been around for a long time. I think most investors who got into crypto probably started by looking at Bitcoin. Then the rest of them, if we think about those as micro or small caps, as they go through their life cycle, some of them are going to fall off. Maybe it's because there's better technology in a different coin. Maybe it's because there just wasn't enough demand, there wasn't enough interest for it to move on and carry forward into a more viable option. So over time, because this is such a new industry and such a new asset class,

• 18:29Speaker 03

  we're probably going to see, I would say, a consolidation in the number of coins, but that doesn't mean that the asset class goes away. And the reason that maybe I'm coming off as forward thinking is because there's also this theory of don't fight the trend. And that doesn't mean that you should be trendy all the time in investing. You certainly shouldn't, right? You shouldn't go to a cocktail party and just buy what the next person says that they bought. But this is a trend now that's been around for a few years. It doesn't seem like one that's going anywhere. And I wouldn't want to be one of those investors that ignores it and says, this isn't going to stick around, and then I miss out or I'm not learning about it in the moment because I've just decided that traditional investing doesn't allow for this type of concept.

• 19:10Anthony Pompliano?

  Yeah, it makes a ton of sense, and I think that a lot of people are kind of coming to this conclusion as well. So it's cool to see you, you kind of sharing that. When you talk to somebody who is either a young person or somebody who's just getting started, what can they do on the SoFi platform? Like, what is that kind of entry point from the invest features? It feels like there's a couple of different things that they can do. Is there one thing where you're like, hey, get the account, go ahead, start here, and that's what's going to get you started on this kind of investing journey?

• 19:34Speaker 03

  Yeah, look, if you're a younger investor, I'm going to paint with a broad brush here. I'm going to assume that you don't have millions of dollars in assets, right? It's probably a smaller account. You just want to get started. You're a little nervous about it. You don't know a lot about it. So what you can do on our platform is invest in little pieces. So let's take a share of stock, for example. There are some shares of stock out there that trade for over $2,000 a share. If you don't have a lot of money to invest, you can't buy a whole share. So we offer you the opportunity to invest in fractional shares. You also obviously have the opportunity to invest in things like ETFs, where you can buy ETFs that are diversified with smaller amounts of money. You can buy little bits of crypto at a time. And as a newer investor, that's a really important option to have.

• 20:17Speaker 03

  It's also an option when you have our platform and you're in the Invest platform or you have something in the SoFi Money platform, you have access to financial planners for free. So if you're starting out in your financial journey and you want to talk to somebody about how you're budgeting, how you're spending, how you should be investing, how to pay down your debt, what are the different ways to prioritize that? We offer you those resources as a SoFi member. There are so many things that you can do on the platform. You can literally have your entire financial life on the platform. And that's, I think, the biggest value prop we have.

• 20:51Anthony Pompliano?

  So I've been dropping in the chat the entire time your Twitter account. People keep asking where they can follow you. Just give everyone kind of the pitch on if they follow you on Twitter. What's the type of content that you're normally sharing there?

• 21:02Speaker 03

  Sure. So my Twitter handle is Liz Young Stratt. I tweet every day, multiple times a day on the markets. I try to keep it some market content, some economic content. And not only will I give you some of the big data that gets released, because obviously not everybody is sitting in front of a Bloomberg terminal all day long like I am. So give you some of the data that's released, because you're going to hear about it in the headlines. Things like inflation data, things like housing data, GDP, labor market data. And then also try to explain, why do we care? What does that mean? Right? So show it. Here's the data. Here's how it looks in comparison to history. Here's what I think about it. And then market data. What's the market? Doing today, if there's big moves in the market today, if there are certain sectors

• 21:47Speaker 03

  that started to outperform other sectors, if there's a trend that we're starting to see, maybe the market has either surpassed a recent high or fallen through a recent low, things like that, what do I think about it? What do I think is causing it? So it's an easy way to kind of keep a pulse. I also share on the Twitter feed, articles that I write, they come out every Thursday morning. Sometimes those are on thematic topics. This week's is going to be on inflation and how to invest in an inflationary environment. Sometimes they're market calls. So what I think is going to happen for the next couple of months or the next quarter, or even the next half of the year. So you can get a lot of different content on Twitter. Occasionally I'll tweet about the Green Bay Packers. I'm from Wisconsin. I'm a huge Wisconsin sports fan, so you're gonna have to put up with some of that, too.

• 22:31Anthony Pompliano?

  Aaron Rodgers said that he owns the Bears.

• 22:37Speaker 03

  Last week, it's true.

• 22:38Anthony Pompliano?

  Yeah, sure. He said, "I own you. I've always owned you."

• 22:43Anthony Pompliano?

  Pretty cool. All right, Liz, listen, thank you so much for doing this. Highly suggest again, everyone, please go follow her on Twitter. I just dropped her Twitter account in there one more time. We appreciate you coming on. My favorite part of your Twitter bio is, "If you want something new, you have to stop doing something old. Don't be old. That's how you become new." So we appreciate, uh, we appreciate your time today. I hope everyone learns something and we'll definitely have to do it again in the future.

• 23:04Speaker 03

  Thank you.

• 23:05Anthony Pompliano?

  All right, see you later.