Wealth Podcast Post

Active versus Passive Investing with Garrett Phillips

George Grombacher July 17, 2022

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Active versus Passive Investing with Garrett Phillips

LifeBlood: We talked about active versus passive investing, how the last 20 years may be very different than the next five to 10, the importance of taking a non-correlated approach to investing, and how to get started, with Garrett Phillips, Managing Partner of 3Summit Investment Management. 

Listen to learn why investing in a savings bond could be well worth your time and money!

You can learn more about Garrett at 3Summit.com and LinkedIn.

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Our Guests

George Grombacher


Garrett Phillips

Episode Transcript

george grombacher 0:00
Come on Bob Leffler. This is George G. And the time is right welcome. Today’s guest struggle powerful. Garrett Phillips, Garrett, are you ready to do this?

Unknown Speaker 0:18
I’m ready, let’s go.

george grombacher 0:19
Let’s go. Garrett is the managing partner of three summit investment management, they’re designing low risk portfolios for individuals and small institutions, helping them make sense of the markets. Garrett, tell us a little about your personal life more about your work and why you do what you do

Unknown Speaker 0:35
that so So personally, I’m 48 years old, I live in Denver, I’m married, I’ve got two teenage girls, my oldest just graduated from high school. And my youngest, just this week, started driver’s ed. So that’s the point I’m at with my kids in my life. You know, we live in Denver, so we do a lot of outdoor stuff, as everybody here does, you know, Colorado is great place to live. And, you know, we try to do a lot of that with the kids, especially because we know that that time is kind of coming to an end with them as they’re getting older. And as they’re growing up and moving on to, you know, start their own lives. So, so that’s a little bit personally, professionally, I’m an investment manager. I’m, as you said, at my three summit Investment Management. And I think, you know, as a little background to that, and how I got there, I’ve been interested in finance for probably a little more than 20 years. When I first got into it, you know, my first exposure to finance was that in 2000, I got a job I was working, I was doing most of the accounting work, it’s time and, you know, I, I got a job working for a broadband company technology was, you know, big deal. And I thought, let’s get into technology, which was not the best timing, but it was working for a broadband firm that had a lot of venture capital money. I don’t remember the exact amount. But I remember at the time, the zeros on it were baffling to me. And ultimately, I was asked to do just investment portfolio accounting for this very simple portfolio of cash and cash equivalents. And, you know, it was kind of then that I got hooked on investments, I thought that was great. And so you know, as, especially as, as the broadband and the tech bubble burst, I, you know, started looking to work in finance. And so, you know, I think that was probably the first the beginnings of it, I started working in finance as an accountant, as an investment accountant, and then got on to the operation side, and then into the portfolio management side. And mostly what I was looking at, you know, as I was, as I was looking for positions and jobs, I was looking at institutional type investments. And so, you know, a lot of times when we say institutional, we mean, an account, that’s more than $100 million, or a couple 100 million dollars. So sizable firms, you know, large endowments, large companies, large clients, other investment clients, even, you know, mutual funds, hedge funds, those kinds of things. I remember one of the first interviews that I had, in hedge funds, one of the guys asked me, he said, What is it that that you want to do here? What do you want to work in hedge funds? And I said, Well, I’d like to know how big deals get put together, I’d like to know how big investments get put together. And I think at the time, I said, you know, I’d like to know how a billion dollar deals work. And he said, Well, you know, let’s start with million dollar deals. Let’s do that. And then let’s see if we can find somewhere where we can find a billion dollar deal. So I was maybe a little over my skis on that, but but I did. I mean, I learned how, you know, big deals got put together, I learned how mutual funds got structured, I learned how hedge funds got structured, and learned a lot, especially at some of those early firms to where, you know, ultimately, Dan, you know, got into more sophisticated portfolio management on the on the institutional side.

george grombacher 4:00
Nice. So you and I have been working in the money space for around the same amount of time. I started in 2001. And that has been, I don’t want to say it’s been basic, but certainly passive investing has been pretty successful over the past 20 years, because equities have really been the only game in town. What are your thoughts on the what we’re experiencing now? And maybe what you see happening five to 10 years from now.

Unknown Speaker 4:28
You know, it’s a great topic to talk about, I think, the environment we’ve been in certainly in the last 15 years since 2008 2009. And even going back a little bit before that has been a very, you know, manipulated interest rate environment the Fed has since 2009 2008 really kept interest rates very low. It seems that you know, if you look at markets today, and where we’re at today, and just you know, even to think about a few numbers and not to get too far in the weeds here, but, you know, if you like where the s&p closed today, we’re down 22% from the highs. And those are highs that we set just back in January, the very first part of the year that NASDAQ down, you know, 30 to 32 and a half percent almost. And then I think if you couple that, you start to look at interest rates, and you start to look at a couple of things that people really do pay attention to. So I don’t know how many, you know, people every day are looking at the 10 year rate on Treasury. But we’re at about three and a half percent on a 10 year rate. And I think what’s kind of significant about that, is that, that it’s been very low for a while, but even since last Thursday, that’s about 4045 basis points, or almost a half a percent higher than what it was just last week, you know, so we’re sitting here, and we’re talking about it on Tuesday, and just in those couple of days, those have shot up, we’re gonna get the Fed is going to come out with a number of of how high they’re gonna hike interest rates tomorrow. And then I think another telling thing, that everybody’s kind of watching, and especially, you know, really looking at day to day right now, is mortgage rates, a 30 year fixed mortgage rate was 6.28%. Today, that’s almost twice what it was back in January. And you know, who can even remember the last time that they were that high? So I think there’s really kind of a key thing going on there is that we’re in a secular shift in rates, and in the interest rate environment. And it’s a shift, you know, a secular shift that we haven’t seen for decades, where most people don’t remember mortgage rates being this high. Right, and we’re potentially mortgage rates have, you know, room to even continue to increase is you start to look at, you know, I, the first mortgage I ever had was in 1996. And because I was so young, and because interest rates were different, that was almost a 12%. Mortgage, that had to be a pretty cheap house for me to be able to afford payments on a 12% mortgage. But, you know, we haven’t seen that kind of an environment for interest rates in 20, or 25 years. And I think, then when you start to couple, you know, not just interest rates, but stocks and asset valuation, when you start to look at inflation, and you start to talk about all these things where, you know, if you watch TV, or if you watch the news, or if you’re reading articles, you know, you start to see this theme of, well, this is the highest it’s been in 22 years, it’s the highest it’s been in 40 years, you know, the inflation print, the highest it’s been in 40 years, I saw an article the other day because of mortgage interest rates, that mortgage rate applications are the lowest. And I think it’s refi applications are the lowest they’ve been in 22 years. You’re talking about decades, since we’ve seen some of these numbers. So clearly, this secular shift in the rate environment is on the horizon, if we’re not already in the middle of it. And what we could be looking forward to in that is that we could be looking at, especially in the stock market, and as this trickles down to valuations, we could really be looking at five or 10 years, the last decade of investments in the stock market.

george grombacher 8:25
So what is what is the ordinary investor do?

Unknown Speaker 8:29
So, I think, you know, I’m a little biased here, but I’ll sort of explain why. And I think why it’s relevant, but kind of back to what you were talking about, about passive investing. passive investing has been, you know, very viable for the last 15 years, last 20 years, because we’ve been in the kind of interest rate environment that we’ve been in. Because that’s propped up asset valuations, we’ve been in an environment where you can really just by the index and passively earn returns, that adjusted for inflation, you know, maybe maybe, in a manipulated rate environment are real returns, I think that what’s what’s an investor to do? What’s a person to do? I think we’re gonna see a period where over the next five or 10 years, active money management, and active money managers, money managers that are actively managing your portfolio will start to be the only way to earn real returns in this rate environment.

george grombacher 9:26
It’s fascinating, just that we have generations one or two at this point that have never known interest rate on a mortgage to be what you experienced it when he bought your first home. And they’re used to they’re accustomed to getting a pretty good return just by buying the s&p 500. And just, it’s almost a new paradigm of okay, wow, I don’t even have any idea how to manage money. And it may be time and I think that a lot of people have claimed victory for passive overactive but we may See that that completely flip flops?

Unknown Speaker 10:02
I think that could be and I think the case that you can really make for active money management is, you know, first of all, when investors when people hire a money manager, you know, one clear thing that you want to do is make sure that that money manager is a fiduciary, that’s a legal definition. That’s an ethical definition of somebody who acts in your best interest as a money manager. You know, so three summer work fiduciaries. And that’s how we manage money is, is in the best interest of our clients, I think then when you start looking at what those money managers do, then the thing to start to look at is, do they have strategies that can benefit your portfolio? Do they have strategies that are uncorrelated to the overall index, and by uncorrelated I mean, they essentially kind of don’t look like the overall index, you know, the s&p is very heavy technology weighted. So if you want to be uncorrelated, you have to be less weighted in technology. And and you have to be uncorrelated in multiple asset classes, you have to have diversifiers in your portfolio. And you have to have, you know, very sophisticated strategies and risk management tools, which were sort of the things that, you know, I took away from a career that started in institutional money management was that institutions have these very sophisticated techniques, risk management techniques, and they have strategies that overlay and are uncorrelated to the overall index. And you know, in the long run, that’s how they make more money,

george grombacher 11:29
which totally makes sense. And I really wonder, because it’s not obvious. What if the average investor really understands what it what uncorrelated really means. When they think investing? I think that they think, well, it’s the money and said, My 401k, which is in equities, maybe a little bit of fixed income. And somebody was just telling me that out of all the assets under management in the world, a tiny percent of 1% is in alternative investments and commodities and things like that. And that’s really, I don’t know if that’s what you’re talking about, certainly a part of it that professional money managers or institutional money managers take, take advantage of those other asset classes.

Unknown Speaker 12:10
Yeah, I think, I think I think you hit it right on the head is that not everyone always understands what you mean by uncorrelated not everyone always understands what you mean by different sectors, different strategies, those kinds of things. You know, I even think back to sort of like why I got into money management for individuals and small institutions, like we do a three Summit, as opposed to the institutional money managing money manager that I was doing before in terms of mutual funds and hedge funds. And all that was a conversation that I had with my mom. And I think this was in like 2008 or 2009. And, you know, as the markets were sort of unraveling and, you know, she said, you know, you’re in this business, can you help me out with this, I feel like I’m a little bit on my own here trying to figure this out. And this is just her retirement accounts. This is her 401k That she’s built up over a lifetime of working and her past IRAs and things like that. And I sat down, and I looked at it, and I said, Well, I think as close as you are to retirement, you need some diversification. You need less stock holdings. And I think back then the sort of buzz was a 6040 portfolio. Right? I don’t think that now’s the time for that I think we’ve probably reached the end of the traditional 6040 portfolio. But I think that takeaway from that conversation with my mom was, well, it was one it was, I think you need to hire a professional money manager. If you’re doing this on your own. Let’s find a fiduciary for you, let’s find out professional money manager, that wasn’t really the business I was in at the time. And so we found a great advisor for her. But at the same time, then, you know, we also looked at her portfolio, it was very heavy in stocks. And so diversification and not correlation to her structure in our portfolio at the beginning, was let’s make sure we have healthcare stocks, it was kind of sector diversification, that kind of thing. But it really wasn’t diversification for risk management. It wasn’t strategy diversification. And it was instantly the thing that she benefited benefited from as soon as she hired professional money manager, where she then got a non correlated, you know, she had different asset classes that performed differently in different periods, you know, not all of them being up at the same time, not all of them being down at the same time, a mixed bag of performance, so that you have are very well diversified for all scenarios. Now. I think that 6040 portfolio, Ron has kind of come to an end we’ve seen over the last, you know, six months, maybe even before that, maybe the year 6040 portfolios get hammered, because typically in the past you would see a 6040 portfolio is 60% stocks, 40% bonds, stocks and bonds over the last six months have both performed poorly. And so I think that’s a you know, sort of a message of things to come is that it’s going to take a little bit more so sophistication to, you know, be in the right asset classes as opposed to kind of a set it and forget it traditional 6040 portfolio.

george grombacher 15:08
Yeah, yeah. I appreciate that. Is it you mentioned fiduciary? And that’s a term that I think people are starting to understand a little bit a little bit better. What are some of the other questions that, that you would encourage a consumer, aside from just coming to your website and getting in contact with you? What are questions that people should be asking of the people that they’re talking to, to ensure that the advisor knows what their will follow the strategy we’ve been discussing?

Unknown Speaker 15:41
I? Well, I think, certainly fiduciary is, is the the top thing and, you know, I know my conversations with clients with prospects with friends, those kinds of things. Not everybody knows that that’s a legal and ethical distinction, right? And, and a broker that charges you permissions is not a fiduciary, that could have you could have a fiduciary relationship with a broker. But if if somebody’s charging you fees that are commissions, that’s generally not a fiduciary, and that’s a broker. And if somebody’s making Commission’s typically, then they a broker dealer doesn’t have the same requirement to act in your best interest as a registered investment advisor. So I think there’s that key term registered investment advisor, that means fiduciary. That’s one of the things I think then when it comes to the portfolio, I think you want to look at I think you want to ask a lot of questions about strategy diversification, you know, how do we, as an investment manager invests your money? What strategies do they employ to to earn real returns, and I think you want to hear that strategies are diversified, there’s multiple different strategies, there’s multiple different ways that we make real returns out of the market. And, you know, like, you talked about commodities and alternatives and things like that. So, you know, with commodities, we always have a pretty significant allocation to gold. And most people will have some sort of allocation to gold or precious metals or something like that. But, you know, we treat it as a significant part of the portfolio, because we think it’s a unique way or a unique source of returns. And so we consider it a strategy that we want to be invested in. And there’s, you know, two or three things. So I think that that’s sort of the measure of good asset management, is how diversified are those strategies? And and how do they really work?

george grombacher 17:40
I love it. Thank you. Garrett, people ready for that difference? Mickey tip, what do you have for them?

Unknown Speaker 17:46
All right, difference making tips. So so here’s what I’ve got. So I think the general thing is, you know, make sure even as you’re looking at your portfolio, and this is this is investments, I think this goes for life in general. Make sure you don’t miss the small things, because there’s there’s real yields in the small things. Right. And you know, sometimes, and I’ll give you a specific example. And this is so I think is a great tip is that I, you know, been in portfolio management so long that a friend of mine asked me what I thought about a savings bond, a series I savings bond. And I haven’t thought about savings bonds in years. Because typically, in a savings bond, you’re limited to your purchasing of about $10,000, you buy like $10,000 a year. And so in terms of portfolio management, when you’re looking at somebody’s you know, 401, K’s, their, their IRAs, etc. It’s really not a meaningful asset class. But I will tell you, if, if your listeners look at a series I savings bond, the eye is inflation adjusted. Those are the rates on those are about nine and a half, almost 10% right now. So it’s a small amount you can invest. But if you have $10,000, in a savings account, or money market, should check out those series i investments, you have to buy them electronically, you have to buy them personally. There’s some restrictions on him, you have to read all the fine print, you’re limited to about $10,000. And if there is a holding period, and you get charged a little bit of a fee, you lose a little bit of that yield if you break it early, but they’re yielding a pretty high rate in this environment.

george grombacher 19:23
Well, I think that that is great stuff that definitely gets caught. So funny. I wonder if you know you would have to, to your point. Yeah. And thought about it. And forever. Somebody had said that to me, you know, two years ago, that you were crazy. So if different seasons of life in different times in the market. Yeah, that’s

Unknown Speaker 19:40
right. That’s right. I mean, it’s hard to turn down a 10% a 10%. Yield there almost.

george grombacher 19:47
No doubt. Well, good. Thank you so much for coming on. Where can people learn more about you? How can they engage with you?

Unknown Speaker 19:53
Well, thanks for having me on. George. I enjoy listening to your podcasts and if people want to learn more about us, they can check us out too easy. His way is our website. It’s three summit.com. That’s the number three su M mit.com. And all our strategy information is there. There’s some helpful tools, some videos about investing, and all our contact info is there as well.

george grombacher 20:14
Excellent. Well, if you enjoyed this as much as I did to get your appreciation and share today’s show with a friend who also appreciate good ideas, go to three summit.com the number three as you mit.com and dig deeper into everything that Garrett’s been talking about we’ve been talking about today. Thanks, Ken Garrett. Yep, thanks so much. And until next time, keep fighting the good fight. We’re all in this together.

Transcribed by https://otter.ai

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