Transcript:
Easan Arulanantham:
Do you still believe socks is a good quality investment? I watch your show several times a week. And it’s been a while since you mentioned it.
Tom Vaughan:
Yeah, so what he’s talking about is the iShares semiconductor ETF, the symbol is SOXX. That’s pretty much what we call it all the time. So it just means the semiconductor, it’s a, it’s a really nice one. It has, I think, 35 different semiconductor companies in there, you know, across a fairly broad range. It’s all US based companies. As far as that goes, not not positive on that might have Taiwan semi in there anyway, nonetheless, it is a piece that we’ve had in the portfolio all year, up until recently. And so the answer John’s question, no, we do not have that in the portfolio now. And here’s why. There’s three different markets strategies that I use, right, so the first one, great example 2020, markets flying upward, you know, we have a broad diversified portion of the portfolio at all times, like the Vanguard, total stock market index, etc, then I use these targeted indexes. And I actually use more targeted indexes and these big upward moving markets, because I want to try to capture more of the little waves that are going on, that are happening there. So 2020, it was innovative technology, genomics, Clean Energy, you know, that type of thing. And that’s where that’s, that’s where the money was being made. So we had that. And then we got into a market like we’ve had here in 2022, where the market starts to come down, right, falls below the 200, day moving average. But the leading indicators for recession have not triggered. So then I want to have a portfolio of well diversified pieces, less targets.
So I have, you know, for over the year real estate, the semiconductor index, Microsoft, and Apple, for example, is my four main targets this year. And what I want to do then is on these big dips, when things stretched to the downside, and I have some specific measures that I use, I want to rebounds. And so Sox was doing the worst all year has been a pretty big sell off in semiconductors, even though the demand is extremely high, right now, the expectation is that the demand might be falling off. And so they’re starting to sell those off. But I was looking at that, from the standpoint, I want to buy those low, right. But once we get into a situation where a recession is looking imminent, and that leading indicators are starting to show that, and we have the market coming down, which is obviously happening, that’s when I started to get defensive. So we removed the socks piece, removed the real estate piece, essentially, now we have that going into an inverse component, we took out a large portion of our diversified portion to move into a T bill type strategies just to park the money and just essentially reduce the overall exposure. Because buying on the dip when the market falls, another 20%, if that were to happen, doesn’t make any sense.
So this is a period of time where he just want to be defensive, let the market kind of come to you and see what happens. Now, we could be wrong, right? I mean, we just had a pretty good upward week, maybe we have another one next week, you know, maybe we don’t come down any further. Maybe we already established the low back, you know, a few weeks ago, and we’ll have to adjust the portfolio for that. But that’s why we don’t have that in the portfolio right now, just because, again, it’s a higher volatility piece. I love that in a market where I’m rebalancing because I can buy more and more, I don’t like it in a market that could come down a lot more. And again, if you look at the stats, and you look at what has happened historically, you know, once you get past a 20% downturn, the recovery times gets substantially longer. And you could be in for some real trouble there. So this is just a point where I’m going to be more careful. But I do like that index, I probably will get back into that index. I think the long term viability of semiconductors is is awesome. And we’ll see what happens.
Easan Arulanantham:
Yeah, so if the time horizon was kind of different, say you’re like an individual investor, you’re okay with the volatility and your time horizons, five plus years. Do you think Sox is still a good investment?
Tom Vaughan:
Yeah, I do. You know, and that, and that’s one of the challenges for us, you know, as practitioners in this business got 270 households. Everybody’s got a different timeline, different opinion, different way that they want to manage the money, but for the most part, our clients, you know, appreciate the consistency. And so that’s one of the things I strive for all the time, try to consistently you know, at least match or slightly beat the markets and those types of things. Versus having that you know, big rundown this semiconductors done much worse than the market so far this year. If I look at you know, socks versus VTI for the toaster, stock market index, for example. And so, you know, I don’t want to continue that ride for too long if things are going to because, again, my analogy right now is we’re standing on the edge of a cliff, if you look really closely historically at what’s going on, we’re right on the edge of a cliff right now. And so we’re safe, they haven’t fallen off the cliff, you know, no problem as far as that goes, but the risk level just jumped dramatically, because we’re so close to the edge of the cliff. And so what I’m going to do is put on a parachute, I’m going to sell some of my more volatile positions or pair them back, and I’m going to get some inverse and some T bills and things like that, that are basically my parachute.
And I want to be able to use that to buy back in at some lower point, if if the market does go off that cliff. If we don’t go off that cliff and we back off, then I’ll kind of get rid of the parachute because you don’t need it, and move back into sort of a normal thing. So theoretically, no matter how old you are, if what I’m talking about happens, in other words, if the market goes down, 35%, you know, another 15%. From here, I don’t know if you’re 20, or you have a five year outlook or not. If I’m right, you won’t have to suffer that extra downturn on socks, and we can buy it back at a lower point, right? That’s the theory doesn’t always work. But more often buy and hold works, right? So that’s why, you know, generally speaking, if you have a longer term outlook, that that works, you could you could keep it as far as that goes or continue to buy it. I personally have a very long term outlook and I personally will buy all kinds of things all the way down. And you know, just because I don’t need the money, I plan on working till I’m 75 you know, that kind of thing. And so, but I’m a much more aggressive investor personally than any of my clients are. And that’s, that’s okay.
Easan Arulanantham:
Yeah, it’s you never want to catch a falling knife. You know, you may grab the handle, but you may also get the blade. That’s gonna not be a fun experience.
Tom Vaughan:
Yeah, that’s right. It’s good. Good analogy.