Don’t get carried away by rising interest rates. Instead, consider the impact of interest rates on your retirement plan. Doug reviews fundamental points about retirement planning and how to make sure your money is there for you when you actually need it.
How should rising interest rates affect the way you handle your investments? Money manager Chris Cogswell returns to The Goldstein on Gelt Show and discusses what happens in a rising interest rate environment. Chris also explains how high frequency traders compare to retail investors to the market and institutional investors.
Follow Chris Cogswell and his work at: http://www.prginc.net/. You can also follow him on LinkedIn as J. Chris Cogswell and on Twitter at @JChrisCogswell.
Watch How Rising Interest Rates Affect Investment on YouTube.Read the Transcript
Interview with Chris Cogswell
Chris Cogswell, CFP®, discusses high-frequency market trading and why clear thinking keeps you from making costly financial mistakes.
Douglas Goldstein: Chris Cogswell has been a buddy of mine for several years. He really wanted to talk today about ethnic hole-in-the-wall restaurants. But I said, “Chris, you and I talk a lot about the markets and the economy, and because we’re both involved in investment management, we have sort of our own language and our own type of discussions that a lot of people never get to hear.” So Chris and I were about to engage in a discussion like that and I said, “Let me click on the recorder and let everyone hear the real discussions that we have, minus all of the kind of Wall Street jargon, so that people know that we too are a little bit concerned about crazy markets and what goes on. So, Chris, this is our secret, private discussion, but I have to tell you that probably a few million people are going to tune in.
First, tell me what’s your favorite ethnic hole-in-the-wall restaurant?
Chris Cogswell: Unfortunately, it’s no longer there, but it used to be called “Sari-sari,” which is a Filipino term. It was a Filipino restaurant that had all of six tables, and when you walked in you thought, “Boy, I’m back in a developing country.” The food was great, the people were great, and it was perfect until it closed about two years ago.
Douglas Goldstein: And it’s in the Philippines?
Chris Cogswell: No, it’s in Louisville, Kentucky, practically in the middle of the Midwestern United States.
Are the Markets Insane?
Douglas Goldstein: Getting back to the markets and the economy, I’m finding that my clients are saying, “You know, Doug, they are raising interest rates and the world is insane. What should I do now?” Do you feel a) the rising interest rates and b) the world is insane?
Chris Cogswell: I’m not afraid of rising interest rates. The world is not insane. It’s probably acting rationally underneath. It’s just that nobody sees it, and frankly if you believe in the free hand of the market, it’s probably acting exactly the way it’s supposed to, which is rationally. It’s just that it’s made up of millions and millions of people, right? They’re acting in their own best interest, which is the way markets work, and so I don’t think it’s insane at all. I think it’s normal. It’s just that from a 30,000-foot level, you can’t see it acting rationally. It doesn’t look rational, but each individual underneath is acting as he’s supposed to.
Douglas Goldstein: So you’re a big fan of this sort of free hand of the market thing. It’s actually funny because certainly in the States, when people are talking about this, they’re saying maybe it’s gone too far. Look how a lot of people are really suffering, and the money managers have got all the tricks. They’re trading so fast, no one can even make a move. How do you feel about that?
Chris Cogswell: It’s interesting. I had a discussion with a guy and he managed his money for big institutions. And he found out what you talked about - all of this really fast high frequency trading. In fact, the high frequency traders were getting there ahead of the other big institutions, and so the institutions can’t keep up either. So in a sense, when I was talking with my friend about it, it made sense. At least, it does from my perspective that you shouldn’t even try it. Even the institutions are getting beat up with it. You should actually have a plan, work the plan, and don’t freak out when the markets get a little volatile.
Douglas Goldstein: I feel that you know all that if you are trading, and the speed that you can click “send” to your trade really matters. You’re probably not going to lose because some high tech traders are ahead of you. The real problem is how you can possibly make decisions that quickly and that well. And, you know, the academic studies show that people who make quick decisions without thinking clearly just end up really messing themselves up.
Chris Cogswell: Exactly, and even the corollaries as to what I just said, are that even the institutions do it badly and really there’s really no argument for kind of trying to beat it.
Douglas Goldstein: Do you think that applies here, or it just doesn’t?
Is Tactical Trading a Good Idea?
Chris Cogswell: No, not at all. It’s interesting that when you manage portfolios, you really want to say, and I can feel comfortable saying, “I’m going to have a strategy, not a short-term trading approach. I’m going to have a long-term strategy, which is at least 12 months out, and I’m going to feel comfortable that I’ve got good resources and a good plan.” Clients know how things are hopefully supposed to work.
Douglas Goldstein: Why do you say 12 months?
Chris Cogswell: Once you get below 12 months, that’s a tactical way in business. And that’s when you start getting into the high frequency stuff. If you say, “Well I’m going to go shorter than that,” why wouldn’t you all just go all the way down to the shortest nanoseconds? Why do anything in six months when somebody else can beat you to that? So you very quickly work yourself down to lowest common denominator, which is as fast as you can get, and that’s as we discussed not where we want to go.
Douglas Goldstein: So you and I, I think, are definitely on the same side of the table as far as trading because I’m also not really digging to try to trade and I’m not into the tactical thing. In fact, I always like the comparison because I wrote this book about chess and investing. I wrote it with a woman who is a world chess champion, Susan Polgar, and we once played a blitz game. A blitz game is where you get five minutes to decide on your whole game. So Susan said, “Doug, take five minutes and give me one minute.” And it meant that I had five minutes to play my whole game and she had one minute to play her whole game. Obviously I lost, but she had a whole game, because her timer went from one minute to about 43 seconds, meaning she was able to do a whole game in 17 seconds. I think that’s a good comparison between institutional tactical traders and normal people. If you can’t compete, then don’t even get involved in the game.
Chris Cogswell: But here is something interesting. On a conference call a couple of weeks ago, one of these big platform guys out there who reviews hundreds and thousands of managers, institutional managers for money, found that even institutional managers who tried to do tactical management last year failed miserably. So it’s one of those things. Again, it gets back to the point. Tactical trading doesn’t really work even for institutions a lot of the time.
What About Cash?
Douglas Goldstein: Chris, when you manage portfolios, you often move to cash, which seems to me like a tactical decision in order to protect from the downside. Am I letting people in on a secret that they shouldn’t know about?
Chris Cogswell: No, not really. I think that what we are doing is recognizing the fact that volatile markets tend to go down more often than not. So we are not running away from the market. We are actually understanding the market better by saying that if the volatility is going up, the market will probably head down more. So we’d rather not be in a down market. We are still participating in the market, but just in a different way.
Douglas Goldstein: What does that mean? Are you still participating if you are in cash?
Chris Cogswell: Well, that’s still part of the market.
Douglas Goldstein: So you define cash as a strategic asset as opposed to other people who say, “Gosh, the cash is sitting in a bank or in a money market earning zero.” They don’t see that as a strategy. They see that as a non-investment. Is that a fair differentiation?
Chris Cogswell: I think that’s exactly right. It’s a part of any strategic plan or portfolio you do for any client. When you do financial planning for an individual client, you say, “Do you have your emergency reserves?” Do you need to set some aside for a specific event in the future? So cash is in fact a strategic asset. It always has been. Just because it’s not in the market, i.e. it’s not buying any listed bonds or securities or funds, it doesn’t mean it’s not invested. It means that it’s a strategic piece of any plan in any portfolio. So we use it to manage risk, and that’s in any respect what you should do.
Douglas Goldstein: Do you think the average investor managing his own portfolio should use it that way also? In other words, let’s say a guy says, “Wow, December and January were crazy markets.” He sees the volatility and decides to go into cash. Is that the type of decision that someone who’s managing his own portfolio should make?
Chris Cogswell: Here I’m going to argue for institutions that can do certain things better than individuals. The fact of the matter is that most people shouldn’t say, “Well I know what I’m doing with “timing” and I’m going to pull things in and pull things out. I can monitor and manage volatility globally.” In other words, they think they know what’s going on in Asia, Africa, the Middle East, Europe, and United States, and they can monitor those levels. They’re taking the temperature on what the market does when it opens that day or in a given couple of days a week. That’s a very different thing. Most people, in fact, will also do worse in the market short term, medium term, and long term. So the difference here is that we’ve got a track record of saying, “We can see over long periods of time with volatility management at a certain sophistication level that enables us to outperform.” So they are two very different things, and it has to do in reality with sophistication level.
Why Can’t Individual Investors Manage Their Money Like an Institutional Manager?
Douglas Goldstein: So you are saying, and just to be very clear, that for regular people managing their own accounts, using cash or any investment strategy they’re simply not going to be able to do it at the same level than an institutional manager can. Tell me why.
Chris Cogswell: Frankly, it’s sophistication level. If you have an institution, for example in our case, our particular partner, which has offices in Asia, the U.S., and Europe, they are monitoring volatility and their entire goal is to manage the volatility to a certain level. The average investor says, “Well, I don’t feel really comfortable, so I’ll put more in cash.” But they’re not necessarily rules-based and they don’t have enough information to really make the informed decision that over a long period of time, will give them a successful track record.
Douglas Goldstein: What do you think of the scenario that if interest rates go up even a little bit, the U.S. is not going to be able to pay the interest on the treasuries that are coming due all the time, which could lead to a total breakdown in the U.S. government and economy?
Chris Cogswell: I think there is some validity to that concern on paper. I think the average person who runs a company or an organization, or even his home, will look at that and say that’s a real problem. The U.S. is a slightly different sort of a place. Basically, it prints its own money and it is for the moment still the reserve currency of the world. Normally that’s what will happen and as the U.S. is its own bank, there is a tension of where that will play out. I’m not sure that’s actually going to be the case, although in black and white terms, that is what you would expect to happen.
So there is a real concern about that. I think that’s one of the reasons that interest rates have not gone up prior to this. But interestingly enough, I saw some research a couple of weeks ago that said that when the United States got rid of quantitative easing, starting a couple of years ago, they brought down all of machinations with the balance sheet of the United States, in fact including the 25 basis point. The interest rate increased, as we just saw in December. There’s actually been a tightening of 325 basis points in the last two years. It’s not just 25 basis points. In a sense, the debt service potential has gone up dramatically already, even though it’s actually technically enlisting a 25 basis point increase.
Douglas Goldstein: Tell everyone how they can follow you and follow your work.
Chris Cogswell: They can go to my website at www.chanceryfa.com. I am on LinkedIn as well, as Chris Cogswell. They can also go to our corporate website, which is www.prginc.net Portfolio Resources Group.