Jeremy Witbeck: 
Welcome, everyone. This is Jeremy Witbeck, a partner of Polaris wealth advisory group. And I have with us Jeff Powell, our managing partner and Chief Investment Officer Jeff feels like it’s been a long time since we last spoke.

Jeff Powell: 
back. No, absolutely good to be back.

Jeremy Witbeck: 
Yes. So today is going to be a fun day, we’re going to change it up a little bit and go over some of the technical terminology that I think you and I take for granted, just having an understanding. And so this is something that you’d mentioned would be a fun idea. And I’m looking forward to just going through some of the terms that we use, and really what the meaning is, and why why it’s used the way that it is in investing. And I know this is one of those topics that can be a little bit dry, certainly not something that everyone’s probably chomping at the bit hearing that description. And so what we’re going to do is we’re gonna toss in some more serious words, a little bit more technical, with some of the more fun words that are thrown around our expressions to really get a feel for what people really mean when they say certain things. So on that note, we’re going to start off with a little bit of the more serious side, and then let’s kind of weave in every other term, some of the more fun expressions that are that are stated. So that let’s go ahead and start off with the one that you hear a lot about, which is standard deviation. So what is standard deviation?

Jeff Powell: 
Well, standard deviation is a mathematical term. And when you’re looking at standard deviation, what you’re really trying to determine is the predictability of the return of the investment that you’re dealing with. So, you know, if we’re going to be teaching a math class, what you want to do is look at a bell curve, and draw a line right to the middle of the bell curve. And 68% of the one standard deviation within it is is found there. So when you’re looking, again, at having higher standard deviations, or lower standard deviations, what percent falls within that first standard deviation is really what they’re asking you for. So if you’re a, you know, a 16, standard deviation and a 0%, return are saying, Okay, well, you got a, you know, within one standard deviation, you’re going to lose 16%, or make 16%. better way of describing it to me Oh, and again, you can go up two standard deviations, and that’s capturing 96% of the, of the probabilities of where you’re going to fall into things and so on. But, again, the higher that number is that standard deviation number, the harder it is to predict. So imagine, again, as a fund manager, your average return is 10%. And your standard deviation is 30. It means that within a 68% probability, you’re either going to be 40% return, or a negative 20, somewhere in that range, and somebody had a standard deviation of five on the other hand, and with a 10% return, they’re a lot more predictable. And so again, you’re looking at that kind of context. 10% return, you know, that within a 68% probability that you’re going to either be 15, or down as low as five, so more predictability and so on. But the analogy that I kind of have tried to throw out is, you know, again, we love using driving analogy. So imagine driving on the highway, going 100 miles per hour, and you turn your steering wheel, maybe just an inch or so to the right or left, you might drive off the highway, if you’re going 20 miles per hour, and you move that steering wheel, and then on either side, you may even change lanes. So the faster the portfolio is, the higher the standard deviation, the more the variance is of the end result of what you’re trying to predict, which means that it’s harder to predict it, which means that it’s harder to hit your target financially, when having a higher standard deviation investment.

Jeremy Witbeck: 
Just that’s a great explanation. Thank you so much for going through that. So here’s a one that’s actually very timely, given that we’re in the month of January, and that is the January effect. What does that mean? What are people referring to when they say that?

Jeff Powell: 
Well, again, what what people do in the financial industry is they try to, to create biases based upon what’s been working. So the January effect is kind of a as a as January goes, so does the rest of the year. What we’ve found is that, yeah, there have been, you know, a substantial amount of time that when January was positive, so was the rest of the year. But when you really kind of break it down, and you look at the market when the markets are up, you know, historically 70% of the time, and you say oh, well your January is up there for the rest of it’s more than a flip of the coin. So the general effect is not really a great way of viewing the market. So the fact that we’re up so far, the beginning of January and if we were to finish off January is by no means a guarantee that February through December are going to be up as well. But that’s what when people are referring to the general effect and they’re trying to do or try to equate a correlation between January and February through December when the real As a bunch of one.

Jeremy Witbeck: 
Yeah, well, I mean, looking back at last year, I think last year is a great example of that, where if we use the January results in 2019, right, February and March should have been awesome. And with a pandemic, they were anything but and So to your point, I think, sometimes we stretch to make connections there that aren’t necessarily there. So I’m flipping back on the more technical side and a little bit related to standard deviation, and that is beta. So what is beta?

Jeff Powell: 
So beta is a correlation calculation. So again, going back to math class here for a moment, a beta of one means that if the markets were going up, one, your investments are going up one, you can either do it on investments, you can do it on your entire portfolio by doing a weighted average, which is something that we do quite a bit. So when you have a high beta above one, you when the markets are going up, it should be going up more, if a beta of less than one, than it should be going down with it, you can have negative beta, and you can also have zero beta, meaning that there is no correlation to the market, or it’s negatively correlated. So if the markets are going up, that investments gonna be going down, it’s just not going to be going up as much, which is where again, the below one mark. So what we use beta for really is an understanding of the risk within our portfolio on a weighted average. So imagine that you had all your investments that you had in your portfolio had two betas. So that means that again, the markets up 1%, you’re up 2%. But let’s say that we wanted to take and not very many of our clients have 100% of their equity, or have 100% of their money in equities. A few do but all but imagine we are, you know, in a balanced situation, we want to be 70%, stock 30% bonds. But we’ve got this portfolio that looks like this, and can we go out and buy 70% of the portfolio in stocks, but the beta is two, well, that’s going to be like a 140% investment in stocks. So you could actually lower your exposure to the stock market down to 35%, with a two beta portfolio and have the same price movement, as if you had gone out and bought a bunch of one beta. So again, that’s a bit of an extreme, but it’s a way for us when we’re putting together and looking at our portfolio, if we’ve gotten defensive. So again, our growth and income strategy, which is typically a 6040 split, if we’re sitting 6040, is it getting the price movement of a 6040 portfolio? Or is it more or less, because we need to understand that because again, if we’re sitting there with 60%, and we have a bunch of high beta stock in there, it’s gonna feel like a whole lot more exposure to the stock market than it would otherwise.

Jeremy Witbeck: 
Yeah, Jeff, thank you again, for another excellent explanation. I think the other part that I would add to that is that when you have a properly diversified portfolio, when it’s constructed properly, beta actually starts to become a much better risk measurement tool than even standard deviation. Because of course, you get the zig and zag with the individual holdings and their standard deviation and how it all comes together. Right beta does the best job of measuring that and really helps you understand that if the market goes up X amount or down XML, what’s going to be your overall impact. So once again, great, great answer or a great explanation on how that works. The next one is selling mango waves kind of building on the January effect another one of those rules that we sometimes throw out there.

Jeff Powell: 
Yeah, so it almost is self explanatory. So a mango. So it’s saying to you that, you know, come may 1, the markets are really not going to perform, you should sell and leave your portfolio behind and not invest in anymore. The problem with that and so basically what it’s saying is that may through October, are the worst months of the year and November through April are the best places to be investing. And oftentimes it also will go you know, May through September, though capture five months. But if you were going to look at six months here or there, there have been far too many great May through October’s, we You and I were just talking about the fact of Imagine if you had gone ahead and sold in May of 2020, you’re gonna miss out on a significant portion of the run up in the marketplace, he would have taken your beating. And, you know, with owning the market and February and March, it was recovering in April, and then he would have said, I’m out of here. I’ll see you in six months, and I’ll be investing back on November 1. Just a wise way of doing it. And looking back again, we’re just mentioned the 2020 market but I’m looking at other years mean 2017 up 8% from May and October versus 2.8 for the November through April 2014 was the same way. 2013 was the same way. It’s there historically from the 50s to presence. You would have made a lot more money, and they November through April time period. But again, as much as I’d like to be on a six month vacation, it’s really not a great way of using a strategy with your portfolio.

Jeremy Witbeck: 
Yeah, and Jeff actually had someone bring this up to me fairly recently. And I definitely understand where this comes from. When you look at data that goes back 80 years, I looked at it over the last 10 years. And what I found is that it actually doesn’t really seem to work anymore. And I don’t know if it’s just because the sample size is smaller, or because everyone kind of figured this out, which is what tends to happen with these kind of roles. And when everyone figures it out, they don’t work anymore. But something that, to your point, if you had tried to employ a strategy like that, you probably would have missed a lot of what has been some of the best returning months in the stock market as of late. Alright, so flipping back to the more technical side, and this is one that I definitely hear a lot of active managers talk about. And that’s alpha. Jeff, what is alpha?

Jeff Powell: 
alpha is the value that’s brought to the table and portfolio management. So oftentimes clients will confuse a total return with what alpha is. So for example, the Jeremy if Polaris provided a 12% return, and the s&p 500 was up 10%. Did we do a good job?

Jeremy Witbeck: 
Depends? Yeah,

Jeff Powell: 
it’s a bit of a trick question. Now. Okay. So let’s say that Polaris took twice as much risk as the stock market to get a 12% return. And the s&p 500 was up top. Yeah. All right. Yeah, absolutely. So it took far too much risk in order to get a little bit extra return. Just like you can sit there and say, Okay, well, the markets were up nine, or say they were up 10. Again, and we were up nine. But again, if we took half the risk of the stock market, and we captured 90% of the return, then we did an excellent job. And so that’s where alpha calculations come in. It’s a risk adjusted performance. It’s saying, How I mean, did you bring value? Or did you not bring value to the table with the risks that you were taking? And so again, not an easy calculation for the average person to go out and do themselves, but it’s one that they should be definitely asking about? Because what they should understand is where, you know, is this person bringing value to the table or not? And if they’re not, then perhaps they should index which we’ve talked about in days past?

Jeremy Witbeck: 
Yeah, absolutely. All right. So this is one that may be a little bit more difficult to explain why except, but it’s one that I know a lot of our technical traders have heard before. And that is a dead cat bounce. So what is a dead cat bounce?

Jeff Powell: 
Well, first of all, I mean, how hard of a comment, right? I mean, when you really kind of think of the rules, David behind it. Last year, one of the things I was worried about was dead cat bounces. So what a dead cat bounce is a sizeable drop in the market. And I need to have a rally, which is the bounce part of this. And then you have a further deterioration you have the markets go down even further than they were before. So when we bottomed out in February, and March, march 24, I believe was the exact bottom. Or maybe it was a day beforehand. But anyway, back in the March, when the markets bottomed out, we started to see a big rally. And we talked about this in a lot of our educational pieces that 70% of the time, when you have a watershed type of event, the markets rally, and then they fall off, and they go even lower than where they were before. And that’s what a dead cat bounce is. Basically, it’s it’s, again, a big drop, it bounces up and goes down even further. But again, I really want to research how it came up with a name that it did, because it’s really, when you think about it, logistically, quite a gross description.

Jeremy Witbeck: 
Yeah, and it tells you a lot about the way that investment traders minds work. I don’t know if that’s something that we should be proud of. But it’s certainly an expression that you hear a lot. Jeff, I’m going to go ahead and throw one other more technical term and it certainly relates to the alpha conversation that we had, and that is up capital ratio and down capital ratio. So what is it that that’s trying to explain?

Jeff Powell: 
What you’re really looking at with up capture down capture is, you know, again, it’s it’s a having your cake and eat it too situation. As a taxable manager, though, one of the things that we’re trying to do is to provide downside protection. And so when you’re looking at downside capture, how much are we protecting a portfolio to the downside of the market? And then the upside capture is, are we you know, having our cake and eat it too. Are we actually able to outperform the markets When they’re rebounding. Now again, if you could limit yourself to half the downside and 80% of the upside, long term, you’re going to win and win a very, very big way. The problem becomes is how when you do have an extended up period, and you’re only capturing 80% of it, that eventually the markets will capture back a catch back up to you. So talking about having a 50% downside, 80% upside, is a great conversation piece. But in a bull market, you really want to be greedy and have more than that. So when you’re looking at a portfolio manager, it’s really kind of describing to you, is there tactical nature working for them?

Jeremy Witbeck: 
I liked your point about the the 80%, too, because that’s been kind of the holy grail, if you could get 50% downside 80% upside, right, that’s one that I know a lot of models are built trying to achieve. And to your point, right, we just went on another extended bull market run from really 2009 through today. And if you only captured 80% of that any of that 50% that you mitigate on the downside is probably more than then caught up by the market. And so one of the things I stress into your points is that for tactical managers, you also have to be nimble and adaptive and recognize when things change, you want to change a little bit. And I would argue that our strategies have done a very good job of doing just that, I’m going to go ahead and pick on myself a little bit. And I’m sure I’m not the only one guilty. But I use this phrase a lot, because I think it’s one that really well explains human behavior, and just how emotions and internal biases can get the best of you. And that is that bull markets climb a wall of worry. So what is that saying mean?

Jeff Powell: 
Well, if you look at the markets, and you look at the historical nature of what goes on in any given year, there’s always a reason for you not to invest in the stock market. So really, I mean, we talk about equal opportunity warriors, we talk about all sorts of things where you know, again, people panic when the markets are dropping, and then when they start going back up, then people are like, Oh, my gosh, well, now it’s gone up a lot, it has to correct the gap. So if you look at any given year, and the stock market, there’s probably four or five reasons why you shouldn’t have invested during that market. But yet still the markets go up. So it’s just saying, Hey, you know, bull markets, you know, and again, the average secular bull market last 14 years, the last one we had was from 1982 to 2000. Okay, these are long time time periods. But there are cycles within these time periods as well. And you got bulls and bears there, too. So it doesn’t mean that the markets have to go straight up. But you had the same thing going on in the 80s and 90s, where people were like, Oh, my gosh, how much further can this go up? Well, it was up almost 20 200%, during that time period, million dollar investment would have turned into over $22 million and total investments with dividend reinvestment and so on. Why would you not want to be a part of that? Now the last one was an 18 year time period, like I said, the average is 14. So one of the things that we keep on trying to caution clients about with this whole bull markets climb a wall of worry is that we started our secular bull market in 2013. If we just have an average time period for our secular bull market, now 14 plus 13, is 27 puts us out into the Midway part of the year. And so if we’re looking at it in that kind of context, we really need to be looking at it and understanding that there’s a lot longer way for this to go and not to sit there and feed into you know, the things that go bump in the dark and worry about is that going to have a negative impact. And is that not going to be something that we’re going to actually be able to to withstand for a market continuing to move up. So it’s more of a trying to temper someone’s emotions. I mean, again, we’ve talked many times before about how the average person allows emotions to be the dictating factor with how they manage money, is really trying to call that and say, you know, Jeremy, bull markets come over, right? It’s okay to worry. But that doesn’t mean that the markets are still gonna go up. So be cautious. Understand that. But let us do our job. we’ll navigate it for you.

Jeremy Witbeck: 
And to your point, Jeff, I can think of 100 different reasons on why people wouldn’t have wanted to be invested just about any given year. And yet here we are, where the market keeps compounding in that eight to 10% range, the economy keeps growing. And to your point. I think sometimes we’re our own worst enemy when it comes to being a stumbling block and not participating in what’s been one of the greatest economies in the world through the mean through any recorded history that we have. And so that saying definitely is trying to help us recognize that we don’t want to let emotion get in the way of us being successful. So I think that’s about all the time that we have spent a lot of fun. So what I’d like to do, Jeff is we’ll go ahead and we’ll stop here and And our audience can look forward to a part two, where we’ll go through a few other terms and hear your insights and explanations as to what they mean and how we can better understand the conversations when those phrases are used. So Jeff, thank you so much.

Jeff Powell: 
Thank you

Jeremy Witbeck: 
and to our audience. As always, be happy, be safe and the healthy. Polaris wealth Advisory Group LLC is a federally registered investment advisor. The information statements and opinions expressed in this material are provided for general information only and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security and is not intended as individual or specific advice. It should not be construed as investment, legal or tax advice. before acting on this material, you should consider whether it is suitable for your particular circumstances and if necessary, seek professional advice. Polaris wealth does not offer professional legal or tax advice. All information contained herein is believed to be accurate but accuracy cannot be guaranteed. advisory services are only offered to clients or prospective clients or florists Health Advisory Group LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Diversification does not assure a profit or protect against loss. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris wealth Advisory Group LLC MSA client service agreement is in place