Get His Take on the Recent Market Selloff plus Diversification Strategies for this “Kitchen Sink” Investing Environment
Ric Edelman: I'm very happy to welcome on to the program John Mayer. He is the chief investment officer of Global X ETFs. He and his team, craft Global X ETFs Investment Strategy. John, welcome to the program. Thanks, Ric. You know, in this economic environment, there's so much volatility, so much concern about where the economy is headed. We all know the situation with inflation and interest rates and the supply chain problems, the war in Ukraine, lingering COVID on and on and on. So I'll ask you the question, is this time different?
Jon Maier: So, Ric, every time it's different, it's true. Every period has their own wrinkle. You know, when have we lived through a pandemic? When have we lived through a period where the Fed is going to remove liquidity? When have we lived in a period where there's a war in Europe and now, we have supply chain issues, obviously, with restarting the economy, but then further lockdowns in China. So if you look back to different periods, say, from 2009 to 2021, during that period, we had record high profit margins, multiple expansion. And this was all fueled by low interest rates. And this all led to the biggest bull market in our history. Corporate profits increased and performance followed, both on the S&P and the Nasdaq. And this was all because of low interest rates and that low interest rates was good news for returns. And then the worst news of all, the pandemic. And now that central banks around the world are on the track to raise interest rates and shrinking balance sheets, a new thought process has to be embedded. I think the market is going to be a lot more focused on business models and less focused on kind of broad exposures. This time is different.
Ric: So if that's true, if this time really is different, and I think there's a lot of credibility to what you're describing, traditionally, investors have said, I'm going to reduce my risks or manage my risks by diversifying. I'm going to own a wide variety of asset classes stocks, bonds, real estate, oil, commodities, foreign securities, government securities and so on. And yet what we've noticed in the past 6 to 9 months, everything everywhere is falling in value. We saw that happen in 2008. Diversification doesn't really seem to be helping reduce the risks very much. What's your reaction to that?
The 60/40 Portfolio and “Kitchen Sink” Diversification
Jon: I mean, that's a fair statement. So typically, at least over the past 30 years, we all have been accustomed to the 60/40 portfolio. But what do you do when stocks and bonds are correlated? And that's the situation that you have right now. So as financial conditions tighten, traditional fixed income remains positively correlated to stocks. And that's problematic to find. Diversification and the correlation between bonds and stocks is highly variable depending on the macroeconomic conditions. So if you look to the past, say, in the seventies and eighties, they had a strong positive correlation. And since that time, because of the interest rate environment that we've been in, they were a nice complement and provided diversification. So right now there's a conundrum. How do you effectively diversify? And for a period of time, energy and commodities has proven to be a fairly decent diversifier, particularly you've had the war in Ukraine has put pressure on the energy markets when the Nasdaq is down close to 4% and the S&P is down 3%. And because of the CPI numbers being higher than expected last week, everything is selling off. Today I would say everything is correlated. It's more difficult, but today it's more like a kitchen sink. Over the coming days, we'll have some more clarity in terms of what sectors we're going to focus on and will benefit in the current environment.
Ric: So Global X is very well known for being one of the most effective, one of the largest, most successful ETF providers in the industry of dozens of different ETFs, many of them thematically focused on specific themes and investing in the marketplace. What's the best way for investors to manage their investments in this marketplace? How do they reduce the risks? How do they manage through this most? Ideally, what's the best way to get the most value from their investment strategy today?
The Flexibility and Diversification of ETFs
Jon: Well, first of all, ETFs in general, I think are the ultimate fintech instrument. They are diversified. And if you want to get a little more focused, you can get thematic exposure. If you want to be exposed to cloud computing or cybersecurity or disruptive materials. And within those ETFs, you're also getting a certain level of diversification. Perhaps value is more in favor right now, and you can get that exposure with an ETF if your time horizon is longer and you want to be exposed to some disruptive technologies, we have ETFs in that particular area. Also, if you think commodities are a diversifier, whether it be gold or uranium or some energy exposure, MLPs that provide income in this environment, that's another way to diversify your overall portfolio. So at Global X, we have whether it be thematic, which are more growth and momentum oriented, or you have some income oriented which tend to be kind of more on the value spectrum.
Ric: So what's the final piece of advice at the end of the day? Bottom line, this is the final message that I really think investors need to hear about today's investment marketplace.
Jon: Well, I do believe that if you stay diversified over time, markets will recover. If you look at historically things, the S&P 500, the Dow, the NASDAQ, while take some time to recover after the dot com bubble. Overall, if you're holding a broad exposure, markets do recover. So while I do think it makes sense to gear towards the particular environments that you're in, I do believe that staying the course is the best strategy over time.
Ric: That's Jon Maier. He's the chief investment officer of Global X ETFs here on The Truth About Your Future. To learn more about those ETFs that Global X offers, just go to Global X ETFs. Com. Jon, thanks so much for joining us on the show today.