Turning emotion into investment discipline

(upbeat music) You're about to hear my conversation with Gleb Savitzky, Vice President and Portfolio Manager on McKenzie's Multi-Asset Strategies Team. In today's episode, we'll explore how portfolio design can help investors overcome behavioral pitfalls and stay invested for the long term. Using ETF portfolios and asset allocation ETFs as our case study, we'll look at how smart design, emphasizing discipline, diversification and automation can make all the difference in investor outcomes. (upbeat music) This podcast is for informational purposes only. Information relating to investment approaches or individual investments should not be construed as advice or endorsement. Listeners should seek professional advice for their situation. (upbeat music) Welcome to The Invested, a podcast for McKenzie investments. I'm your host, Karna Matthews, Vice President of ETF Product Strategy. Investor behavior is one of the biggest determinants of long-term performance. Yet it's often the hardest thing to manage. From chasing performance to panic selling and downturns, emotions can derail even the best investment plan. To discuss how portfolio construction can help investors overcome these behavioral traps, I'm joined by Gleb Savitzky, Vice President and Portfolio Manager on the McKenzie Multi-Asset Strategies Team. Gleb, welcome to The Invested. - Thank you, Karna, great to be here. - Fantastic, well, let's start with the big picture. There's a lot to unpack here on our conversation today. Why do investors tend to fail more often because of behavior rather than the simple pullback or drawback of picking the wrong stock or the wrong fund? - Yeah, so when I think about behavior and investing, it's an incredibly wide topic with a lot of research that has gone into it, especially in the past 20 years. So I think to narrow the discussion, I'll focus on specifically about how fear and greed really drive suboptimal decision, especially when there's periods of high volatility. So as we know, when there's periods of volatility, that's usually accompanied by high periods of market downturns. And this is when often the news comes out and you hear all these headlines about how the TSX is down the most in three years or it's the largest drawdown seen in 10 years. And unfortunately, this is when I get questions from my parents about my job of what is going on. I looked at my account and I see that not only have I lost returns for several months, but also potentially years of returns are gone. And emotionally, that is when you want to do something. You see a negative return on your account and it compels you to act. Now, of course, we all know this is usually not the greatest time to act. This is when fear is driving your decision. And of course, we know markets tend to revert when you always hear markets hit new all-time highs. But one aspect I don't think that gets talked about enough is even if you are good at timing when to leave the market, when do you go back in? And on the multi-acid strategies team, part of my responsibilities is to select managers. And these are discussions we have quite often. And quite often the story I hear is that when the markets are down, we'll get back in after the economy improves or the catalyst that's driving it is gone. And on the surface, that sounds very rational and logical, but let me give you an example. Though during the global financial crisis, the market bottomed on March 9th, 2009. However, if you were to look at economic data, such as US unemployment rate, US unemployment rate actually peaked in October, 2009. Now, what I did was I took a look at what did the S&P 500 return during that time? And since the bottom up till that period, it was a 55%. So just simply waiting for the catalyst to even hit its peak. I'm not even talking about the decision of has the data turned over. The market has already looked forward and is looking ahead. And if this is hard to do for professional investors, it is definitely very hard for the average investor. So not only does fear impact when you exit, but I even find people become comfortable not being in the market and getting back in is also very difficult. So then the next question becomes, well, what do you do about it? I think there's two ways. One is of course to have a process that was designed when you didn't have an emotional time driving your decisions and also have the discipline to follow that process. - Those are really great insights. And yes, fear and greed, we are all guilty of it, not just your parents, my parents. I myself get into it certainly into those moments that as you say, even as professionals, have to remind ourselves of our investing principles and to stay the course. So that's a great introduction to our conversation today as we start to talk about discipline through design. So let's spend a few minutes on that. How can portfolio design, especially more automated solutions, you talk about sort of the legacy and history of bounced funds in this country, we've seen automated solutions like ETF portfolios and asset allocation ETFs evolve here in Canada. How can these kinds of solutions help enforce that discipline that you spoke about earlier? - Yes, I think the main feature is just simple rebalancing. You know, that's talked about often, but one important aspect of rebalancing is that what it does is if let's say equity markets go up, that means now your equity weight is higher than your target. So what it does, then you sell them and buy fixed income. Conversely, if the equity market is down a lot, then you buy equity. And so this is a contrarian type strategy, which is the exact opposite of what I just said, a fear of selling when you're down. So you're actually fighting that exact emotion by doing the opposite by something as simple as rebalancing. And one thing I did when I was preparing for this podcast, I plotted the top and bottom returns of the S&P 500 per day. And of course, when you think about the worst days, they happen in the global financial crisis during COVID, even liberation day happens there. And the best days though are also during those periods. The best days, single day returns are during COVID, during the financial crisis, and during liberation day right after that as well. So this is where rebalancing helps. It does the opposite. If equities are down a lot, it buys. If equities are up a lot, it sells. It really works well in periods of high volatility because it's a mean reversion type trade. Now, this type of rebalancing is built in directly into our ETF portfolios and asset allocation ETFs. And because we have a systematic way to do this, we have a process we follow that's not just looked at daily and frequencies. We also have third-party oversight to make sure we follow it. Then we can create outcomes that are forecastable and B, then they allow the advisor to plan for the long-term goals. Because if you do not do something as simple as rebalancing, a portfolio's weights can drift materially over long periods of time and that can really create different set of outcomes for the investor. As an example, you can actually have equities go up a lot and they can have a great amount of return, but you can also have the opposite. And that's something really that we focus on in the multi-asset strategies team. We do that when we look at our own products. We do that when we evaluate managers. Just because someone had the highest return, we ask why is that? Is that because there was a risk management issue? Because if you have the highest return, you also could have had the lowest return. And rebalancing really helps these portfolios have a defined set of outcomes. - Yeah, thank you for underscoring the importance there of rebalancing and something that can often be a challenge when you are investing in individual ETFs, for example. And we've seen many advisors now in Canada really benefit from the almost 1600 ETFs now available to them and building portfolios with various individual building blocks. Now, some advisors through their dealers may have tools that can help them in that rebalancing, but many don't. So let's talk a little bit about this sort of modern portfolio construction view and the access to all of these wonderful tools that our advisors have today. There's factory ETFs of all sorts. You've got lots of thematic ETFs. Certainly a very high number of active ETFs now here in Canada with almost 35% of the total ETF AUM in Canada as an active ETFs. How do these individual building blocks fit alongside something like an ETF portfolio or an asset allocation ETF? How can all of this work together effectively for advisors? - Well, first of all, I think it's great that there's so much choice for the advisors, the more the better. And on the multi-asset strategies team, our goal is to take all of these many different tools and to combine them into a standalone solution that the investor can hold as a core holding, which means it can be up to 100% of any client's specific holding. We are the ones that take a look at the ETF universe. We combine them, we rebalance them. We really look at the portfolios a whole because there's many ways to get a similar exposure using all of these different ETFs. So we really like to look at the top portfolio and we really want these ETF portfolios and asset allocation ETFs to be used as a core holding. But of course, if advisors or someone has a certain opinion about a certain factor or manager or country bet or whatever it is, these are complementary. They can combine these ETF portfolios used as a core, but also add exposures that they particularly like, these are really diverse set of tools that can be used to achieve anything you want. These are just another tool in your toolbox and you can use 100% of it or as little as you need. The other benefit about these portfolios that because they're very core, they are quite liquid. So it's also very easy to enter and exit these portfolios. - Great points. And yes, we've even seen some advisors use these kinds of mandates in rebalancing in the sense that they're moving from perhaps some active managers to others and they don't want to be out of the market. So these can be very efficient tools to stay equitized, to stay invested in the market while you might be allocating to other places in the world through different managers or through McKenzie. So appreciate that perspective. If we spend a little bit of time now on just generally these ETF of ETFs or funds of ETFs that we've continued to see evolve maybe 10, 15, 20 years ago, advisors were primarily looking at this kind of access through a balanced fund, although different. But this kind of rebalancing of multiple exposures, multiple ETFs in a portfolio is very much institutional-like, right? So we've seen this democratization of exposure for advisors, including in the form of structuring of product. So talk to us a little bit more about that. How have these sets of tools evolved? You know, how are they similar or different as well to traditional balanced mutual funds? - Right, so I think if you just focus on the balanced funds, balance funds, including we on our team manage some balance funds tend to be really focused around an equity manager and a fixed income manager. And they really tend to be tailored around a certain exposure manager style or country. So they're really used to be, if you like one of a certain thing, you can get a lot of it. These asset allocation ETFs are much more broad, they're much more core from their asset allocation. And it really tailors to much more an institutional focus, as you mentioned. And myself, I know people that work at all the major pension plans that manage money for Canadians, people on my team have come from those areas as well. So they have managed money for Canadians. And those pension funds will have teams that cost millions that do this rebalancing, that look at the exposures. And now this is all something that's available in a standalone solution that an advisor can take. And they don't have to worry about if the exposures are out of line, they don't have to worry about if equity fixed income mix is out of line, they don't have to worry about if new ETFs are coming in, because we're always analyzing the universe. So that is all being done for them that has large teams being done in the institutional world. So it's really helping them access something that they can buy and hold and not really worry about the investment aspect. - Yeah, that's great. The value proposition as well for advisors, can you give us your thoughts? As you manage the ETF portfolios, you speak to advisors on a regular basis in terms of how these types of solutions are being used. Can you tell us a little bit more about how that value proposition of the advisor is evolving and how these kinds of products can really help with that value proposition? - Yeah, so I think we're sitting in 2025 and this wouldn't be a podcast if AI wasn't mentioned. And AI has really brought a lot of information to the hands of the clients. So you don't really need the advisor to help them from more of a knowledge gathering. And the investor knows roughly what is the correct thing to do. And these portfolios really kind of help you do that. I think where the advisor can really help is exactly on what we started this conversation, the behavioral aspect. I think we all know that selling equities at the bottom is not the right thing, but it's not driven by rationality. It's driven by emotion. And I've heard some advisors call themselves almost psychologists, really helping their clients in their unique situation, whether it's tax planning, estate planning, and of course the behavioral aspect. So if they're not worried about the investment because we take care of that, we look at the portfolios daily, we make sure all the exposures are online. They can focus on the emotional aspect, which is just as important and can have an extreme input into the final wealth of the client. - Fear and greed, as you said, managing fear and greed. Well, you've provided us a lot of great insights today. We've got one last question for you in terms of our wrap-up on our discussion. Your one key takeaway for advisors, investors, for our listeners in, for advisors in helping their clients build portfolios that they can stick with and for investors to stay the course. One key takeaway. - I think it all goes back to managing that fear and greed, and that's the discipline to follow a process. And I think these asset allocation ETFs and our ETF portfolios have that process that creates that discipline. And it's a solution that can help them achieve their goals for their clients. - Vlad, thank you for sharing your insights today. You've helped us see how thoughtful design through diversification, discipline and automation can turn portfolios into tools for better behavior, not just better performance. That brings us to the end of this episode of The Invested. If there's a topic you'd like us to explore in a future episode, please reach out through our blog or find us on LinkedIn. Until next time, stay invested. The content of this podcast, including facts, views, opinions and recommendations is not to be used or construed as investment advice and is not an offer or an invitation to buy or sell any security. The content of this podcast should not be relied upon for any purposes and McKenzie Financial Corporation is not responsible for any reliance upon it. 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