We chat with renowned financial advisor Michael Kitces at the Morningstar Investor Conference in Chicago.
Kitces answers a big question: Is the economy worse than we think? He explains that a few big companies like Nvidia, Meta, and Alphabet are holding up the S&P 500. But this doesn’t mean the economy is bad. It’s common for a small group of companies to drive the market. Since it’s hard to predict which companies will do well, he stresses the need for diversification.
Kitces tells us to focus on long-term growth instead of trying to time the market. He shares a famous quote from economist John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.” This means it’s better to invest broadly and wait for the market to grow over time.
Kitces also says that career development is important. He believes boosting your income through career advancements can have a bigger impact on your financial health than trying to get the highest returns on your investments. He says, “Spending more time focusing on my career and getting a raise… will actually be more meaningful than trying to improve the returns on my own money.”
We discuss the importance of index investing and proper asset allocation. Kitces advises owning a diversified portfolio that includes international and small-cap funds. Even if these funds aren’t performing well in the short term, diversification helps spread risk and capture growth from different sectors and markets.
Kitces talks about the cyclical nature of markets. Some people worry that the market will go down just because it’s been up for a long time. He explains that markets don’t “die of old age.” Many factors influence market cycles, and it’s hard to predict when a downturn will happen. This reinforces the idea that staying invested and diversified is usually the best strategy.
Finally, we talk about inflation and interest rates. Kitces explains that it’s hard to predict when inflation will return to the Fed’s target rate of 2 percent. This means that interest rates might stay high for a while. It’s important to keep a long-term perspective and not make drastic changes based on short-term market movements.
This episode offers practical advice on investment strategies, the importance of diversification, and why focusing on your career can be more beneficial than trying to outsmart the market. Kitces’ insights help anyone who wants to reach financial freedom.
Timestamps
[Note: Time codes will vary on individual listening devices based on advertising run times.]
1:23 – Discuss becoming a famous financial advisor.
1:50 – Talk about Michael’s keynote at Morningstar Conference.
2:08 – Discuss the role of a small number of companies in holding up the S&P 500.
3:28 – Explain historical trends of a few companies driving market returns.
4:06 – Discuss the unpredictable nature of markets.
5:11 – Discuss NVIDIA’s role in AI and cryptocurrency.
5:34 – Explain how some companies act as proxies for broader economic trends.
6:12 – Confirm the common phenomenon of a few companies driving the market.
6:52 – Emphasize the importance of diversification.
7:38 – Discuss historical changes in dominant companies.
8:27 – Predict the future performance of large-cap value stocks.
9:24 – Discuss the cyclical nature of growth and value stocks.
10:19 – Caution against market timing.
11:27 – Explain the irrationality and efficiency of markets.
13:23 – Discuss the importance of broad-based diversified portfolios.
14:03 – Talk about the aggregate growth of markets over long periods.
14:46 – Explain how index investing works.
16:26 – Discuss the role of international and small-cap funds in diversification.
17:05 – Address listener questions about international and small-cap funds.
18:10 – Discuss the impact of regulatory frameworks on AI development.
18:45 – Talk about comparative advantage in the global economy.
19:04 – Discuss the benefits of trade and specialization.
20:13 – Predict economic success without AI development.
21:05 – Explain how more people and productivity drive economic growth.
22:23 – Emphasize the importance of diversification in the portfolio.
24:18 – Explain the zig-zag nature of different investments.
25:22 – Discuss the impact of AI on small-cap companies.
26:09 – Highlight niche markets and specialized AI tools.
27:03 – Predict future success of specialized AI companies.
28:18 – Discuss the range of successful companies in different sectors.
29:03 – Explain the importance of economies of scale in AI.
29:42 – Talk about the variety of AI applications in different industries.
30:20 – Emphasize the breadth of the economy beyond just tech.
31:11 – Discuss emerging markets and their potential for growth.
32:11 – Explain the demographic advantages of emerging markets.
32:49 – Discuss the risks of political instability in emerging markets.
33:30 – Highlight the impact of global trading partners on economies.
34:13 – Discuss the importance of geopolitical factors in investing.
34:42 – Address country-specific investment bets and risks.
35:06 – Explain how ETF structures allow for specific investment strategies.
36:27 – Caution about the time and effort needed for detailed investment research.
37:02 – Emphasize the efficiency of markets in pricing opportunities.
38:18 – Discuss the challenges of beating the market.
39:34 – Explain the inherent risks in individual stock investments.
40:01 – Address the cyclical nature of markets and investor fears.
41:24 – Discuss the impact of economic cycles on market predictions.
42:58 – Emphasize the difficulty of market timing.
44:18 – Talk about the importance of focusing on career development.
45:01 – Highlight the long-term benefits of career growth over investment returns.
46:15 – Discuss the potential of earning power as a personal asset.
47:07 – Emphasize the value of career investments over small investment gains.
48:14 – Address the benefits of seeking raises and promotions.
49:21 – Discuss the impact of career choices on financial outcomes.
50:37 – Address the challenges of career-related decisions.
51:30 – Talk about inflation and wage growth.
52:19 – Predict the persistence of inflation and high interest rates.
53:08 – Discuss the relationship between inflation and economic slowing.
54:16 – Compare inflation trends between the U.S. and England.
55:11 – Explain the complexity of the U.S. economy and interest rates.
56:23 – Discuss the difficulty of predicting inflation rates.
57:12 – Address global inflation and its impact on the U.S.
58:20 – Explain the long-term impact of global economic trends.
59:32 – Discuss deflation and its risks compared to inflation.
1:00:27 – Highlight the dangers of a deflationary spiral.
1:02:11 – Discuss the cyclical nature of markets and the difficulty of predictions.
1:04:01 – Emphasize the importance of long-term investment strategies.
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