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Individual investor is ‘a force to be reckoned with’: strategist

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Yahoo Finance’s Myles Udland and Brian Sozzi break down today’s market action and outlook with Liz Young, SoFi Head of Investment Strategy.

Video Transcript

MYLES UDLAND: Let's talk more about the setup for markets right now. Let's bring in Liz Young. She is the head of investment strategy over at SoFi. Liz, great to talk with you once again. So let's just kind of start with the market here and a year that I think we came into, and folks were saying, OK, you know, maybe it'll be another good year, certainly more volatility. We haven't even had a 5% pullback in the S&P 500. How surprised have you been by-- at the index level, at least-- kind of the calmness of this backdrop we've seen?

LIZ YOUNG: Yeah honestly I don't know that it's been a surprise that it's been calm. I think the magnitude of this rally has been a little bit more of a surprise. I'm glad that we've been able to squeeze so much more out of it. And now the question mark is, OK, in a year where we haven't had a 5% correction-- it usually happens. There have definitely been years where it hasn't happened, so it's possible that we get all the way through this year and we don't have a 5% correction.

But this is when people start to scratch their heads and say, OK, are we due for it because it hasn't happened yet. And I wrote about this in a piece that'll come out today. We're not necessarily due for anything just because it's a certain time in the calendar, it hasn't happened for a certain amount of time. But what you do have to look at going into fall is that there is that sort of proverbial wall of worry that we're going to have to climb. I think that we can climb it just fine.

It's more about, are there investors in the market that are going to be able to withstand some of that worry, things that maybe they haven't seen before, things that are going to happen in Washington, debates that are going to happen in Washington. And there's a lot of newer investors in the market, so I hope that they're ready to withstand some of those question marks.

BRIAN SOZZI: Liz, to that point, do you think those newer investors are prepared to handle any bumps in the market?

LIZ YOUNG: I think they're prepared to handle bumps in the market that they've seen before. So there certainly have been volatile moments. We've had pretty big rotations in and out of growth and value this year, and what you saw in 2020 was really that concentrated bets paid off, which is something that we as long-term investors don't usually talk about. In 2021, it changed and diversification paid off because there was a lot of flip-flopping, right?

There were cyclical sectors that won part of the time, and then it would go back to growth sectors winning. What I think is going to be a challenge for some of the younger and newer investors is that we have some big news coming out of Washington. We have to go through a debt ceiling debate. We have to go through a budget debate. That's going to include tax hikes.

We're going to start hearing from the Fed about tightening and tapering, and that's something that, if you got into the market in the last 18 months, you haven't been through yet. So we're going to have to learn what market reactions look like in those times. Generally speaking, when there are prolonged debates in Washington and we knock up against that debt ceiling, the market doesn't like it. So it's possible that we see an uptick in volatility. It's possible that we see a little pullback.

But I would point out a pullback is OK, and honestly when we have times like this when we've hit new highs and we're at a record number of new highs at this point in the year, it's OK to have a little bit of a breather, everybody step back, sort of re-evaluate, and then you can let go of some of that trepidation or consternation about, oh my gosh, are we in a bubble, have we gone too far.

MYLES UDLAND: You know, Liz, I wonder with so many new investors in the market, particularly individual names and perhaps not thinking about some of these big macro drivers that you and I are going to talk about here, I wonder if these sorts of dynamics become less important over time if that marginal bid is more of a single stock kind of chaser. And people have no idea what reconciliation means let alone want to trade off of the event.

LIZ YOUNG: Yeah, there are times that I don't know that I know what reconciliation means. Everything gets really complicated.

MYLES UDLAND: We can pretend, that's fine.

LIZ YOUNG: But-- yeah, but no. It's a good point. And it's one worth talking about. So there's two things I would say to that. First and foremost, I think that the second half of this year is a stock-pickers market. And people say that all the time, we throw that term around. What I mean by that is that you have to choose stocks that are quality, so they're positioned to not only withstand some of those bumps in the road, but they're positioned from a competitive standpoint to outperform their peers. And they're positioned from a health standpoint in their financial statements whether that's balance sheet, cash flow, whatever you want to look at to withstand some of those bumps and carry forward even if and when rates rise.

So quality Matters and it should make a bigger difference as stock pickers in the second half of the year. So if you're an investor that's looking at individual names and you're choosing names that are going to win, then you probably do do pretty well. Now to your question of, does that macro stuff matter, in a stock-pickers market, I would say it probably matters less, and we want people to focus more on the fundamentals.

We want investors and the market at large to focus more on fundamentals of the companies rather than macro fundamentals. But it's always going to matter. And you can't really be an investor with your head buried in the sand. So the first half of this year was driven largely by macro factors. And 2020 it was driven largely by macro factors. Those factors are going to come off the table as we move into a more normalized economic regime of not as many asset purchases.

Hopefully at some point we talk about raising rates because we're not in an emergency situation anymore. So the macro still matters. It matters less as we get out of the emergency.

BRIAN SOZZI: Liz, what percentage of an investor portfolio right now should be in crypto? We've seen some pretty interesting moves. Bitcoin has stalled out. That rally has stalled below 50,000. Ethereum, though, has picked up. Cardno has picked up. How do you how do you make those allocations?

LIZ YOUNG: Yeah, well I can't give a prescriptive percentage of what a portfolio should have in crypto. It's going to be different for everybody. What I would say about crypto assets, though, is that they really have come onto the scene. People are really interested in them we obviously talk about them a lot at SoFi. There's a lot of new investors and a lot of excitement around crypto assets.

And it's not something that I think is going anywhere anytime soon. I think it's an asset class that is here to stay. Now, as you're investing in it, I still stand by that tried and true hub and spoke method. So the hub of a portfolio is the core. Those are the things that you want long term exposure to that you always want exposure to. So those are things like US equities.

If you're a long-term investor and you need growth, you're looking at small- mid- and large-cap equities. You could even start dipping your toes in the water of developed market international equities at this point. And then you want to protect that core, obviously, with some of the traditional things. You can use corporate bonds, high-quality corporate bonds. You can use alternatives to protect it as well.

I would consider crypto assets something in the spokes. OK, so there's the hub, there's that core of the portfolio, and then the spokes are where you put crypto assets. And it depends on what your objective is. If you're a long-term holder you can withstand some of the volatility that's going to happen here. Still such a new asset class to the industry, something that I think the market is going through a price discovery phase in, especially in some of those newer coins.

And there's still a lot to be known about what the regulatory aspects look like down the road.

MYLES UDLAND: And, you know, Liz, just to finish up maybe big picture, and I think about what you guys are doing at SoFi and just sort of where the market is in general with respect to retail investors, new folks in the market. I mean, where do you think it goes over the next five years? Because we haven't seen participation like this in a couple of decades. It's never been this easy or affordable to get involved in the market. How do you think about the maturation, I guess, of this new generation of investors?

LIZ YOUNG: Yeah, first of all, I would say I absolutely love that there are so many new investors in the market because we talk about compounding and the power of compounding over time and being able to save and invest and get to your future goals because of what the market offers you as an investor. So I'm absolutely ecstatic that there are so many people involved and excited about it. I think that the individual investor is going to be a force to be reckoned with and that the landscape of the market has changed as a result.

And there's a lot of powerful forces that go into that. I think it's also really important, just as a globe, that there are people that can access investments today that couldn't access those types of investments before. So alternative assets, for example, used to be a thing where you could only access them if you were a large institution or if you were a high net worth client.

Now we have individual investors, everyday investors that can access parts of the market that they couldn't before. So I think it has leveled the playing field. I do think that it's really important for companies like us to provide a lot of education on investors' behalves, because as people have started this sort of DIY investing, there's not as much guidance. There's not as much education available from, let's say, a financial advisor because there's less of a relationship there.

So it is the responsibility of people like me and companies like SoFi to provide that education.

MYLES UDLAND: All right. We'll leave it there. Liz Young, head of investment strategy over at SoFi. Liz, great to talk with you once again. I know we'll be in touch.