The Wiser Financial Advisor Podcast

Get Real. Get Honest. Get Clear.

How To Protect Your Wealth In Volatile Times with Guest Carolyn Czaflick

In these times what might happen in the financial sector? How can you best protect your money: your wealth? In this episode host Josh Nelson talks with Carolyn Czaflick, of Morning Star Investment Management, about the economy, the markets, all the craziness and volatility that’s out there. Plus what it takes to be a solid investor and get through tough times as well as good times. This podcast is not about market timing. It’s about strategy. Sound strategy! It’s about getting back to basics as far as what’s important when it comes to being an investor. We believe you’ll find this episode highly valuable.


Wiser Financial Advisor – Navigating Crazy Markets with Guest Carolyn Czaflick

Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.        


This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. Let the financial fun begin!

Recently I had the opportunity to sit down with Carolyn Czaflick, portfolio specialist at Morningstar Investment Management. Carolyn is responsible for communicating the firm’s investment philosophy process and strategies, and she participates in the portfolio management meetings, serving as liaison between the portfolio managers and the firm’s clients.

She brings 25 years of industry experience to our talk about the economy, the markets, all the craziness and volatility that’s out there, what it takes to be a solid investor and get through tough times as well as good times. This is about strategy, not market timing, and really getting back to basics as far as what’s important when it comes to being an investor. I think you’re going to find this highly valuable.

Josh: Carolyn Czaflick, glad you’re able to join us today.

Carolyn: Thank you so much, Josh, happy to be here.

Josh: You’ve been busy these days. I’m sure you’ve got a lot of craziness going on.

Carolyn: Oh, I don’t know what you’re talking about. What craziness? You know, just typical day in the markets. But yeah, needless to say, these last few weeks have definitely been giving a lot of investors some cause for concern. You know, though, as we’ve seen in the past, this is business as usual. It’s about managing through some of the short term noise and proceeding over the long term.

Josh: Of course, we all counsel ourselves and our clients to be invested for the long term and everything, but sometimes it’s hard when you’ve got the volatility that we’re seeing right now in such a sharp reversal from a year ago. Then it was like a dartboard approach—you could pretty much put your money in anything and it would make money. Now it’s the polar opposite, correct?

Carolyn: Exactly right, so if you take a look at the different sectors of the S&P 500 for example, in 2021 each sector was up. Like you said, you could throw like at a dartboard and make money; it didn’t really matter, it was just a matter of how much you made. And we’ve definitely seen that correction take place so far here in 2022. If you look at the S&P 500 sectors year to date through yesterday, energy is up 50 plus percent and everything else down, so we’ve definitely seen a correction take place this year.

Josh: Yeah, it’s been hard to identify areas that you’d be “safe.” I mean, cash isn’t safe right now from losing 8 or 9 tenths per year from inflation. I know everybody’s risk tolerance is different; everybody’s situation is different, but what have you been talking to people about here recently as far as things that the average investor should be thinking about?

Carolyn: So, inflation is that ugly word that we can’t seem to not speak about. I don’t think there’s been one meeting where I’ve not had to talk about it with either advisors such as yourself or their clients. And back towards the fall of last year when inflation started to tick up a bit, a lot of the pundits used the term “transitory,” right? Back then I would say, “Well, transitory is so subjective.” For you, Josh, transitory could mean three months. For me, I could be looking at six months. Someone else may be thinking it’s two weeks.

You don’t hear that term anymore. Obviously, we’re seeing inflation at the gas pumps. We’re seeing it in stores. And a lot of the uptick in inflation has been driven by these higher energy costs. So purchasing power is definitely being hit across the board, and that’s what’s really driving inflation. It’s food, energy, and then housing as well. So even though it’s at about 8.6%, certain items are definitely much more expensive than that. So yes, cash purchasing power is not the safe haven it was. And if you invest in the equity markets, then your money unfortunately has seen a larger drawdown. The same thing with bonds as well.

Usually, what happens in these types of environments if we think back to the basics of investing, there’s somewhat of an inverse relationship between equities and bonds. Usually, when equities are doing well, bonds may not be faring as well and vice versa. But we’re in an environment now where everything is looking grim. It’s hard as an individual investor to take that step back and not let emotion drive your investment decisions. It’s great for those investors that have an advisor such as yourself. I think that the hat you’re wearing these days is probably more of counselor versus financial advisor.

I always tell people the news likes to report on stuff like this. They’re not as engaged when everything is more boring and ticking along as it should. So the first thing you can do is try not to be wrapped up in this 24/7 news cycle. It could cause you to make decisions based on emotion that are probably going to be the worst thing you could do at a time like this, right? The basics of investing are buy low, sell high. And if you let panic kick in, you’re gonna do the exact opposite.

Josh: Where do you at Morningstar see things going this year and next year as far as Fed policy and how far will they need to go before inflation starts to come down to a more reasonable level?

Carolyn: Recently, we know the Fed raised rates by 75 basis points (0.75%). I think prior to the last few weeks, the idea was it would be 50 basis points. Anytime there are rumblings about rates being raised or how much they’re gonna be raised, the markets are already aware of it. It’s not that anyone was that surprised. Then there was discussion that the next meeting might be another 75 basis points, but it’s kind of a couch sale, maybe 50 points, right? So you know the range of where it’s gonna potentially be, but there’s also so much unknown between today and the next meeting, right? That’s where it’s very dangerous to ever try to predict the direction of anything when it comes to investing, because it’s hard to get it right and more importantly, get it right at the right time.

So, back to interest rates. At the end of 2018 to 2019, the ten year yield was going down. I remember advisors saying, “Well, they can only go up. Look at history, look where it’s been, consider the reversion of the mean.” And it went further down. So, if you structure portfolios based on predictions and you don’t have that prediction correct, that’s just going to lead to a lot more volatility.

I think that now we’re in a position of inflation with, as you say, too many dollars chasing too few opportunities, and it’s going to be up to the Fed to rein it in in such a way that it doesn’t cause a recession or something more drastic.

I think back to 2020, which I know is not something that’s very warm and fuzzy, but when COVID hit, we shut down as an economy and we didn’t know in February or March or April of 2020 that the worst would be so succinct. It was a 33 day period, so that went down as a two month recession. You think back to ’08 or ’09, you think back to the dot-com bubble burst and how long it took the markets to recover. So yes, in 2020 the government stepped in, stimulus money came through, unemployment was provided for gig workers that in the past didn’t have the means to get that. Those changes were made pretty quickly. It was kicking that can down the road with money coming in, but it helped get us out of that. I don’t think anyone thought we’d end up with the markets performing as well as they did at the end of 2020. Same for 2021. So are we feeling warm and fuzzy right now? No, but we have enjoyed a 12 year bull market leading up to this point with the quick flip with COVID. So, no one could really be surprised at where we are today. It’s not going to feel good, but like everything, markets are resilient. They’ll rebound. It’s just a matter of being patient, and if you have time, that is your friend.

Josh: Yeah, certainly, being a long term investor, but people are afraid, right? People don’t like to see their balances go down. They think, “It’s going to keep going down and down until I lose all my money.”

Carolyn: Two things. We were dealing with supply chain issues that were an after-effect of COVID that were extended longer than we had wished they were. But then you had Russia invading Ukraine and geopolitical risks that came in. This confluence of events are adding to the fact that energy is doing so well and other areas are correcting themselves.

Our research took a look at past geopolitical events and how long it took for the S&P 500 to recover. The Iraq War, North Korea, all these events that occurred back in time. The one that took the longest to recover was 9/11. I had to go back and think about why that was. I forgot that when that happened we also had the dot-com bubble burst. So this isn’t the first time that we’re enduring multiple events occurring at the same time that are affecting the markets. But again, as long term investors over the longer period, this will come back. It will. We’re human, right? We feel the pain of a loss twice as much as we feel the happiness from a gain. Yes, it’s very hard to look at your balances today and see them lower. But the thing I tell investors to remember is that it wasn’t that long ago that you were looking at your balances and they were increasing and increasing and increasing. So at some point, that correction was going to take place. Now, it’s that time.

Josh: So that is a risk certainly, that we’re not just looking at one issue right now; there are actually a lot of things coming together. And of course there could be some upside surprises too, right? Now things look pretty grim. There aren’t a lot of people saying that we’re going to avoid a recession altogether. But what are the odds you think, as far as a mild recession? Will the Fed get it right, or is it going to get really ugly?

Carolyn: Josh, if I had that crystal ball, I’d be on a beach somewhere right now, and that’s the thing: We don’t try to predict when or to what extent. We focus on opportunities that we can find in the market based on our research, things that we think are undervalued based on what we think are assets worth looking at, where they’re priced in the market and not overpaying. As valuation-driven investors, we view these as opportunities to reassess and look. Because sometimes there are areas of the market that we like, but they’re overpriced and expensive, and we’re not going to overpay. So when that correction takes place, it’s an opportunity for us to look back and say, “OK, now, is that still an asset we want to own? And is it now priced below what we think it’s worth?” So, our multi-asset portfolios, are very well diversified across equities, fixed income, U.S., non-U.S. We are believers in diversification with that long term view going forward over the next 10 years versus looking in the past or trying to predict a direction, be it rates, inflation, or markets. Because at the end of the day no one is smart enough and no one has that answer.

We stick to assessing our multi-asset portfolios to make sure that they’re allocated in such a way that regardless of market conditions, whether high inflation, low growth, low growth, low inflation, whatever the case may be, we feel confident in our allocation to minimize drawdowns to the best of our ability. Anytime you can compound a smoother return stream over time, it’s going to lead to better performance. So, we’re not looking to shoot the lights out in any market, because then we’re also not going to participate in the significant drawdown either. And anytime you start to play this game, it gets a lot more difficult. It’s a lot harder and takes more time and money to recoup those losses and then move forward.

Josh: I think that’s probably the greatest risk right now. One thing that we’re sharing with clients is why one of the greatest risks is trying to make a big bet on, “Hey, I’m going to go to cash and wait this out, try to buy back in at a lower price.” We’ve seen the disastrous drawdown in crypto currencies of late.

Carolyn: And I would say there’s no such thing as a free lunch. If it sounds too good to be true, take a step back and really perform extra due diligence.

Josh: Yeah, and Warren Buffett has had a lot to say, Bill Gates as well, on crypto currency. Not that it’s going away necessarily; it’s probably a thing that we’ll have at least as an option in the monetary system for some time, but very, very high risk. So yeah, staying diversified, also dollar cost averaging, we talk a lot about that and using that as a strategy—simply putting money in periodically through 401K investments, because you’re right, the timing is pretty tough to get every time because we can’t predict the future.

If anything, I think the fact that the Fed has admitted they got it wrong and the Treasury has admitted that they got it wrong this time, should make us all feel better. Because if someone thinks maybe they got it wrong by not getting out of the market, going to cash, something like that, it’s human nature to think somebody should be able to figure this out. But that’s pretty tough to do. Being a long term investor is not about figuring out the short term movements.

Carolyn: Right, and actually Josh, to your point about letting your emotions drive your investment decisions and people wanting to move to cash, there is a graph that I love to use with clients because I think it’s very telling. It’s three different investors that all started with $100,000 and went into 2008, 2009. Investor number one couldn’t handle the stress of the markets, called up their advisor and said, “Move me completely to cash, I can’t handle this. My ulcer’s acting up. “ Investor #2 similarly said, “I don’t want to lose more, so get me out of the market.” Then a year later, once confidence started to increase and the market started to do better said, “OK, well now I want to go back in,” so the basics of buy low sell high ended up the exact opposite. The third investor followed the Hear No Evil, See No Evil program, didn’t look at statements, didn’t let the media suck them in and get them to make any emotional changes, just said, “I’m going to let my assets work for me.” That third investor ended up with somewhere around the $680,000 value, so that’s an example of three different scenarios and what happens. It’s the power of compounding or having that money at work. Because market timing is impossible.

Josh: When it comes to portfolio management, everybody has a different risk tolerance, and that’s the financial jargon that we use for how much risk people can tolerate, or how much turbulence people can tolerate before they cry uncle and say, “Oh, this is not for me.” What kind of moves have you been making and looking at?

Carolyn: Based on our research and looking at what parts of the market tend to do better in an economic recovery, we have for a long time had a bias towards value stocks versus growth stocks. And as long as our investment research supports our decisions, we’re not going to change them. So you can appreciate that sometimes that was a tough position to defend, but now, value in this environment is really doing so much better than growth. That’s going to ebb and flow between the two—no surprise there. We’ve been looking at adding to cyclicals. And on the fixed income side, we haven’t talked much so far about yields, but yields were so low they hit 2% at one point. It’s over 3 right now, which is still low relative to where they used to be, but somehow ironically high relative to other developed markets outside the US. So everything is relative. You’ve seen the yield curve move up, but it’s still pretty flat in that intermediate space, so we’re looking at more intermediate short term.

In terms of developed market fixed income, some of the developed countries have negative yields on the shorter end of the curve, and so we’ve been looking at emerging markets that have been relatively speaking paying higher in yields, anywhere from 5 to 8 or 9 percent. But then again, there are a whole set of different risks you need to be comfortable with. You know the work that our teams are doing globally. We’re researching over 200 equity and sub-equity asset classes, 150 fixed income and sub-fixed income asset classes in over 30 currencies. So we have a pretty good gauge in terms of what those risks are. As long as we are comfortable with the risk, we feel that the risk is appropriate for the return potential. That’s how we view the markets.

Josh: Sure, and that’s the nice thing is about bear markets, right? There are a few nice things. One of those is that it opens up pockets of opportunity. There are companies that start to look more attractive, especially tech stocks. I have seen a major selloff in some of those areas, but your company, Morningstar, has more of a value tilt. For some of our listeners who aren’t familiar with what growth versus value means, what would a value company be versus a growth company? And have you seen any of that shift now that some sectors have sold off? Have they become value companies whereas they were growth before?

Carolyn: Think of value companies as those that are well established. Strong balance sheets. Oftentimes, any excess profits are being returned to investors in the form of dividends. These are your boring-ish type of stocks. Growth stocks, think of as not as mature. Sometimes they’re younger in nature, and a lot of those excess profits are being put back into the company to improve the company overall. They tend to not have as much brick and mortar establishment around them. So technology companies are a lot different than a Ford that’s producing cars that are physically large items in inventory.

We have seen a correction taking place this year and it has hit the hardest in those areas that saw such an expansion of their price. A lot of those growth type companies that fall into technology or communications benefited from COVID, so basically Facebook, Amazon, Apple, Google, Microsoft, Netflix. I can look back and it pains me to see my Amazon purchases in 2020 versus previous years. With Netflix, we couldn’t go out to the movies, so we brought the movies home to us. Now people are getting out and about and they are able to go into stores and physically touch and try clothing on, so you’ve seen this reversal of what we’ll call non-store retail sales and those in-store. As you’d expect, during COVID we all figured out how to online shop and we weren’t able to physically be in stores. Now we’ve seen that reversal take place. Also, those six stocks at their height were about 27% of the S&P 500 market cap weighted index.

So the more shares in price, the higher it represents the index. The S&P 500 is around 500 or so companies, so it should be a pretty well diversified representation of companies here in the United States. And you have these six behemoths that were over one quarter of the total. Needless to say, so far they’ve been hit the hardest. Up through mid-May, those six companies plus two others (Tesla and I think Nvidia) were responsible for half the losses on the S&P 500. That was also hard for a lot of investors that thought they were well-diversified. Now they’re realizing that as quickly as that was a contribution to growth, it’s now also a contribution to decline.

Josh: That’s a good point, because there’s a school of thought out there that says all you need to do is buy the S&P 500 and you’re good, you don’t ever have to do any kind of active management. Sometimes that works, but in markets like this, especially when a few companies get way overweighted, that can cause a lot more risk in your portfolio than what you’re comfortable with. So, we’re proponents of active management. Certainly, there’s nothing wrong with using the index funds or exchange traded funds; we use them in a lot of portfolios. But to make a blanket statement and say, “All you need to do is throw in the S&P or the Dow,” or something like that could be missing some pieces.

Carolyn: Right, and that’s diversified within one part of the market. So, when we talk about diversification, especially our multi-asset portfolios, we’re saying you need to be diversified in equities in the US, outside the US, and diversified in bonds in the US and outside the US. That has been tested of late, and I think technology has a big part in that. But anytime you can add in assets that don’t have a high correlation with each other, meaning that they’re not going to move to the same degree under the same market conditions, then you’re able to maybe keep from having such a significant drawdown take place if you’re only in one part of the market and that part of the market is suffering. The flip side is that then when you have that diversified pool of assets, you’re not going to participate in the huge upside of it.

In the decades I’ve been doing this, I’ve never met an investor that doesn’t love upside volatility. Everyone loves when there’s volatility with everything going up. It’s during the downside volatility that the risk tolerance gets reassessed. And we’re human beings; it’s natural that that’s going to happen. And being diversified is not just diversified within one part of the market. It’s having broad exposure across the markets. If you take a look going back each calendar year and see which parts of the market did the best and which ones did the worst, it’s all over the board. That’s a backward looking view, and none of us are smart enough to know how 2022 is gonna end. That’s why it’s important to be diversified so that you can help minimize some of those drawdowns, especially in times of volatility like we’re seeing today.

Josh: Yeah, absolutely. And it’s important to be humble enough as individual investors, to know that we’re going to be wrong sometimes. No matter how convinced we are on this certain thing, whether it be a particular sector or where the market’s going, we’re going to be wrong sometimes. The way that we can correct for that is diversification, asset allocation, getting back to those tried and true principles that maybe aren’t as exciting, but actually do work over time. Along that line though, and I know it’s dangerous to ask this, but what’s your team’s outlook, your market outlook or economic outlook for the remainder of the year, looking at this next cycle?

Carolyn: I’m always very cautious when I’m asked that question because that’s not our approach. We’re not predictors. We never claim to be predictors. We think that’s a dangerous area to play in and we try not to do that. We stick to our investment principles, which is being long term, looking at our research, not overpaying for any asset, and oftentimes that tends to be more of a contrarian perspective. You mentioned Warren Buffett earlier. I would say that our investment style and approach is very similar to his. We’re big fans of Warren Buffett from that perspective. When the market recognizes what an asset is worth, we’ve invested in it when it’s below that. Hopefully we’ll then appreciate and have some positive returns based on that approach.

Josh: Well that’s great. I always like to ask people who have experience in the investment industry and the financial industry: What about young people, maybe young recent graduates? What advice would you have for them?

Carolyn: Start saving young, because then those dollars are at work for a long period of time and through the effects of compounding that long return stream, you will be very happy when you’re older or are our age, to know that you have that nest egg. When I was younger and looking at job opportunities, I was so focused on salary. When you’re young you wanna live on your own or go out with friends on the weekend, whatever the case may be. And when a company would propose a great benefits package, I didn’t care about health insurance. I was 20 something, and to me that was something I’d deal with when I was older.

Then as I got older, that benefits package started to become important. So, if a company has a 401K, especially if they’re going to match your contribution, take them up on it. It’s hard to save when you’re younger because you may not be making as much money, and with inflation everything is costing more. So, at least put in what the match is for that 401K. Otherwise, that’s money you’re leaving on the table that is yours. Find a way to budget elsewhere. You can’t take it out of retirement accounts without paying a penalty, whereas if you have a savings account you might be tempted to take a little out.

Josh. Yeah. And what would you give them for career advice?

Carolyn: Do your due diligence and explore options. Oftentimes, you don’t really know what you want to do. Do what’s right for you and have faith in your decision.

Josh: All right, well thank you, Carolyn. I think our listeners are going to really enjoy your insights and I certainly appreciate your time.

Carolyn: Thank you so much, Josh, really appreciate you.

Have a great week and God bless. We love feedback and we’d love it if you would pass it on to me directly at

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This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.