The Pendulum of Prosperity: Saving vs Investing

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Anshu Bahanda: Welcome to another episode of Wellness Curated. As you know, my aim with this podcast is to put before you ideas, approaches and tools that can help you lead a healthier and happier life. This season, we’re going to focus on financial well-being. But before I continue, I’d like to request you to subscribe to our channel and to like us. The subject of today’s discussion is: The Pendulum of Prosperity. And we’re going to talk about how to strike the perfect balance between saving and investing in this very unpredictable world where there’s fluctuating markets, there’s disruptive technologies because of AI, there’s socio-economic upheaval, and there’s this crazy unpredictability because of climate change. So this question is pertinent more than ever in today’s day and age. We have with us Umit Kumcouglu, who is the CEO of Kare Investments. He’s a seasoned investment banker and has worked at Goldman Sachs and JP Morgan. He has a diverse academic background and has expertise in Turkish politics and in financial affairs. He will be giving us some valuable insight on navigating the balance between cash and investing. Welcome to the chat, Umit.

Umit Kumcuoglu: Thank you for inviting me. Great to be here.

AB: Now, my first question to you is: How does the current economic climate impact the decision making process for individuals when it comes to saving or investing?

UK: I think the most important difference that happened recently is the return of inflation and the return of high interest rates. So, as you know, since the global financial crisis of 2007, interest rates were very low and inflation was also fairly low. So it was a very different environment compared to most of the 20th century. Whereas in the last few years, finally, inflation made a comeback and then interest rates made a big comeback. So I think that’s the key change that we all have to deal with this year.

AB: Thank you for that. So tell me, Umit, is there an area of investment that you would say is a good bet; it’s safer? And if so, would you say look at a geographic location? Like, I know a lot of people are talking about India at the moment. Would you say, look at a sector, look at AI. Would you say, I don’t know, put it in fixed deposits just while this turmoil is over. Tell us. 

UK: So, normally, nothing that’s safe gives you a good return. So if you look at it over the long term, it’s very rare that something that is relatively safe offers a good return. And in that respect, today is an exception. I think currently, US Treasuries, which is the simplest investment product and the lowest risk product, offers a great value, which is rare. I mean, currently, inflation in US dollars is about 3%, three and a half percent, whereas short term Treasuries yield five and a half percent. So you have more than 2% extra, which we haven’t had in a generation. So I think very rarely a safe investment is delivering returns at the moment, which probably won’t last very long, but generally I think it’s safe to say that nothing that’s very low risk will offer a good return in the long term. So everyone has to make a trade off between how much risk they’re willing to take and how much return they can buy with that risk. In terms of industries, geographies, segments like that, I think the key point is your expertise, so not everybody can play every game. So I think it’s most important to stick to the areas that one knows and take the risks in areas that one is comfortable in.

AB: Okay, so you would say stick to the areas you know. US Treasuries at the moment are a safe investment. How long do you think that’s going to last?

UK: Well, it’s always safe, US treasuries…

AB: Sorry, what I mean is it’s a safe and good investment. 

UK: They will… I think interest rates will come down probably next year and inflation will probably go down to around two and a half percent or so, and interest rates and inflation will both be around two and a half percent down a year or two. So when there is a positive real interest rate in Treasuries, it’s not a bad time, unless of course, there’s always opportunities everywhere. There could be real estate opportunities, venture capital opportunities, things that can personally come to you. So unless you have something along those lines, I think in the general broader markets, US Treasuries are interesting at the moment, which is a rare phenomenon. 

AB: And tell me, is there something else that you particularly like at the moment? What is Umit’s favorite investment?

UK: I’m still invested in global equities, especially in the US. I think despite the recent rise in the indexes, they still offer decent value. So I think taking money off the table, going too safe isn’t the right thing to do at the moment, so one should maintain risk, of course. You know, I’m from Turkey originally, so Turkey is always on my horizon, so I follow what’s going on. You know, currently there is value in the Turkish market, but I think there’s nothing really dramatic, I think, given how attractive treasuries are, because that’s what drives the whole market. Right? I think until interest rates start coming down significantly, the higher risk opportunities will be difficult.

AB: Okay, and tell me, what is your approach to finding the balance between saving and investment in this crazy volatile market that we’ve seen? 

UK: I think you’re using the word saving slightly differently from what we use in the industry. So when you ask about striking a balance between saving and investments, I think you mean lower risk investments and higher risk investments. So the way we use…

AB: Absolutely. 

UK: Saving is the money you don’t spend, right? So any money you don’t spend is saving, and then you can choose to do nothing with it or invest it into something which could be higher risk or lower risk. So if I rephrase a bit, if we talk about striking the right balance between safer investments and riskier higher return investments, I think that depends on the global environment as well as one’s own perspective. So it’s important to know yourself and your needs, I think, both in terms of your goals and your expenses in the future and your risk tolerance, your liquidity needs. So taking all those personal factors into account, you must come up with a strategy and there is no right answer for everyone. So given your views and what you can sleep comfortably with, a strategy can be formed. And I think that also depends on how much training you have in the finance industry. You can choose to do most of this yourself or you could choose to hire people you trust to do it for you. I think there is a similarity between general- kind of bodily health- and mental health and financial health. In every case, it’s useful to invest into it yourself and learn enough about it yourself to do some of the job yourself. But there’ll always be room for experts. Even us, as financial industry professionals, tend to stick to a part of the business that we know, and we also hire advisors in other parts. And I think that’s true for everybody. So you should focus on a limited number of things yourself and then hire trusted advisors to do the rest of it for you. 

AB: Because I was in the banking world about 20 years ago and the kind of crazy markets I’m seeing now, in my career, I hadn’t seen before. Do you think this is unusual, this will pass?

UK: Well, I think in some respects the markets are volatile historically, in some respects they’re not. So it depends which perspective we’re looking at. I mean, one thing that’s clearly changed is the way globalisation operates, right? So from the end of World War II all the way into, say, 2020 or so, there was a one way street in globalisation. So there was not only more global integration, there was global integration in a unitary fashion. So everybody was joining the same system, kind of the Western capitalist system led by the United States. Everybody else seemed to be joining that. So there was rule-based governance within it, to some degree, and there was a certain understanding that stemmed from the US- European relations from the 50s that kind of became a model for the whole world. And now I think it’s hard to say. I don’t think we’re going to deglobalize, but globalisation is not really one way and there’s not one kind of system that everybody’s joining. I think it’s a more multipolar world, both in terms of geopolitics and economics. So there’s more bilateral relations between all the players. I think India is a good example. I think India is now a large player on its own. The Indian-Chinese relationship, Indian-European relationship, Indian-American relationship— those are all separate dimensions. So there’s a lot more bilateral relations and bilateral trade flow. So it’s a different kind of globalisation. I think that’s one difference. And of course, that causes some uncertainty because there’s no single system with the centre of gravity. Actually this kind of diversification of global size or power is unpredictable. We haven’t had that in a while. So that’s one factor. 

Then a more long term factor— of course, climate is a big factor, which hasn’t had much obvious impact yet. But of course, it’s always in the background and having a lot of secondary impact. And I think we’re seeing more and more of its primary impact with more hurricanes and floods and fires that hit. And they become more visible. I think in the next five years they’ll become a lot more visible. And then AI, I think it’s part of the solution to a lot of these problems, as well as a potential problem on its own, because, of course, it changes the way we work. So the good side of it is, I think, with AI doing more work, human beings can do less work, and everybody can be happier if we can share this wealth somewhat equitably. But who knows, kind of given human nature, probably the gains will not accrue fairly, as they almost never do. So that could become more beneficial for some than others. So AI kind of is really a double edged sword. It brings a lot of advantages to the table, but also a lot of risk. So I think those are the main sorts of volatility in the market at the moment. So long term, yes, there’s more uncertainty, but short term, of course, markets are managed a lot better by the governments at the moment. So governments didn’t manage markets for thousands of years. Of course with these unmanaged markets, there’s more tail risk, as we call it. So there are several big events that were just created by the market. They could destroy the economic conditions. Now the governments prevent that. So when things become hectic, governments intervene to do things. So that kind of volatility has been lessened. And I think governments are pretty good at managing market volatility of that sort. But of course, the longer term issues we discussed are harder to manage. 

AB: For people who are doing their own wealth management and asset allocation, whether it’s finding somebody or whether it’s doing it themselves, in the current scenario, for the next, say, three years, two, three years, how would you advise them to do their wealth management and asset allocation? 

UK: Well, it’s very difficult. Of course, as we mentioned briefly, there’s a different answer for everybody because everyone has different needs and risk tolerance and liquidity requirements, et cetera. So it’s hard to find an answer that’s one size fits all. But I can describe kind of how we approach the problem as an advisor or discretionary manager. So we know there’s like four major areas that are in every large portfolio. There’s the equities and fixed income, the types of investments, and then there’s the public and private versions of these. So these four things are the main assets, and then there’s some peripheral assets to these, from real estate to cryptocurrencies, which emerged recently, to commodities to infrastructure, things like that. So there’s a lot of peripheral things, but these four core markets, public and private, equity and fixed income, [they] tend to be the main things. And for a while, since the global financial crisis, liquid fixed income just wasn’t interesting. So only three out of the four boxes were generally filled for any portfolio. Now liquid fixed income is back, so we have four tools to play with again. And we were in a long period when private equity out-performed public equity, I think in recent years that has declined, whereas now private credit is doing better. I think with real estate, there was a great run worldwide until recently, which seems to have stopped, and cryptocurrencies became very fashionable for a while, but they didn’t really make a huge impact. With the market and commodities, commodities rarely come to play a big role. Generally, it’s kind of a very expert insider market, and then occasionally they become quite important, like the days of the energy crisis. So they sometimes play a big role in the mainstream markets. But currently we’re not in one of those times. So really the big debate is the comeback of public-fixed income and the opportunities in private credit. They are the most spoken things in our world at the moment. 

AB: Okay, thank you for that. Umit, tell me now, we’ve talked a lot about risk tolerance. Are there any effective strategies that you can recommend to individuals who are doing their own investments to mitigate risks?

UK: Well, first you need to identify the risk, because it’s not an obvious question. Even for very sophisticated clients and very sophisticated managers, it’s not an obvious question to answer. It sometimes takes years for the advisors to really discover what the risk preferences of the principles are. So I think we have to be very cautious about that. I think first there is kind of an objective or kind of more concrete side of the risk. How much liquidity you need, what your goals are, how much money do you need to realise certain goals you might have. So there’s some things that can be calculated reasonably in a straightforward fashion. And then there is the emotional side of how you behave when things are going well and things are not going well, which is a bit harder to measure because you really never know before you experience these things. So I think it’s a learning process, really. So the decision maker has to assess his or her own risk tolerance and then act accordingly. 

AB: And the other thing is, Umit, what I’ve seen, even very experienced people, they don’t always make money. So what are some of the common mistakes you’ve seen? With all your experience? What have you seen that you would say- this is where people go wrong?

UK: I think the most common mistake is probably in a volatile environment, taking too much risk. So too much might mean a real financial constraint or an emotional issue. So you start an investment, it goes badly originally, and you get out of it too early and then lose on the opportunity to make money afterwards. For example, the COVID era was a good example of this, the COVID era and the overall equity market. So the market was relatively high at the end of 2019 and interest rates were rising. So what we experienced in 2022 was going to happen in 2020. There was going to be a rising rate cycle. And as that rate cycle started, the market was fairly bullish still. And then COVID hit very suddenly, and there was a huge market collapse. But then the market collapse was so huge, it was kind of obvious that the governments were going to bail out the market somehow. And indeed they did. But if you were, what I’ve noticed is people who, by luck, were uninvested in March 2020 got really lucky because people who were invested, even when they had the view that things would reverse, they had a hard time increasing their positions in March 2020. So I think if you’re not in these extremely volatile times, you need to have some dry powder to deploy when things get rough in case they do. So that money is not going to be deployed all the time. But I think it’s good to have a reserve to deploy in these exceptional times. And again, you should not be too invested in what you need to cut, because it’s a big difference. Say if your long term risk tolerance is whatever it is, if that calls for, say, a 60% equity exposure on average, when the times are right, sometimes you need to go below that so that you can increase it. Because when you’re already at 80%, when the bad days come, you have really nothing else to invest, and you miss a lot of opportunities that way. So I think the most common mistake is to get overexposed so that you’re not able to increase your exposure when the opportunities arise. 

AB: So what you’re saying is that asset allocation is absolutely vital. Don’t just do this. Don’t just go and quickly invest in something because it’s an opportunity. Think through your assets and how you would like to allocate them before you do the allocation. 

UK: Yes, I think asset allocation is the most important part of investing that kind of determines the basics. I mean, it’s almost like building a house, right, that you need to first define the foundations, and then you can build the fine stuff around that. But the fundamentals of investing are mostly really the asset allocation side.

AB: Okay, and now I want to talk about something you mentioned. Cryptocurrency. People have bought houses on the back of cryptocurrency. A friend of mine invested in it and called one morning very excited, saying she had made enough money to buy a car, and then they lost it in two days. So what is your view on it?

UK: Well, I mean, the cryptocurrencies are basic commodities. I think you need to differentiate when we talk about technology. Technology isn’t limited to computers or IT technology. So surely cryptocurrencies, and I think the whole blockchain related investment segment, was a very advanced product from an IT or computer technology perspective. But cryptocurrencies are not advanced products from a financial technology perspective. Because basically a cryptocurrency is equivalent to a commodity, which means something that can be easily identified and is fungible, right? So any metal or any kind of well defined agricultural product or any monetary instruments, those are all commodities of some sort. So cryptocurrencies are something like that, and that is not a very… And people have been trading gold for millennia now. What have we discovered about commodities as a storage of value and as a monetary instrument? That they are primitive. I think we’ve evolved from commodity currencies into central bank-managed currencies for a good reason, because commodity currencies are inherently very volatile. So they’re not good stores of value and they’re not good transactional tools. So they are, in that respect, very primitive. So cryptocurrency was something that brought together a very advanced computer technology with a very primitive financial technology. So it’s a weird product. So in the end, they became a great avenue for gambling, but not a great avenue for financial management. For the broader public, I think bitcoin will probably survive along with gold as a kind of archaic commodity that people love. But there’s really not much room. I mean, I think it’s not even clear there’s room for two products there. I think even one is enough. There’s no second gold out there, right? So there’s like silver, platinum, et cetera, but they’re not quite the same thing. Just like that. There might be a second thing, like ethereum that survives out there, but all in all, it’s going to be a very limited part of the financial market. So I think the cryptocurrency craze has really been left behind. 

AB: Right. And as you know, I’m Indian, and what I find is that with a lot of Indians… We were talking about gold. When it’s a time of volatility, the Indians just buy gold. What is your view on something like that?

UK: India has a very sophisticated economy with a not-so-sophisticated political system. So it’s like the opposite of China or the opposite of say, the centralised European countries where there was a very strong and actively managing government doing things. And in that respect, basically that political entity provided certain services to the people. India has always been the most chaotic place in the world, right? I mean, it’s a sophisticated place so it wasn’t really, it was a place with a lot of activity, a lot of wealth, but it was very chaotic, that kind of environment. Of course, how to protect your savings is a big issue. I think in China you can neither, of course somebody is thinking out for you and even if you try to get out of the system, it’s impossible to get out of the system. So in these centralised economies, not only is there actually a nanny state but it’s very difficult to get out of it. So the question doesn’t even arise. I think in India it’s a fairly kind of free and relatively chaotic place, so you have to come up with these things. So I think for Indians, the importance of real estate, importance of gold arose from a lack of a centralised political system answering some of these questions. Just like different European countries have different centralisation levels, India tended to be in one extreme as a fairly sophisticated but not centralised system. And that has certain effects, the attachment of people to gold being one of them. So I think as more products become available, of course, like recently, interesting things happened, like these national ID number schemes and everybody getting access to phone based financial products, et cetera. So there’s been a transformation in India over the last ten years. I think with that, with more products being available, the role of gold will change somewhat. But I think it’s such an important part of culture. Of course, I think it’s always going to be there as an important but probably fairly small part of the financial market. 

AB: And I wanted to ask you another thing. Umit, I know you’ve got young kids, I’ve got young kids. What would you advise them? How would you advise them to go about so that they can meet their financial goals? 

UK: As we mentioned earlier, I think you need to make a choice as to what you’re going to educate yourself in and what you’re going to depend on others for. I think one important issue is to make those decisions, so you can’t be an expert in everything. So you need to pick certain parts of this puzzle to do yourself and find others to help you in the other parts. That’s one thing, knowing yourself at any age. But especially for the young people, because the older people have had more time to do that. Younger people are just starting to get to know themselves. I mean your risk tolerance, your other emotional reactions related to investing, because that will shape any strategy and to develop healthy habits. So to be realistic and to make your calculations properly, to get to know yourself and anticipate your emotional swings and plan accordingly. And then the important things are more behavioural than technical. So I think getting the behavioural infrastructure is the key thing for a young person starting investing. 

AB: And the other thing that you had mentioned was the emotions that humans feel. I mean humans feel now that we can’t separate ourselves from the emotions but it’s cost a lot of people a lot of money. So what is your advice on that? How would you advise people to manage their emotions? Give someone else their money to manage their personal money 

UK: That is useful to some degree. First emotions are the decision making part of the brain, right? That there’s no decision making without emotions. Analytics is just a support mechanism as kind of neuroscience has figured out. Emotions are the basis of decision making in the brain so there’s no avoiding emotions. But you can guide your emotions and add the analytical or rational side as a support function, so you can of course improve the support function and get better advice from there. But in the end your emotions are going to be what determines your move. So I think you need to train yourself a bit to control your emotions a bit better, anticipate your emotional swing so that you can actually provide yourself the right tools in advance, and choose a path that creates… The point is not to lose control. 

AB: Easier said than done. I mean we have great ways of convincing ourselves about things as human beings. The other thing I want you to tell us is what trends are you seeing, what do you think will develop? What are your favourite areas to explore at the moment?

UK: I think the key issue is the normalisation of the interest rate markets at the moment. So inflation is going down and real interest rates will remain high for a while. So typical fixed income cash is interesting at the moment and kind of medium term bonds are interesting. So that is a trend that will last for a couple more years. I think equities are still an important part- probably are going to remain the most important part of the investing equation especially in the English speaking countries. Then there is, of course the regulatory and tax environment, which is constantly changing. We need to take that into account. In terms of private investments, I think everybody should have some. I think this was really limited to the larger players. Now everybody has more access to it and of course we have to be cognisant of how much we can follow and have access. It’s difficult. Big portfolios. Exposure to private investments is not going to be the same as a small portfolio but I think even for small portfolios there is a room to invest a little into it that shouldn’t be avoided again. I mean real estate is an important part of humanity and it has to be also included in the financial discussions. And I think the big trends like climate and AI- we have to be cognisant- and also take those into account in making our plans. 

AB: Now, the next generation, I think, views properties differently. At least the millennials, I feel like they don’t want to own, own like our generation did- we wanted to own. Will that change? There’s a lot of intrinsic structures being changed. AI is changing a lot of intrinsic structures because things are changing at such a fast level. Do you feel like a lot of these markets, say real estate, which I took an example of, will be less important? 

UK: I think it will always be important unless humans kind of transform themselves into electronic beings and live a different way until as long as we have these bodies, I think we’ll need the houses. I mean, the change has already hit the commercial real estate market. There’s different ways. 

AB: Absolutely. 

UK: You don’t need to spend as much time on your offices. And that led to a collapse of the commercial real estate market worldwide. Pretty much. So that’s already happened. But I think in residential real estate, the high quality properties are still doing pretty well. And the reason is it is a luxury item. It’s great to have a nice house in a nice beach or city or whatever. I think that is not going to change very easily. But what’s different is just that the whole market is so expensive. Of course, 30 years ago when we were starting, it was less of a sacrifice to buy a property because they were much cheaper. Nice properties were much cheaper and now they’re not. So the young people have to give up a lot. I started my career by buying an apartment right away, but that was because I could afford it and I didn’t need to work double to… I mean, I could buy one in the routine course of my life, whereas a person in my shoes today won’t be able to do that. Of course that will change. They’re not going to want to pay double the amount that I paid when I was 22 to do the same trade. And that’s why they’re not interested because the deals are just not there. I mean, if real estate was more affordable, more young people would be buying, no doubt.

AB: Okay. Thank you, Umit. So I’m going to do a quick summary. We always do a rapid fire round at the end of the chat to summarise our chat. So your top tip for finding the right balance between cash and investments in a volatile market?

UK: Yeah, I think maybe if I need to give one tip that would be: to invest in riskier assets when the mood is dark, not when the mood is grey. 

AB: Interesting. Okay. A common mistake people make in managing their finances during uncertain times? 

UK: I think cutting their losses too late, taking profits too early. That is a common mistake.

AB: Wonderful! Key factors individuals should always consider when navigating financial planning and wealth management.

UK: I think that is knowing yourself, and your reflexes, and needs. That is the most important factor before you start doing anything.

AB: Thank you Umit, what an incredible chat we’ve had.

UK: Thank you so much. Thank you. It was a lot of fun. Thank you for inviting me. 

AB: Thank you.

AB: Thank you for taking the time to be here with us today. To my listeners, I hope you learned something new and I hope we’ve helped you come closer to a healthier, happier, more hopeful life. If you enjoyed it, please press like and please tell your friends and family to subscribe to our channel. If you subscribe to us, we can get more and more speakers and we can provide this service to you for free. Thank you for being here with us today and see you next week.