October 2021 Portfolio Review: Emerging Markets, Inflation, Tech, and Social Security

Zachary Bouck |

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On the first Tuesday of every month, our investment committee meets to discuss all Denver Wealth Management (DWM) portfolios. We discuss and debate what's working, what's not, and our market outlook.

This week, I, Zachary Bouck, CIMA®, and Austyn Garcia recap, discussing:

  • Recent Accomplishments and the Future of the Financial Industry
  • Emerging Markets and the Problem with Modern Portfolio Theory
  • Rising Rates and the Impact on U.S. Corporations (Specifically Tech/Dapps)
  • Is E.T. a good movie?
  • Social Security's 2022 Cost-of-Living-Adjustment (COLA)
  • Investing in Inflationary Environments

If you have questions regarding your long-term financial plan or investment portfolio, call our office at (303) 261-8016 or request a free consultation. Our team will reach out within 48 business hours to schedule a meeting with a DWM financial advisor. 

We're recording this podcast on October 18th—last week was pretty significant for me. I had the opportunity to compete alongside 19,000 other runners in the legendary Boston Marathon. I am happy to announce that I beat my previous marathon personal best by 26 minutes.

From Boston, my family and I headed to New York City for the 2021 InvestmentNews 40-Under-40 award ceremony. I presented on a panel of 39 other esteemed financial advisors from around the nation—we ate a little, had some drinks, and discussed the industry's future.

If there was one theme from that forward-looking discussion, it's Fiduciary. Financial advisors make money in numerous ways, including through the sale of annuities, effecting trades, and management fees. Some methods are more outdated than others, leading to a shift that will consolidate practices around acting in clients' best interest.

At DWM, we are a fiduciary.


In our September (2021) Portfolio Review podcast, I mainly talked about China and emerging markets.

In 1952, economist Harry Markowitz published a paper known as modern portfolio theory (MPT). His thesis concluded that about 90%-95% of portfolio returns come from a broad diversification of assets, including emerging markets, which has served as a guide for investors for decades.

The problem with MPT is that it's backward-facing, analyzing historical gains, losses, returns, volatility, etc. It doesn't account for significant global changes.

Here's a wild hypothetical: China declares war on India. MPT looks at the past ten years of China-based corporations, which have performed relatively well for investors. The theory doesn't have much to say regarding the two most populated countries in the world squaring up on the battlefield.

We recognize that MPT is a flawed model in that regard—at some point, you have to dig into future economic prospects.

My example was hypothetical, but political and regulatory turmoil is very real right now in China. From 2010-2020, the Chinese government aimed to double their per-capita GDP (economic output per person). They dabbled in capitalism for a while, opening their borders to western money and companies.

It worked; Chinese output grew substantially over the past decade. However, in 2021 the Chinese government decided to ease up on the free-market approach, implementing stricter regulations on corporations, limiting profitability.

Limited profitability means constrained investor appreciation. Well, our Investment Committee decided that we don't really care to invest in Chinese corporations anymore. When investing in emerging and developing markets, it may be wiser to stray from traditional asset allocation (MPT) and take a more forward-looking approach.


When interest rates are low, businesses—like individual consumers—have an easier time borrowing money to invest, which is the case in expanding economies (see: 2020-2021). However, as rates increase, there's a concern that economic growth will cool down due to reduced borrowing. And that can be true, usually temporarily.

The growth or return of a company's stock is dependent upon its success or lack thereof. Apple, for example, was historically a debt-free company but began borrowing funds because of the United States' strange rules around repatriating foreign profits.

Note, this is not a recommendation for Apple, to buy, sell, or otherwise. But essentially, if Apple were to earn $1B in France and transfer that money to their Cupertino, California headquarters, Apple would owe some taxes to Uncle Sam.

Thus, Apple may instead leave the $1B in France and simply borrow some cash in the U.S., avoiding taxes. That's a significant reason we see these mega tech corporations borrow—it's not for cheap loans but because of this financial arbitrage.

In the long term, it's not a big deal. In the short term, rising rates may cause a bit of seasickness.

We don't know what's going to happen with rates, but we can see—and this is the more exciting part—what's happening with "platform" companies (i.e., Apple, Facebook, Google, etc.).

Look at the apps on your phone. To show up on your homescreen, those apps pay a toll. Spotify, for example, pays Apple for access to the platform—the App Store. As of 2020, the Apple App Store featured more than 1.8 million apps, generating a fortune in transactional fees.

We're now seeing a movement toward decentralized applications (dapps). Basically, through the power of blockchian technology, software companies and their apps are trying to find a way to consumers without taking the toll road through mogul platform companies.

It becomes even more interesting (I know, how much more interesting can it get?) when you look at the technology ripple that's turning into a wave. It's almost reminiscent of the early internet.

Web pioneers began with online forums, which evolved to social media and eCommerce. Shoot, when I traveled to Boston last week, I managed the entire itinerary from my phone—flights, ride-sharing, TSA pre-check, reservations, vaccination passport, etc.

Dapps are gaining momentum as what may be the next iteration of the internet. That is all to say, opportunity in tech may just be starting. Folks around the world are seeking solutions in technology, finding ways to enhance our lives holistically.

Now, it's all fine and dandy to sit here and rave about the wonders of technology. But investors need to balance the future-securities-cool-kids with the less sexy necessities. Many investors and analysts predict Blockchain technology to be a global power-player, but trash removal will still be essential in the next century too. A balance between the have's and have-not's—the Socs and greasers, if you will—is paramount to a well-diversified investment portfolio.


The Social Security Administration (SSA) recently announced a 5.9% 2022 cost-of-living-adjustment (COLA) on retirement benefits. That is the highest adjustment since 1982, a year that brought pop-culture treasures like the best-selling album of all time, Michael Jackson's Thriller.

Steven Spielberg's movie, E.T., also came out in 1982. In the podcast, we discussed our thoughts on the sci-fi family flick (21:17-22:59). Suffice it to say, neither of us have it on deck for the next movie night.

The SSA adjusts retirement benefits each year to keep pace with inflation. Analysts predict that inflation will be reasonably high next year due to the Fed's intense fiscal stimulus. Cash is king; demand is up; supply is down. Learn more about addressing your benefits in our 2021 Social Security webinar.

Economists and investors have graffitied media headlines with inflation recently. But unlike the dumpster fire catastrophe that it's made out to be, inflation doesn't have to break portfolios. Two groups stand out in benefitting from inflation: people with long-term fixed-rate debt (i.e., mortgages) and the Federal Government (the largest holder of fixed-rate debt).

In elementary math homework terms (easy numbers, but absurd situations), $2,000 may buy 2,000 items at the dollar store. If inflation causes the dollar store to raise prices to $1.50, you can only buy 1,333 of the same products.

Thus, if your mortgage is fixed at $2,000 per month and prices increase, your mortgage effectively decreases.

The reality is, we all like to complain about inflation—it's satisfying. But if you're an engaged and educated investor, there are ways to position your portfolio to perform better in inflationary environments.

Buy companies that hold large amounts of fixed debt.

Borrow money at low rates and reinvest it at higher earnings potential. 

Invest in companies that have pricing power—think of industries with low competition and limited regulation.


Like most portfolio review meeting recaps, we threw a lot of information at you in this episode. If you have questions, want some help, or know someone who may benefit from our services, call our office at (303) 261-8015 or request a free consultation on our website.

When it comes to managing your portfolio, we like investors to have the three t's: time, temperament, and technique.

Take the time to research. Understand what's going on in our economy and on a global scale. Study how various sectors and assets perform in evolving market environments.



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Bonds are subject to marker and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Asset allocation does not ensure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.

International investing involves risks such as currency fluctuation and political instability and may not be suitable for all investors.

Any individual securities mentioned are for reference only and are not intended as a recommendation to buy or sell.

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance.