'Risk is a huge component of investing': Expert

Alfred Eskandar, Salt Financial President & Chief Operating Officer, joins Yahoo Finance’s Kristin Myers to break down the latest market action.

Video Transcript

Let’s turn now to the market action as we, of course, are seeing the NASDAQ making a big rebound from the worst selloff in that index in several months. We have Alfred Eskandar, Salt Financial President and Chief Operating Officer, here with us now. So Alfred, always great chatting with you. So we see the 10-year retreating from some of those highs that we had been seeing this week.

And a lot of folks that I had been speaking with said that rising yields are temporary, but I thought it would last a little bit longer based on what they had been saying. I’m wondering what your thoughts are, if the fears around these rising yields can be put in the rear-view mirror. Or do you think it’s going to continue to weigh on markets for several more weeks or even months?

ALFRED ESKANDAR: F think the market was kind of looking for a reason to pull back a little bit. If you look at the end of 2020 with NASDAQ rising over 43% and the S&P up 16, we started off the year really strong. And we’ve had lots of news, positive news, about COVID. So things started heating up.

And it’s a combination of whether folks are looking to take a little off the table, protect some gains, get a little bit jittery, and try to go into a little bit of a protective asset preservation mode. So it’s not unusual to see a pullback like this, but I think it’s also [AUDIO OUT]. There’s another portion of investing to consider, and that’s risk.

All right, Alfred. So then I’m wondering how much volatility you might be anticipating here going forward just because of what we’ve seen happen right now in US equities. But also, looking even out more broadly, we’ve seen– for example, just a subsection– the Reddit trades have been surging, then doing an about face. We have seen a lot of volatility in cryptocurrency lately. Cryptos, at least bitcoin, coming back off some of its highs. So how much volatility should investors expect over the next couple of months?

ALFRED ESKANDAR: Well, I’m glad, Kristen, that you even brought up volatility. It feels to me that we don’t talk enough about it. We certainly don’t– in the bigger scheme of things, are not looking at risk enough. And if you look at the meme stocks, as popular as they’ve been, incredibly sensational– obviously, we’ve seen even [AUDIO OUT].

It’s time for investors to realize that risk is a huge component of investing. And yesterday with the VIX spiking 35% in a single day, it’s a reminder that you have to protect your portfolio the same way that you buy car insurance and home insurance to protect your other valuable assets.

So then let’s talk about protecting your portfolio, especially because we have, I think, a lot of new investors that decided to join the party in 2020. So how should investors really be looking at allocating their portfolios right now?

ALFRED ESKANDAR: So there’s a number of different types of participants in the market. And it’s really important to understand that it’s not just millennials trading on Robinhood, but there’s $37 trillion in the US capital markets. One thing to keep in mind is that baby boomers hold 55-plus percent of that where millennials are less than 5%.

So thankfully, the industry recognizes where the influence is and have been creating products to help those in the different buckets. Somebody trading in the market today who’s 55 years old has a very different goal and overall desire from the market versus somebody who’s 25. And thankfully, there’s been enough product innovation to help investors find products that have buffers, that have principle protection, that actually offer downside protection when you’ve got a 5% pullback in the NASDAQ like we did this week.

So thinking about that– because I think so many folks have really been chasing gains, especially because of some of the run-up that we’d seen in the markets over the past year. And also, with a lot of these Reddit trades, I think it’s causing a lot of investors to maybe have some unrealistic expectations of the kind of returns that they can expect. But if you are someone who wants to look for those gains in 2021, where can they be found?

ALFRED ESKANDAR: Well, technology continues to be an unbelievable force in the market. And I’m not talking about the Reddit type of stocks. I’m talking big, multinational, tremendously profitable companies that are continuing to benefit from the COVID status, and even outside of it, are continuing to build tremendous products and services that people really value. So whether you’re a Microsoft or an Apple and you’re gigantic, you’re just getting bigger. Their earnings are tremendous. The companies are incredibly stable, very, very well-run. [AUDIO OUT] benefit from a global lift and recovery as well.

I actually want to ask you about cryptocurrency. I don’t think I’ve ever chatted with you about it. What do you make– I was looking at bitcoin just a second ago. It’s at a level of almost $48,000 right now. Do you think investors should be adding cryptocurrency to their portfolio? What do you make of bitcoin?

ALFRED ESKANDAR: So it is my personal opinion– so I don’t want it confused with anything else– look, the asset is incredibly volatile. I’m not sure it’s proven itself stable enough to be a stored value. And last time I checked, I can’t exactly use it everywhere I want to use it. So it’s not really a means of exchange just yet.

It is an asset in the sense that it has appreciating price, and it’s been going up tremendously, as we’ve all covered for a while. I still don’t understand it enough to give you some real insights. But I can tell you that I don’t own any, and I don’t plan on it anytime in the future.

Oh, you’re right about that. I can’t go use bitcoin to go purchase anything at any store nearby to me as of right now. You were talking about protecting yourself against downside risk, so I want to switch now to that. What are some of those defensive positions you think investors should be looking at in 2021 based on how the markets are doing right now?

ALFRED ESKANDAR: Well, from a factor investment perspective, momentum and growth have certainly been under a lot of challenge the last couple of weeks while value continues to do well. So if you’re playing ETFs, that’s certainly a good spot. For other more innovative type products that are really ideal for more senior and certainly more seasoned investors, you’ve got other types of wrappers altogether, everything from structured products to fixed-index annuities.

These type of products offer 100% downside protection on the principle with participation on the upside depending on the index you choose. Again, it’s the different type of product for a specific type of investor. If you want to join the day trading community and think you’ve got an edge over somebody else that you’re going to be trading against, God bless you. And thankfully, there’s enough technology available today to make it really easy.

And I think that– one last point I want to make is the market is efficient because we have different types of participants in it. If everybody was a day trader, it would not be as efficient. We’ve got long-term institutional investors, early novice retail investors, and very seasoned pros. It’s a good thing for the overall health of the market.

All right. Salt Financial President and Chief Operating Officer Alfred Eskandar, thank you so much for joining us today, as always.