That title might be a bit of a stretch but there was an excellent writeup in the FT yesterday by John Authers that questions the assumptions about equities that are held dear by
Authers refers to multiple quotes from a Rob Arnott article due to appear in the Journal of Indexes. A big take away is that "the cult of the equity" has let investors down. Also the efficient market hypothesis cannot be applied to the last 18 months.
The charts included in the article are pasted here and contribute to the argument that it may be a while before equities work again. Reader Clive left a link to essentially the same chart a few weeks ago.
Read the article, I can't do it full justice with a recap.
My first thought is somewhat snarky but with more and more people telling us that equities may not work it seems like maybe we are getting to a point sentiment-wise where equities should be be bought with both hands for what could be a Q2 1933 type of rally (the market doubled in about three months 54 up to 106). If equities truly are broken, which is not what I believe, then shockingly violent spasms in either direction would not be a surprise. This not a prediction so much as contrarian thought.
Perhaps the more practical way to think of this is something I have been writing about for a while in terms of evolution of portfolio construction. If your financial plan calls for 7% as a mid-line number for success you can still get that number even if it means owning less straight equities. Averaging 7% may mean including commodity exposure, absolute return exposure, thematic exposure, foreign currency, foreign debt, exposure to countries that are more in their own worlds or other things.
My view for several years has been that US equities will still go up but at a lower average annual rate than what we have been accustomed to. This means having more exposure to the things listed in the previous paragraph, less reliance on broad-based products like SPY and EFA and more reliance on narrow products like sector, sub-sector and country funds, individual stocks, specialized mutual funds and maybe types of products that do not yet exist.
If this scenario pans out it will require more work but I believe it could deliver a better risk adjusted result than passive investing. The extra work required would be in terms of research, understanding how things trade and how to blend various products together to get a volatility you can live with. Just because it would be more work does not mean it isn't doable, I've been writing about this stuff for four and half years. If I can begin to understand this stuff you can too.
15 comments:
I wrote last fall about the famous nine percent. As investors rethink all of this, they will be prone to pull in their horns, but that may not be the right instinct, as you point out.
S&P???: This maybe a stupid question but has the S&P500 always numbered 500 because in the first part of the century I am doubting it. In regards to the second chart for dropping S&P dividends, as the number of S&P companies increases I would think that it increased the number of companies that are not able to continually pay a dividend over a century's worth of time more so then companies that could. Sure they have dropped but perhaps not as dire as the graph would indicate.
In seeing equities and bonds getting ready to cross again perhaps in 2060 we will have an article discussing "The death of bonds" for those who invested in 2009...
No offense to John Stewart's mother, but if you are 75, with the strategy of buy hold and never change or rethink your investments then I don't know it THE system is broken as much as YOUR system is broken. Additionally I don't think Cramer advocated retirees to be so heavily into equities. The very few times I care to listen to him he stated if you need money in the next 5-10 years it should not be in the market.
I say this coming from someone who also lost 50%+ since this current mess started so I am pointing fingers at myself too.
so this is a "generational low"
and it's UP from here?
Hi Roger.
Perhaps a good reason to extend diversification to include bonds.
With a sale shoppers hat on it would appear that both stocks and corporate bonds are showing reasonable discounts and not all of those discounts would appear justified.
Take for example the UK's Nationwide building society
http://www.nationwide.co.uk/investorrelations/business-overview/default.htm
They haven't IPO'd and as such are still within the old style investors deposit against which they lend out mortgages type simple mutual society business framework, and they are advertising to the effect of how well placed they currently stand.
Yet one of the routes they raise additional capital by, PIB's, are at sale price levels.
Take for example their 6.024 coupon PIB, at recent prices currently yielding around 9.27% and with a 2013 (if I recall correctly) yield to call of 19.24% (when they have the option of being bought back at a 100 par price).
http://markets.ft.com/ft/markets/reports/FTReport.asp?dockey=PIBS-200309
PIB's carry risk, in that if the society go broke you're one of the last in line, but to date no Building Society has failed to pay the yield. PIB's are also illiquid and carry quite a large bid/ask spread. - Ouch! 55/65 bid ask spread currently shown for NAWI
http://www.iii.co.uk/investment/detail?code=cotn:NAWI.L&it=le
Not a recommendation, do your own research and all that, and I don't own nor currently do I intend to own any NAWI at the present time.
I hope your post gets wide play, Roger. It's much more responsible than the narrow-minded conclusion drawn in the FT article. Authors who kill pixels to once again proclaim the death of equites are doing investors a dangerous diservice, IMHO.
One effect this has on me is to pay a lot more attention to the non-equity portion of my portfolio. In the past, I've simply...
1. Determined the percentage I'm allocating to bonds.
2. Purchased a total bond market index
I look at things like the Permanent Portfolio idea and Swenson's lazy portfolio and other books I read and I understand that long term gov't bonds increase performance at the price of volatility. It makes me think that perhaps I should pay more attention to long bonds. Of course, every question creates NEW questions. What, then, should my bond strategy be? What if my 401k is typically bad and doesn't offer a lot of bond choices? Is it better to lower the 401k contribution and invest after tax money? The questions go on and on. And then of course my wife wonders why I spend so much time in front of the computer. heh.
let's talk about high yield bond
funds...they are doing fine 8%
Fidelity has a few good ones...
any other ideas..thanx
Hi Stephen
I also stated looking at the Permananet Portfolio idea recently
The first item I came across however showed poor (flat) 1996 to 2002 performance.
http://www.investmentu.com/IUEL/2006/20060825.html
But then from the horses mouth a totally different picture for the same period
http://harrybrowne.org/PermanentPortfolioResults.htm
Robert Moore has an interesting variation using ma cross-overs, but his postings seemed to only span 2007 and nothing since.
http://www.safehaven.com/article-6793.htm
The PP is relatively new to me. Seems a lot more reasonable than that of the likes of Scott Burns' Couch Potato and extensions. I get the impression that the simple CP stock/bond blend worked reasonably well historically, but then if an extra element were added in then the historical performance was improved, and then later if another element was added then a further improvement occurred...etc The million dollar question however is what will be identified as the next historically outperforming extension added to the ten-fold.
There was a good discussion of the Permanent Portfolio last year on this blog, I wanna say in the 2nd half of the year.
Here's another link about historical performance from a guy who posts somewhat often on the Diehard forums and does a blog about the permanent portfolio. Performance during that period seems to be ok.
Clive - looks like the comments on performance at the end of the investmentu.com article refer to the Permanent Portfolio mutual fund and not to Browne's actual permanent portfolio. They are not the same.
He did not maintain his association with that fund. His book "Failsafe Investing" made it clear that you should use only the 4 assets, and he did not endorse the mutual fund.
Thanks for those links Stephen.
Must admit the PP does seem to have a simple basic concept. Rather than the "hindsight is a wonderful thing, I look forward to having some tomorrow" type alternatives.
Roger,
In case you have not seen this article by Hougan on the new hedge replica ETF.
http://www.indexuniverse.com/blog/5618-a-look-inside-the-hedge-fund-etf.html?Itemid=3
thanks, i just submitted an article to TSCM about it.
Roger- Yardeni was on Fast Money today and pronounced that the bottom is in and that one should not be defensive with their portfolio. He says that the fed's injection os capital and buying treasuries to lower mortgage rates is working!! Hooray the bottom is in and the Nasdaq has regained its 200 DMA.
On the flip side Roubini says more pain to come... Whom is right, anyone's guess and therefore buy hold is the way to go?
Post a Comment