Many years ago, one decision changed the course of my life.
In the late 1970s, upmarket resorts were all shiny and new…something you rarely, if ever, indulged in.
In those days, camping grounds and highway motels were your standard holiday/weekend accommodation.
For a young fellow from the burbs in Brisbane, the opportunity to stay at a resort was one not to be missed.
The appointments and surroundings were like nothing I’d experienced before. The pool deck was like a tropical oasis. There were sun loungers, wait staff and two pools. One large and one small. The water in the smaller of the two pools was cloudy. What the heck. Time to dive in.
But something inside me said to jump. My descent into the water ended abruptly at my knees. The immediate emotional response was a mixture of surprise, shock and relief.
Up until that day, I never knew an (oversized) plunge pool existed. And back then, warning signs were the exception, not the rule.
Without that change of mind, I’m convinced the remainder of my life would have been spent in a wheelchair.
Had there been warning sign, a depth indicator, someone already in the plunge pool or I’d seen one of these pools before, then the course of my life would not have come down to a 50/50 choice.
By chance I made the right decision that day. But making good decisions should not come down to a coin toss.
Better information = better decision = better life
Seeing dangers and/or opportunities beforehand can help us make choices that lead to better outcomes. That principle applies to health and wealth.
In all my years in this business, the investments that invariably give investors (and, advisers) nasty surprises are the ones operating in cloudy pools.
Absolute return. Private equity. Long/short fund. Growth fund. Geared property trusts.
Most people (including advisers) don’t really know how these products actually work.
When things are going well these opaque offerings can be world beaters. Who really cares how they deliver returns, just keep those performances coming.
But knowing in advance — not finding out after it’s too late — is how you can make valued judgement on whether to dive, jump or not go in at all.
In the August 2019 issue of The Gowdie Letter, readers were alerted to the risk associated with just your basic ‘balanced’ fund, let alone products that are far more exotic…
‘Unless you really and truly know where your funds are invested — besides being in a balanced or conservative portfolio — you have no idea how the dominoes falling in one part of the world can impact — positively or negatively — your capital.
‘For me the only transparent asset class, one that affords me the highest degree of capital protection (a government guarantee up to $250k per taxpaying entity per ADI), is cash and term deposits. Plain vanilla.
‘And that’s my answer to the question I’m most frequently asked…I prefer to hold cash/term deposits and accept a lower rate of return on (100% of) my capital. If the return is not sufficient enough to fund living standards, then the shortfall can be deducted from capital.
‘The alternative is exposing our capital to a predictable and particularly nasty market event — with an unknown time of arrival. An event that has the potential to destroy the majority of our life savings in a matter of months/years.
‘From my perspective — at 60 years of age — that’s a pretty stark choice.
‘Controlling the rate of capital reduction or having no control over the reduction inflicted on capital.
‘The reason I do what I do, is I’ve been there and done this since 1986.
‘Having gone through three major crashes — 1987, 2000/01 and 2008/09 — I know how devastating these capital destroying events can be on people…financially and psychologically.’
That predictable and particularly nasty market event has arrived.
This event — the one the investment industry did not see coming and now wants you to desperately believe will have no lasting effects — does have ‘the potential to destroy the majority of our life savings in a matter of months/years.’
The All Ords fell 35% in the space of one month. Yes, there’s been an attempt at recovery. But it lacks any real foundation.
How far and how fast?
Markets are being set up for another downward plunge. How far and how fast? These are answers only the market can (and will) provide. But the outcome is known in advance…greater losses await.
The market’s first leg down has already confirmed that investors have ‘no idea how the dominoes falling in one part of the world can impact — positively or negatively — your capital.’
This is an extract from Professional Planner magazine on 7 April 2020 (emphasis added):
‘The question for funds today is this — what is the real value of vast number of illiquid unlisted assets held (both directly and through institutional funds) by super and some managed funds?
‘Some have begun to write down assets by 5 to 10 per cent and up to 15 per cent for private equity. Some justify only small adjustments by saying their unlisted valuations never reached the peak valuations that listed assets reached.
‘Even if this were true for some assets, with falls in listed property, listed infrastructure and listed private equity/debt of as much as 40-50 per cent there is still likely a massive disconnect.’
The recent volatility on Wall Street has directly impacted illiquid unlisted assets held in Aussie super funds.
According to the industry hype, these were supposedly uncorrelated assets. Designed to provide ballast to ‘balanced’ portfolios.
This industry BS was exposed in my 2017 book, How Much Bull Can Investors Bear?:
‘The diversification espoused by Benjamin Graham and Harry Markowitz was for an era when markets sent back reasonably reliable signals of risk versus reward. Not so these days. All the market wants these days is confirmation that the Fed has its back. Fundamentals count for diddly.
‘That US$12 trillion that’s been printed into existence since 2008 has had to go somewhere. Any guesses? Try these for size:
‘Bonds. High-yield securities. Shares. Property. Collectibles. Infrastructure. Private equity. Venture capital. Cryptos. Loss-making IPOs.
‘Running in tandem with the asset price inflation (created by the rising tide of cheap and abundant money) is a derivatives market measured in the hundreds of trillions of dollars.
‘I’d like to give you a more precise figure, but the fact is that no one knows exactly how big this weapon of mass destruction is…and that’s frightening!
‘These days a diversified fund might look something like the pie graph below.
‘You think you’re investing in a wagon wheel of supposedly uncorrelated assets.
Source: 720 Global
‘In fact, what you are actually buying into is this:
Source: 720 Global
‘Diversification amounts to nought if the capital behind those asset classes can be traced back to a single denominator…QE, zero interest rates and the chase for yield.
‘Central banks have floated all boats higher…with one exception. You guessed it…cash.’
When you look through the cloudy water and see what’s really below the surface, it’s evident that balanced funds are anything but balanced…they are seriously unbalanced.
The dangers lurking in these funds would only rise to the surface after markets turned nasty.
And here they come. But this is not new. We’ve seen this before.
Unlisted property trusts. Debenture stocks. Mortgage Funds. Hedge Funds.
The inability to accurately price assets in a world that’s been turned upside down has resulted in these funds being ‘gated’, investors are trapped in the fund.
But we’ve never seen it before with ‘balanced’ funds.
Until the Australian Financial Review (AFR) reported last week (emphasis added):
‘Hostplus has quietly changed its terms and conditions so it can freeze redemptions and prevent cash switching, as the $50 billion fund faces questions about its capacity to meet what could be an avalanche of requests for up to $20,000 by out-of-work members.
‘A new clause has been inserted into Hostplus’ product disclosure statement that allows the fund to “suspend or restrict applications, switches, redemption and withdrawal requests”.
‘The statement previously assured members that any request to switch investment options received before 4pm on a business day would be processed. Now, the trustee retains “absolute discretion” to disallow the movement of money and warns requests might be processed with “significant delay”.’
Hostplus has gone on the offensive and advised there’s nothing to see here.
According to the Hostplus press release, this new clause was just an update to the PDS’s (Product Disclosure Statement) ‘governing rules and discretions as these relate to investment pricing and transactions’.
What discretions might public offer super funds exercise when the market turns really nasty? Staged redemptions? Freeze on withdrawals? We’ll see.
But if markets behave as badly and as unpredictably as I think, then investors are in for a not so pleasant surprise. Possibly being trapped in funds that continue to sink lower in value.
That experience as a young fellow taught me an invaluable lesson. Identify danger before NOT after the event.
The decisions you make — stay, go or reduce — could have a profound impact on your life. Choose wisely.
PS: Discover why forecasting guru Harry Dent is convinced we’re in the ‘the greatest bubble in history’ that could wipe out 40%-plus value from the stock market. Click Here for Your Free Report.