In the modern age, balance is becoming increasingly harder to find.
Deep divisions exist between left and right. Facts become a casualty in the war for society’s hearts and minds.
Dare speak the obvious and say that ‘all lives matter’ and you risk being pilloried and vilified as a racist.
Anyone with an IQ greater than their shoe size would ask what’s even remotely racist in saying that the lives of all people‚ regardless of ethnicity matter?
Surely, that’s the attitude we want to cultivate in a multicultural society?
Question the idiotic and debate-ending notion of the ‘science is settled’ and you are labelled a denier. The science on climate change — like it is on COVID-19 — is far from settled. Powerful vested interests are not interested in balanced argument or data that casts doubt over that which is supposed to be ‘settled’.
They have an agenda and any reasoned argument that threatens the preordained outcome must be silenced by the baying mob.
Seeking balanced views is far from easy in a world rife with biases, self-interest and blatant stupidity.
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The investment industry has its fair share of prejudices
The investment industry also has its fair share of prejudices, perceptions and propaganda.
And this chart of the Dow Jones is why.
Source: Macro Trends
Since 1980, the Dow Jones has gone from 875 points to 26,287 points…a thirtyfold increase.
There’s been no other period in US market history that comes even remotely close to this.
40 years of superior performance has turned myths into ‘truths’…
- ‘The share market always goes up’
- ‘Don’t fight the Fed’
- ‘Buy the dip’
- ‘TINA — there is no alternative’
The only fear that shares hold for investors these days is FOMO (fear of missing out).
The Dow Jones chart is the industry’s version of the science is settled on shares for the long term.
Questioning the how and why behind this period of spectacular performance and (just as importantly) whether it can be repeated, is conveniently ignored.
Demographics…boomers are transitioning from credit-funded consumption to pension-funded retirements. Will Gen X and millennials be able to maintain the exponential debt curve…even with rates at near zero?
Since 1980 global debt has risen from US$13 trillion to around US$260 trillion. That extra US$247 trillion was a major contributor to share market growth. Can debt levels increase another twentyfold (to US$5,200 trillion) or have we reached a point of peak debt and now we see defaults?
Another major driver of past performance has been P/E 10 expansion. The earnings multiple has risen from eight times to around 30 times. Can the P/E 10 rise another fourfold to 120 times?
Source: Guru Focus
These are the inconvenient truths that the industry ignores in its unbalanced commentary of why shares is the only game in town.
Failure to understand how we got here means you have no clue where we’re going to.
Without the same drivers of demographics, debt, falling interest rates and P/E expansion, the future is unlikely to be a repeat of the past.
But who wants a balanced discussion in an unbalanced world?
And that unbalanced view is now potentially risking retirement outcomes.
This is from yesterday’s The Sydney Morning Herald (emphasis added):
‘It [the current disconnect between the economy and markets] is a challenge that is prompting some to re-think rules of thumb, such as the traditional 60:40 balanced portfolio, in which 60 per cent of the assets are in shares and the remainder invested in fixed income.
‘With interest rates near zero and little prospect they will rise anytime soon, [Pendal Group chief executive Emilio] Gonzalez questions whether the strategy still makes sense.
‘“We now have interest rates and yields at such a level that how much more room is there that that [60:40 portfolio] will protect you in difficult times? It may well be that a higher equity component at this point in the cycle…may be a wiser position than just a plain 60:40 portfolio.”’
Wow. Where do I start?
Rethink rule of thumb? The traditional 60:40 balanced portfolio?
When I started in this industry in 1986, the traditional balanced portfolio was one-third fixed interest, one-third property and one-third shares.
This ‘rule of thumb’ portfolio evolved due to fund managers chasing performance.
And what asset class was performing the best? You guessed it…shares.
Gradually one-third shares became 40%. Then 40% moved to 50%…oh what the heck, let’s go to 60%.
Now, there’s moves afoot to make the asset allocation in the rule of thumb balanced fund even more unbalanced…
‘…how much more room is there that that [60:40 portfolio] will protect you in difficult times? It may well be that a higher equity component at this point in the cycle…may be a wiser position than just a plain 60:40 portfolio.’
Confession time. I read this passage at least six times. It made absolutely no sense to me. Was I missing something?
In these difficult times, how does increasing your allocation to shares protect you?
And, then this: ‘a higher equity component at this point in the cycle…may be wiser.’
Which cycle might that be?
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This chart (published July 2020) on 150 years of cyclical trends in the US market — adjusted for inflation — has the US share market cycle poised for turning…down.
Source: Advisor Perspectives
A higher equity component at this point in the cycle could be the dumbest thing an investor ever does…unless of course that 150-year cyclical trend no longer applies.
Note: those previous peaks above the mean (red arrow) also coincide with the peaks in the P/E 10.
Calls for increased weightings in shares at the very peak of a four-decade long boom are to be expected.
Belief in the upward trend continuing indefinitely is almost absolute.
All sense of balance and historical perspective is lost.
Fund managers should research some history
What we should be hearing from fund managers is a call to reduce equity weightings of balanced funds back to the ‘original’ allocation of one-third.
But that’s not going to happen. They all huddle around the middle. And when the proverbial hits the fan it’ll be the same old tired excuses…‘a black swan event’, ‘hit by the perfect storm’ and ‘relative to other funds we did well’.
In the context of time, 40 years is nothing more than a blink of the eye.
Fund managers should do themselves — and the investors who have entrusted them with their capital — a big favour and study some history.
To appreciate the natural balance in the investing world, we refer back a couple of thousand years to the Talmud investment strategy.
‘The Talmud contains the teachings and opinions of thousands of rabbis on a variety of subjects, including Halakha (law), Jewish ethics, philosophy, customs, history, lore and many other topics.’
On financial management…
‘Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.’
The Talmud (c 1200BC–500AD)
The rabbis’ opinion on prudent money management has stood the test of time.
In Roger Gibson’s excellent book Asset Allocation: Balancing Financial Risk, he noted ‘whoever wrote the Talmud knew something about risk. He also knew something about return.’
The wisdom of one-third shares, one-third property and one-third cash is considered a relic of the past.
The Talmud investment philosophy is a timely reminder of how it’s possible (over a period of time) to drift away from the wisdom of the ages.
The looming problem for a lot of Australians is their superannuation money is invested in the default balanced option.
These unbalanced funds — with an already overweighting to shares — are likely to suffer serious losses when the cycle gains downside momentum.
The serious imbalances in the global financial system are staring us in the face on a daily basis.
All indications point to a crash of biblical proportions in our near future…one that comes with such force even the mighty Fed could be powerless to stop.
Calls for an increased weighting to THE riskiest of all asset classes, as a form of protection, is a clear indication we have reached a tipping point.
Ironically, the best defence against this unbalanced approach is to create an equal and opposite imbalance in your portfolio.
An overweight position in cash will be the perfect counterbalance to the industry’s one-sided approach.