The Dilemma for Financial Planners: Cash or Shares?

Dear Reader,

This is a true story.

The names have been changed to protect the innocent and the gullible.

In 2018, a relative — who is single and aged in her mid-50s — asked me what she should do with her superannuation money.

The fund’s latest statement, showing a negative return, had her a little rattled.

The amount we’re talking about is barely into six figures. But to her, it’s the world.

Every fortnight she tops up the employer contribution with a salary sacrifice from her modest income.

Ask her why and she says, ‘be nice to have a bit extra for when I get the age pension [at age 67]’.

Mary is an ‘honest toiler’. Life is simple. Goes to work. Lives within her means. Almost owns her home.

My question to her was, ‘how would you feel if your super balance fell by 30% or 50%?

Shattered’ was her one word reply.

In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.

My follow-up question was, ‘how much could your balance fall in value without you becoming too anxious?

Her tolerance was 10%. Want to know how she came up with that figure? She worked it out based on the number of years it would take in contributions (employer and hers) to recoup the lost amount…Mary figured she could work an extra two to three years if necessary.

To which I said, ‘If it was me, then I would switch from 100% balanced to 20% balanced and 80% cash. That way if the balance fund falls 30% to 50%, overall you’ll only be down 6% to 10%. Your cash won’t earn much, but you’ll be compensated with peace of mind.

That’s where I left it with Mary.

Not long after that, she made the switch…80% cash and 20% balanced.

Mary was happy with this until she received a phone call from the new financial planner who was assigned to manage her file.

Bob (the new planner) was doing an annual review of Mary’s personal insurances (life, trauma, and income protection), and also wanted to discuss her superannuation fund.

After that meeting — in mid-2019 — Mary called me…‘The planner recommends I move out of cash. He says I need growth in my fund.

My response (as you can guess) was rather predictable…‘That’s true on the proviso the investment actually grows. But if it shrinks, then you’ll be moving further away from your retirement goal.

Mary opted to keep the 80/20 mix. Apparently, Bob was not too happy.

A few weeks ago, Mary initiated contact with Bob to discuss the ever-rising premium costs of her personal insurances.

Bob took the opportunity to stress the need for her to switch out of cash. He wanted to arrange an appointment to discuss the insurances and superannuation with Mary.

She felt she had to justify the choice she had made with her money. Mary asked if I would accompany her to the meeting. I did.

Should retirees opt for a more conservative tilt?

Long story short: Bob began to explain why ‘share always go up for the long term’.

He used the standard chart showing the All Ords ascent since 1980…rising from around 500 points to over 6,000 points.

A compelling story…until you realise what happened prior to this period of stellar performance.

The All Ords went virtually nowhere from 1968–82.

Port Phillip Publishing


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Using past performance to indicate future returns is risky business.

You’re assuming the conditions that produced those returns — interest rates, debt levels, demographics, tax policies — will continue unchanged.

If you believe the All Ords will again deliver a similar performance over the next 40 years, then you’re assuming the index will be 72,000 points in 2060 (another 12-fold increase).


But equally possible is the prospect of a period of exceptional returns being followed by one of extended consolidation…like 1968–82.

Which possibility do you ‘bet’ your retirement savings on?

In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.

How much downside you can afford to suffer?

To counter Bob’s ‘extrapolation of the trend’ narrative, I outlined the drivers behind the US market’s performance…as outlined in the August 2019 issue of The Gowdie Letter:

The majority of investors know the US share market has been a stand out performer since the events of 2008/09.

But very few know how that performance has been achieved.

Most will cite the strength of the US economy and perhaps the effect of low rates on “forcing” people to buy income producing shares.

But how much have low rates contributed to the market’s performance? What about the other positive influences…how much have they boosted the performance numbers?

And, more importantly, can they be repeated?

Ray Dalio, the founder of Bridgewater & Associates, in his latest research paper “Paradigm Shifts”, has crunched the numbers and produced an interesting chart.

Before sharing his findings with you, for those not familiar with Ray Dalio, here’s a little background from the 28 January 2019 edition of Barrons (emphasis is mine)…

“Bridgewater has delivered the biggest net profit of any hedge fund firm ever, since billionaire [Ray] Dalio founded it in 1975 through the end of 2018, according to an annual ranking by hedge fund investor LCH Investments. Bridgewater—which is the world’s largest hedge fund firm with $150 billion in assets under management—led the list with a net $8.1 billion gain in 2018 for its Pure Alpha, Pure Alpha Major Markets and Optimal Portfolio strategies, following a gain of $300 million in 2017. The firm has delivered a gain of $57.8 billion for these strategies since its founding, according to LCH.”

In short, Ray Dalio is a very, very savvy investor.

Here’s the chart from “Paradigm Shift’s” that identifies how much each “booster” has added to the S&P 500 index performance.

Blue line — S&P 500 index performance.

Red line — the performance without the assistance of…artificially low interest rates.

Orange line — the performance without the assistance of low interest rates AND profit margin expansion (more on that later).

Grey line — the performance without the assistance of low interest rates AND profit margin expansion AND Corporate tax cuts.

Dotted blue line — the performance without the assistance of all of the above AND Share buybacks (reducing the share count).

Port Phillip Publishing

Source: Paradigm Shifts

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Absent the stimulatory effects of these “boosters”, the performance of the S&P 500 index would have been lacklustre…a truer reflection of the underlying economic conditions.

The other performance enhancing factor that Ray Dalio did NOT include in the chart, was the impact of…PE expansion.

In September 2011, the S&P 500 index average PE ratio hit a low of 13 times. Since then it has expanded to 21 times…a 61% increase.

Port Phillip Publishing

Source: Macro Trends

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Let me explain the importance of this contributing factor.

In 2011, a company earning $1 billion was valued at $13 billion (based on a 13x PE).

In 2019, the same company, earning the same $1 billion is valued at $21 billion (based on a 21x PE)…a 61% increase in value that was achieved solely on an expansion of the multiple paid for earnings.

When you deduct PE expansion from the blue dotted line in Ray Dalio’s chart, the S&P 500 index has gone nowhere since 2009.

Granted, these stimulatory factors existed before the events of 2008/09.

However, the influence of and the reliance on these artificial performance enhancers since 2009 is clearly evident in the chart.

But can they be repeated?

On analysis, these enhancers are all one-offs.

Understanding how returns have been constructed enables you to make some considered assumptions on the likelihood of them being replicated.

Charts showing past returns — good or bad — are just the starting point…not the end point of the discussion.

To his credit, Bob acknowledged the potential for further…

  • P/E expansion
  • Corporate borrowings to finance share-buybacks to boost earnings per share (EPS)
  • Tax cuts (quite the reverse if Biden is elected)
  • Interest rate cuts
  • Private sector debt accumulation

…is limited.

Bob now had a dilemma. Doubts had crept in over his previously unquestioned belief in the strength of the share market.

What would he do? Opt for a more conservative tilt in his clients’ portfolios or maintain the industry ‘growth’ narrative?

My guess is he’ll stick with the narrative.

To do otherwise requires a complete change of mindset and a desire to access opinions that challenge institutional thinking.

However, I did wonder what he would do with his own money.

The upshot of our meeting is that Mary did switch her portfolio…to 100% cash.

Bob raised no objections to this.

Your savings represent years/decades of sacrifice and hold the promise of your retirement.

Think carefully about how much downside you can afford to suffer, before your dreams are ‘shattered’.


Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion