The article includes commentary from various firms around the street exploring this with model portfolios that look much different now than they did a few years ago. Also included in the discussion was comments from Mohamed El-Erian and his model portfolio.
I would add to the discussion that de-emphasizing equities after a bad decade in line with the thinking of a lot of brokerage firms is probably a bad idea. The current event may last a couple of years longer of course but after a decade long 30% decline there is a very good chance that we are most of the way through this. The time to implement a 30% allocation to equities is not after the worst crisis since the great depression.This is not to say that you should not increase your foreign allocation. Some fear the US economy and by extension the US stock market are headed the way of Japan. Right or wrong I have never felt it will end up being that extreme. My thought all along has been below normal equity returns in the US creating the need for more foreign exposure.
As mentioned yesterday it is becoming easier to access the world broadly and narrowly with ETF and ADRs.
On a related note the Barron's interview was with Vitaliy Katsenelson (I get spam from this guy in my street.com email account every weekday). There was a lot of discussion about secular bull and bear cycles. It reminded me of something I mentioned once or twice before about a very long term type of exit strategy (perhaps not the best description but bear with me here).
Just as 1982-1999 was a secular bull market this decade is quite probably a secular bear market. The current secular bear will end at some point and then another true bull cycle will begin. Maybe that first one will be a secular bull or maybe not but there will be another 10-15 (ish) year period where global equities go up a lot, an awful lot.
From August 1982 until March 2000 the S&P 500 went from 103 to 1510 with several crises along the way. That a broad index went up so much means that diversified portfolios had a chance to go up something similar. Given what we know about human foibles let's assume that instead of a portfolio going up 15 fold with the market a portfolio only went up eight fold (about half as much as the market) that is still a colossal return in absolute terms.
Expecting a repeat in the US is probably a bad bet. I do think however that we could see something almost that big (maybe eight fold in some 15 year period) in broad based global indexes. In that scenario a US based investor at that time with the same foibles as his 1980s-1990s cousin who takes the idea of a global portfolio to heart might be up four fold.
A decade or two where broad global indexes go up 8-10 fold, or there abouts, is a good as it will ever get. If we are lucky enough to be around the next time something like that happens, regardless of how well we did relative to the index, we would need to cut back exposure dramatically at that point. You could wait for 200 DMA breach or the 50 DMA crossing below the the 200 DMA or something else but cutting back after the biggest bull market in 30 years or 40 years or whatever, even if it keeps going, will ensure much less pain when that party finally ends.
Right now we are at the opposite end of that spectrum globally speaking. To be clear I am not talking about one stock going up five fold in a couple of years or so but getting that type of gain from broad based indexing.
Think of it this way; how much do you have in your account right now? If ten years from now that figure was five times bigger than it is right now, by how far would that exceed your expectations? If you got 25 years worth of returns in ten years do you think it might be prudent to lighten up at that point?
On an unrelated note Joellyn and I did something unusual on Friday night. The rock band Foreigner came to Prescott (Prescott Valley actually) for a concert. Apparently they do this thing where they make contact with a local charity to sell their CDs before, during and right after the concert and the animal rescue that Joellyn works for was that charity for the Prescott Valley show. People paid $20 for a double-disc set, $5 of which went to United Animal Friends, and they got a ticket for a drawing to win a Les Paul guitar autographed by the band and to meet the band after the show. I was roped in to being the spokesperson (no public speaking hangups) which entailed going on stage a total of three times to talk about about United Animal Friends, the drawing and then to announce the winner.Collectively we sold about twice the number of CDs that they typically sell to a much smaller audience than normal netting UAF $1760.
As for the band and the concert. I had forgotten how many big songs they had (check out the Wikipedia page) wow. Only Mick Jones is left from the original band, the rest are new originals (Spinal Tap reference) and they put on a hell of show. About 1/3 of the drum solo the guy did with his bare hands, I'd never seen that before. All in all it went very well and we had a great time. If you care you can see more pictures posted on the UAF Facebook page. If you are on Facebook please become a fan of UAF.
9 comments:
Thanks for your insights on Barron's cover story, Roger. I recognize my own tendencies in the story and agree, as difficult as it is, that it's precisely the wrong time to act on them. Where were these firms' portfolios when we should have been reducing risk?
Sounds kind of like reversion to the mean - which you have said you don't believe in.
Like my buddy said, "after every dry spell, it rains."
Roger,
talking about the 82-2000 market, I was looking at the S&P data from april 62 to today. I have used some stuff that I learned back in college to do such analysis. I did this analysis after I left a question on yesterday's blog. Well what I found is that any such divergence since 62 like we had back in march/2009 is followed by an advance and such divergence is not repeatable in short time but would take many years. I do not know what to make of such finding. I do notb have the S&P data from the 20's to 62. That would be interesting to have such data since it would give me a stronger definitive answer as to wether we are going back down. However, this analysis says that we will not go back to S&P 667 anytime soon. However I am in the camp that after 1166 we are going back down. If anyone has the S&P numbers from the early 20's to march 62 and is willing to share tbhese numbers than I can finalize such study.
Best,
Jeff from Milan, Italy
Roger,
You have know idea how long this secular bear will last. You "feel" it will not be as bad as Japan but do not have any objective data to support your feelings (how could you?).
This secular bear will be a long and winding road and we are not close to the end, but it is difficult to determine if it will be a 7 year or 21 year process as we do not know what steps the Fed and government will take. I fear they will take short sighted steps that make it last a long time. That is what Japan did, it is what we have done so far, and it is the nature of politicians.
When was the last time you heard legitimate sources calling to bring back Glass-Steagall?
The future decade is not looking bright IMO. Of course that could bring very low S&P numbers that then allow a 10 fold increase as you predict.
Anon 9:17,
you are doing the exact same thing I am. Looking at the situation and drawing a conclusion, that's it.
it will work out however it works out but that is my opinion.
Roger,
Fair comments, but I would be willing to bet this turns out similar to Japan.
It does not mean I am right, but I think El-Erian would agree with me :)
why not ladder 6 month T-Bills via Treasury Direct instead of buying TIPS? Seems as though you would conservatively protect against deflation and still able to capture inflation yields without any loss of capital.
how do you ladder products with the same maturity?
six month bills yield less than ten basis points currently.
The pendulum swings, always, but it helps if it does not have a razor-edged axe on the end w/ you strapped down beneath it (shades of Edgar Allen; RIP).
Anon 5:39, you may be thinking of a rollover strategy (usually worked with CD's or similar insured instruments). I'm not a big fan of TIPS for individual investors with no COLA liabilities myself but you might consider a (real) ladder of treasuries plus investment grade floaters to capture the effect you seem interested in. Interest rates tend to respond much more powerfully and quickly than CPI (and more realistically too IMO) so, if treasuries fall, floaters rise considerably faster and, in the deflationary case, the larger treasury position compensates for lower floater prices.
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