Yesterday I ran across a thought provoking post on Seeking Alpha by Charles Hugh Smith. In general it was about the extent to which retail investors have sat out the big rally, how corrupted Wall Street et al is and now investors realize the extent to which it is an attempt to take money from individuals. Smith cites the recent data going around about $26 billion having been recently taken out of equity mutual funds and the $300+ billion that has gone into bond funds.
There were only three comments on the post and all three were skeptical about retail investors having collectively wised up.
I tend to discount the notion of a rigged game where firms collude to steal from mom and pops or the idea that the little guy can't beat the house. I would replace collude to steal with "create ill conceived products that frequently go bad with not enough regard for the end user; be they individual investors or institutional investors." I can recall big derivatives blow ups for Proctor & Gamble, Gibson Greetings and Orange County in the early to mid 1990s. There is incentive to push product to get paid but far more often than not the products although wildly mediocre don't hurt investors.
Don't get me wrong to the extent the above paragraph is correct it is a hideous business model that lacks proper due regard but it is not perpetual collusion to steal. I would concede that there have been instances where collude to steal has been close to right like maybe what Henry Blodget apparently did during the tech bubble.
Even if you disagree with me completely think about the tech bubble and the financial crisis. Each event gave plenty of warning--the same warnings actually. The "bad sector" grew to exceed 20% of the S&P 500, the yield curve inverted, the market rolled over for a period of a few months before going below its 200 DMA. This blog did not exist during the tech wreck but I wrote about these things so frequently as they were happening during the earlier stages of the financial crisis that there were complaints about repetitive posts not to mention the comments which said I was wrong for whatever reason.
Whether you manage for clients or you are your own client every end user is participating because they need money for something in the future--probably retirement. That starts with saving money and then investing the money in such a way as to offer a chance for growth combined with being able to sleep.
Assuming you are not saving $10,000 per month while living off of $5000 per month then some portion of your savings is going to be allocated to risk assets. You can keep it simple with things (stocks and funds) that can be sold easily to heed the warnings mentioned above or you can buy a bunch of "sophisticated" products only offered to wealthy.
To repeat a point made recently, the typical person does not need to beat anything or compete with anybody they need enough money when they need it, that's all. I have been a big fan of Australia, among several countries, as an investment destination. If picking Australia turns out to be correct over the next ten years then I would expect it will go up most of the time and have at least a couple of downturns. Anyone agreeing could buy the iShares Australia (EWA), which I own, and if worried about the occasional downturn they could do something like only own it when it is above its 200 DMA. That strategy could turn out to be successful over the next ten years but who would you have beaten? Who would you have been competing against? Even if you could somehow answer those questions what would it matter?
As a money manager I believe my task is to give clients the best chance possible of having enough when they need it and making that ride as smooth as possible to minimize the chance of their panicking at some inopportune moment. I think the best way to get there is with simple products that allow for the occasional tactical decision.
This can exist even if you agree completely with Smith's article and think I am completely wrong about collude to steal.
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12 comments:
I like EPP better than EWA. You get a diversified asian portfolio and it is still 80% Australia.
I also think they are trying to steal with outrageous fees and mediocre products to bad products.
Yes it is easy to protect yourself by owning a half dozen decent low cost ETFs and ignoring the crap they are selling, but many people do not know this and get fleeced.
Speaking of getting fleeced as long as the lambs are scared to invest in equities we may not see an end to this bull market. When they dump their bonds and jump into equities with both feet we will likely top. Acting like a heard of scared lambs until everything is "good" again and the S&P is above 1350 is their own fault.
Nope. Collude to steal is right.
I think there's an additional reason for so much money going into bond funds - and it's a similar reason why my portfolio is going through a slow adjustment.
It may not be that individuals are avoiding stocks. They may simply realize that their risk tolerance isn't what they thought it was. They realize they need more bonds or cash in their portfolio in order to avoid getting hammered so badly in years like 2008.
You look at a huge amount going into bonds, and, rounded, less than 10% of that number coming out of equities. That speaks to, for instance, people changing their 401k and IRA contributions to go into bond funds.
I tend to agree with Stephen Drone. I think people are simply seeking safety by moving to bonds, not fleeing corruption. I know I am.
I also agree that simpler is better. I'm out of leveraged products, currency trades, shorts, and most commodities. That doesn't mean that the producers had an evil intent; I simply didn't understand them and the risks that owning them entailed.
Finally, I've come to appreciate and pay for professional management for those asset classes that I don't understand but still want, like foreign bonds.
Some hard lessons, unfortunately, but part of my maturation as an investor.
Stephen Drone,
You put things in a good perspective, but there are only twoo types of investors. Those with short memories and those with no memories :)
The lambs will forget their new found love for bonds after things get "better". Then they will get greedy and sorry they missed out which will get them back into equities again.
Maybe this is merely history repeating itself. It is said that the 1929 stock market crash obliterated the individual investor while the 1930-1932 drop hammered the institutional investor.
I also think Stephen Drone is correct that people are adjusting their risk tolerance. They would rather work longer or save more than endure another crash.
Also, Main Street isn't seeing the upturn in their lives. Homes prices aren't rising (except at the very low end and that is probably temporary due to credit/FED MBS purchases) and jobs are still absent. Small business owners are hanging in there, but their incomes are down substantially.
The comments at Seeking Alpha talk about the bond bubble, which there certainly could be, but a bond bubble bursting will more than likely create a stock market drop as well.
This could also be a symptom of a debt deflation environment where investors stockpile cash as prices decline. Irving Fisher talked about how investors accumulate cash during these periods, which amplify a downturn. Today, we have the Fed pumping an unprecedented amount of money into the markets, yet we are seeing producer and consumer price indexes in disinflation. We should be seeing massive inflation. As the effects from the initial stimulus end, prices could deflate - both assets and goods/services. I think we are too quick to think we are safe from further deflation.
However, I suspect the algo-robots will keep the HFT going waiting for the individual investor to offload their shares. They better hope it happens soon or the exit may get crowded with institution guys if the news doesn't improve substantially. The market has priced a robust recovery that hasn't materialized yet.
Your last paragraph sounds like a pretty well-crafted mission statement, Roger. Nicely done.
roger as a follow up to your income presentation you mentioned you hate target date funds and mentioned one reason being they are passive in terms of asset allocation. However, there are target date funds that actively adjust asset allocation based on prevailing market conditions. In the the dc space (401k) they make the most sense for most participants...just look at allocations to company stock in most plans.
i obviously have not seen every target date fund out there but many were bad, i am just not a fan of the concept
Most if not all target date funds change asset allocations as the years march on. It's just that, if that's the route you want to go, you need to choose a date that's DIFFERENT from your retirement date in order to get what, IMO, you'd call a "normal" allocation. The funds often aren't aggressive enough. NOr do they have enough allocated to int'l markets.
So even if a target date fund is a one stop shop, you gotta read the ingredients before throwing it in the cart.
First and foremost, it's easy to forget that the decade is defined by two arbitrary points in time.
Allow me to offer some facts from Ian Lapey of Third Avenue: "For example, ten years ago, the most heavily weighted common stocks in the S&P 500 Index were Microsoft Corp., General Electric Co. and Cisco Systems, Inc. These common stocks declined 70%, 48% and 56%, respectively, during the decade. Ten years ago, these common stocks were extremely richly valued at price to book multiples of approximately 17, 12 and 26, respectively..."
So indexers got nothing but a reversion to the mean from the huge outperformance of the 90's. Yet a basic fundamental strategy offered fair returns, as did a momentum strategy, and a macro strategy. Really the only thing that "broke" was the S&P 500 index strategy which overweighted the overvalued.
Yet it's clear that our unemployment is still quite bad, the picture is grim for small businesses, and real estate has not recovered, leaving many underwater with nothing to invest. The early baby boomers are just leaving their peak earnings years and quickly approaching retirement age.
Stock markets have recovered before the economy has recovered. Funds flows will recover after the economy recovers.
Doesn't it help to consider the facts? Sometimes people get caught trying to predict the future, or call a trend. I think it is what it is, and not much else can be relied upon.
Stephen Drone - the fact that you think most target date funds do not offer a large enough allocation to international markets goes to show target date funds are probably not for you. Target date funds are for those that might not understand the implications of domestic vs. international allocation. The fact is the vast majority of investors have no business trying to chosing an asset allocation. Furthermore, while all target date funds become more conservative (i.e, greater allocation to bonds)as the target date approaches, there are some that will also tactically deviate from their target date allocation. For example, i know of a fund that had a lower allocation to equities in 2000 then 2009 in response to valuations.
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