As everyone on this discussion board knows, 2013 has been a truly strange year for investors in many ways. We have seen some interesting and puzzling events in the world economy, and we have managed to survive any number of what the electronic media would have us think were end-of-world crisis. In a recent webcast for clients, we ended with five observations that we think investors would be wise to consider. For what it is worth to MFO folks, I thought I would post them here for discussion.
1. Be TRULY diversified, but consider an under-weight or over-weight in specific areas if an opportunity presents itself. Look for opportunities among the ignored and unloved. (We like EM right now and would overweight actively-managed EM stock funds such as ODVYX, WAFMX.) But also recognized that sometimes a sector is unloved for a good reason (managed futures, global macro, etc.).
2. Avoid long-term bonds in general, but especially mid-to-long Treasuries. Use flexible mandate bond funds such as OSTIX, GSZIX, LSBDX. Recognize the huge impact Bernanke's May comments had on even short-duration government bonds.
3. Don't succumb to fear. A real or imagined crisis occurs frequently, often with little or no lasting impact. Macro events (black swans) cannot be avoided, but they occur much less frequently than the perennial bears would have us believe. Remember that your time horizon is crucial in managing this aspect. Always be mentally prepared for market corrections. They happen.
4. Understand there is no safe place to get 4-5% now, despite what the annuity salespersons might say. If portfolio income is crucial, consider increasing dividend stocks and reducing fixed-income. Be careful about reaching for yield. Bank loan funds are way overbought right now and many are non-investment grade and could be problematic in a credit crunch.
5. Don't be greedy. Capture gains, especially from long-held bond funds. Re-balance, re-allocate. Nothing is forever. Make sure your investments match your risk profile. Don't confuse the return you NEED with the return that you WANT. If gains are taken from domestic stocks, consider adding or increasing dollars to dynamic allocation investments such as FPACX, IVAEX, TIBIX, OSTVX, PAUIX (yes, still a good option). Or consider reducing volatility in domestic equity via a quality long-short fund.
Comments
Great paragraph on fear. Text book!
Great read to start the day.
Thanks for your commentary expressing your thoughts on the markets along with providing some windsom and suggestions that we individual investors might wish to explore. On the emerging markets front, I began increasing my allocation to them, and to greater Europe, about a month or so ago and I am pleased thus far with my increased valuations.
I have shortened my duration in my fixed income sleeve along with using some multi sector income funds that can hunt the fixed income universe for opportunity. This seems to be in concert with what your are saying.
I am not saying everything that I do turns out right but it is good to hear someone like yourself share your thoughts; and, if those thoughts mirror some of your own thinking and actions that makes it even better.
Thanks again Bob, for helping us individual investors along the path of investing. It is greatly appreciated.
Perhaps, you would consider on writting a monthly piece on where you might be seeing value and opportunity?
Something to think on.
Very truly,
Skeeter
Perhaps my standards are too high, but that’s why I only post on the MFO website. Although I concur with your generic market observations, I rate your five closing webcast talking points as prosaic and pedestrian.
My criterion for judging the merits of your ending presentation is simple. Has the information added value to my investment understanding or value to my specific portfolio? My answer to both parts of that question is a firm “No”. I would not have been happy or satisfied with the shallow depth of that final assessment. I hope other segments of your webcast contained more definitive and more focused investment endorsements.
I have immediate and constant access to similar recommendations on MFO. I can secure identical advice by simply reviewing the general investment lessons pontificated by recognized market wizards like John Bogle and Warren Buffett. Here is a Link to the 25iq website that summarizes lessons learned from a bunch of these experts:
http://25iq.com/
Jesse Livermore was a famous speculator who won and lost fortunes several times. He too formulated his investment rules. Here is a Link to his summarized wisdom:
http://www.businessinsider.com/jesse-livermores-21-trading-rules-2013-2
Much of this does concur with your pronouncements. My issue is that it all has been freely accessible for years. It is old stuff that is widespread and common knowledge.
To summarize, you recommended: (1) True diversification, but some special sector adjustments (unspecified) are acceptable, (2) Avoid long-term bonds, (3) Don’t succumb to fear, (4) Absolutely safe 4-5 % investments do not exist now, and (5) Don’t be greedy.
Unless your clients are from anther planet, these 5 recommendations are all run-of-the-mill general observations or have been specific for our current low inflation rate/low interest rate environment for an extended period. There are no new insights here.
I hope you expanded on the dangers of constant sector rotation. Data demonstrates that even the experts frequently get it wrong. You seem ambivalent on this matter given that you advise to “Look for opportunities among the ignored and unloved.” Yet you caution “that sometimes a sector is unloved for a good reason”. That duopoly is not really actionable advise.
I hope you alerted your clients about the historically poor performance of long-short funds. The tradeoffs between reward and volatility risk remain intact. There are many ways to dampen volatility. Because of their cost structure, it is not clear that long-short funds are the superior choice.
Greed and fear are two ubiquitous human emotions. In all human interactions it is a challenge to control them. One obvious way to control greed is to a-priori set a goal of accepting average market returns. That acknowledgement easily leads to accepting a passive Index investment strategy.
If one adopts that philosophy, it is another easy step to avoid the daily noise of an overly reactive marketplace. That philosophy goes a long way to attenuating the market fear factor. For a long term investor, it’s a comfort to know that the equity markets return positive rewards about 70 % of the time annually, and that these same markets return an annual rate that is about 6 % over inflation.
I’m sure that in the bulk of your client web discussions you made similar points. Your abbreviated submittal to MFO omitted a significant major portion of your presentation materials. Unfortunately, for me, the portion that you did include was far too plain vanilla for most MFO participants, and likely for most of your customers. Your post was just too prosaic. It lacked the insights and bite of your many other exceptional submittals.
Bob, I trust your honesty and your investment sagacity. I know you did better for your clients; their loyalty closes that issue completely.
I recognize that many MFO members have and will disagree with my opinion on this matter. That’s fully expected since it is merely an opinion on a limited subject. I surely do not want this opinion to diminish your fine MFO postings or any relationship that we currently enjoy. I’ve always believed that fair and honest debate generated a superior end product.
Best wishes for your continued success in the investment advice business.
I really appreciate your continued postings and find your insights valuable in general and given what you do. You have to make decisions for a lot of clients and I'd guess the research and thought process before making those decisions is quite significant. Your insights into fund companies (I'm guessing you're meeting with and/or talking to fund companies on a regular basis) is also quite helpful.
Strictly based upon my personal and informal studies of investing; I suspect I have little to offer that has not already been stated somewhere, including MFO. But, I still chit-chat here, from time to time.
However, there are points in time when one may read a particular phrase or group of words laid forth that just happens to "ding the bell" of thought.
At the least, it is a very good day to know that perhaps some words spoken or written has caused someone to think about something they have never before pondered; or to think about a familiar topic from a different perspective.
I have not a clue to the skill levels of investors who read, but perhaps never post at MFO. But, one may hope that at least small trinkets of knowledge may filter their way from many of the fine posts and thinking that arrives at this site. Statements and questions here at MFO have reminded me many times about what I don't know about investing.
I will presume someone gained some knowledge from BobC's post.
Catch
Thank you for your time and efforts with your above post.
Regards,
Catch
Regarding your appraisal of BobC's "pedestrian" advice ... I'll submit that he's able to say more in one or two hundred words than you typically do in a thousand. Regards
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"Greed and fear are two ubiquitous human emotions. In all human interactions it is a challenge to control them. One obvious way to control greed is to a-priori set a goal of accepting average market returns. That acknowledgement easily leads to accepting a passive Index investment strategy."
Try telling that to clients who probably are on the phone every time the market tanks - I have to imagine that Bob has dealt with this a thousand times and has reassured the same people over and over again over time and will have to keep reassuring those people again and again in the future every time the market goes South. I don't know about BobC, but I've talked to an advisor or two who has to be both investor and psychologist.
You continually preach the gospel of not listening to the noise, not heavily trading, etc, but you have to realize that you're NEVER going to get this across to the majority of the population.
Even the greatest investors will occasionally give into emotion and puke up a position - OR they'll give into ego and not give up on a bad position, despite a bad situation (Bill Ackman and Herbalife this year.)
It's happened throughout time and it will happen for many eons to come. If the market tanks, people will throw stocks out. Again and again. And after 2001/2008, people have less trust (and far less of an attention span) then they ever have in the past. As I've said, the average holding period of a stock has gone from years to days. You talk about investing in indexes, that isn't going to change anything in terms of people's emotional responses in regards to investing. Market tanks, market tanks.
People will just throw out an index etf. I strongly believe that having the average person hold an index ETF is not going to change their intolerance for market volatility. They'll have less expenses (if they even care about that) and will dump just as quickly.
If anything, I think investing in what people know is likely a far better way to approach investing in a way that is less prone to emotion. If there's a product or company that someone knows and likes, that's a great way to get them started in investing. The Peter Lynch "Invest in What You Know" theme is a great way to get a young person who has a connection to a product or company (Coke, Disney, whatever) involved in investing and I think that's it's not a bad way to KEEP adults involved with the market.
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"I hope you alerted your clients about the historically poor performance of long-short funds. "
Past performance is no guarantee of future results, and that goes for anything - the market, gold, real estate (housing can keep going up forever and so can every other asset class....) The products in the long/short category have improved quite a bit in the last few years (3-5+ years ago, they were terrible), but I have a feeling that there could be more and more terrific funds in this category over time and a number of people would still be screaming from the rooftops about how anything aside from long-only is an unholy no-no.
Yep, forget giving managers more tools. I'm not saying that people should devote large blocks of their portfolio real estate to these funds, but I continue to not agree with some people who continue to go on and on against these funds. I think it's rather clear at this point that neither side is going to convince the other. I'm happy with the performance of these funds, people don't have to own them.
Additionally, if a Marketfield (to use an example) is less volatile than the market - but still delivers double digit returns on average and has demonstrated significant downside protection - that may not deliver market-beating returns over time, but over time I'd be willing to guess someone (especially someone 50+) will be far less likely to throw out Marketfield at the wrong time due to the emotions you so frequently discuss than they are likely to throw out an index fund. If you are focused on keeping people involved in the market, a fund that has the tools (whether the fund will avoid the next 2008 is, like anything else in investments, not a given or guaranteed) to largely side-step 2008 and then gain more than the market in 2009 is going to appeal to the average person, whether you think it's the right investment or not.
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"There are no new insights here."
And you have discussed emotion, not listening to day-to-day noise and other subjects you discuss in the post above previously at length.
Also, BobC may have not had the time to go into great length and detail. I'd rather he offered something than nothing.
I don't disagree with you on a lot of what you say, but you continue to preach for change in the way that people emotionally deal with investing that is never going to happen en masse. Financial education at the high school level would lead to some improvements, but people are always going to throw out stocks at the wrong time. Hell, I've done it. You try to learn from it. I'm sure I will do it again in the future.
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"For a long term investor, it’s a comfort to know that the equity markets return positive rewards about 70 % of the time annually, and that these same markets return an annual rate that is about 6 % over inflation."
And absolutely none of that is guaranteed or a given going forward. I have really worked at having a much longer term view with my investments, but who knows.
I have strong views on what I believe are future themes going forward (and I think everyone has their own views on what may be themes going forward) and I hope that, over a multi-year period, those themes play out and I'm right. That - and nice dividends - allow me to be less focused on the day-to-day, but I really don't think anything in investing is a given in the short-term or long-term.
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I think BobC's post was indeed in keeping with the spirit of the board ... and, that is to help others.
Please keep on ... keeping on ... It is indeed appreciated.
Skeeter
You are one of the few posters here that I always pay attention to and read everything that you have to offer on many topics. Greatly appreciate all your contributions.
Thanks for taking time to compile your thoughts in those 5 short and simple guideline, Even though I already more or less follow those guideline , It still helps a lot to see someone much smarter than me can validate my plan.
Best regards
I want to thank all of you for responding to my commentary.
I appreciate your attention and efforts. Your comments are lively, enthusiastic, and thoughtful. They are both stimulating and educational. I certainly learned from them. I firmly believe that these types of exchanges help all of us to a higher level of financial understanding.
Also, thank you for mostly focusing on the specific subject matter, and not how it was expressed.
Enough. I have a fatal attraction to the World Serious.
Best Wishes.
I'm always fascinated to observe folks who convince themselves that just because they are intelligent they can somehow apply that gift in any field whatsoever... no experience or hard work required. How condescending!
Thanks much for your continuing help and support.
Best to you- OJ
That really doesn't mean that they will return similar rates at similar frequencies in the future. It's rather a 'false comfort' to the long term investor to imply that it does.
THANK YOU. That doesn't mean don't be invested, but this whole thing of "the market will continue to go up X% over time because it has in the past" is not something anyone should take as a given.