The Cost of timing markets and moving to a more conservative investment option

Missing the sharemarket’s five best days in 2020 would have led to a 30% loss compared to doing nothing.

The 2020 covid-19 sharemarket crash provides a timely example of the difficulty and cost of trying to time markets.

The volatility from global sharemarkets has been extreme this year, nevertheless, the best thing would had been to sit back and enjoy the ride, as is often the case.

By way of example, the US S&P 500 sharemarket index reached a historical high on 19th February 2020.  The market then fell into bear market territory (a decline of 20% or more) in record time, taking just 16 trading days, beating the previous record of 44 days set in 1929. 

After falling 33% from the 19th February high global equity markets bounced back strongly over the following weeks, recording their best 50-day advance.

The benchmark dropped more than 5% on five days, four of which occurred in March. The same month also accounted for four of the five biggest gains.

Within the sharp bounce from the 23rd March lows, the US sharemarkets had two 9% single-day increases.  Putting this into perspective, this is about equal to an average expected yearly return within one day!

For all the volatility, the US markets are nearly flat for the period since early February.

A recent Bloomberg article provides a good account of the cost of trying to time markets.

The Bloomberg article provides “One stark statistic highlighting the risk focuses on the penalty an investor incurs by sitting out the biggest single-day gains. Without the best five, for instance, a tepid 2020 becomes a horrendous one: a loss of 30%.”

As highlighted in the Bloomberg article, we all want to be active, we may even panic and sit on the side line, the key point is often the decision to get out can be made easily, however, the decision to get back in is a lot harder.

The cost of being wrong can be high.

Furthermore, there are better ways to manage market volatility, even as extreme as we have encountered this year.

For those interested, the following Kiwi Investor Blog Posts are relevant:

Navigating through a bear market – what should I do?

One of the best discussions I have seen on why to remain invested is provided by FutureSafe in a letter to their client’s 15th March 2020.

FutureSafe provide one reason why it might be the right thing for someone to reduce their sharemarket exposure and three reasons why they might not.

As they emphasis, consult your advisor or an investment professional before making any investment decisions.

I have summarised the main points of the FutureSafe letter to clients in this Post.

The key points to consider are:

  • Risk Appetite should primarily drive your allocation to sharemarkets, not the current market environment;
  • We can’t time markets, not even the professionals;
  • Be disciplined and maintain a well-diversified investment portfolio, this is the best way to limit market declines, rather than trying to time market
  • Take a longer-term view; and
  • Seek out professional investment advice before making any investment decisions

Protecting your portfolio from different market environments

Avoiding large market losses is vital to accumulating wealth and reaching your investment objectives, whether that is attaining a desired standard of living in retirement or a lasting endowment.

The complexity and different approaches to providing portfolio protection has been highlighted by a recent twitter spat between Nassim Nicholas Taleb and Cliff Asness.

The differences in perspectives and approaches is very well captured by Bloomberg’s Aaron Brown article, Taleb-Asness Black Swan Spat Is a Teaching Moment.

I provide a summary of this debate in Table format in this Post.  

Also covered in this Post is an article by PIMCO on Hedging for Different Market Scenarios. This provides another perspective and a summary of different strategies and their trade-offs in different market environments.

Not every type of risk-mitigating strategy can be expected to work in every type of market environment.

Therefore, maintaining an array of diversification strategies is preferred “investors should diversify their diversifiers”.

Sharemarket crashes, what works best in minimising loses, market timing or diversification?

The best way to manage periods of severe sharemarket declines is to have a diversified portfolio, it is impossible to time these episodes.

AQR has evaluated the effectiveness of diversifying investments during market drawdowns, which I cover in this Post.

They recommend adding investments that make money on average and have a low correlation to equities.

Although “hedges”, e.g. Gold, may make money at times of sharemarket crashes, there is a cost, they tend to do worse on average over the longer term.

Alternative investments are more compelling relative to the traditional asset classes in diversifying a portfolio, they provide the benefits of diversification and have higher returns.

Portfolio diversification involves adding new “risks” to a portfolio, this can be hard to comprehend.

Happy investing.

Please see my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.




Asset Allocations decisions for the conundrum of inflation or deflation?

One of the key questions facing investors at the moment is whether inflation or deflation represents the bigger risk in the coming years.

Now more than ever, given the likely economic environment in the years ahead, investors need to consider all their options when building a portfolio for their future.  This may mean a number of things, including: increasing diversification, investing in new or different markets, being active, and flexible to take advantage of unique opportunities as they arise.

Those portfolios overly reliant on traditional markets, such as equities and fixed income in particular, run the risk of failing to meet to their investment objectives over the next ten years.

Conundrum Facing Investors

A recent article by Alan Dunne, Managing Director, Abbey Capital, The Inflation-Deflation debate and its Implications for Asset Allocation, which recently appeared in AllAboutAlpha.com, clearly outlines the conundrum currently facing investors.

As the article highlights, one of the “key questions facing investors at the moment is whether inflation or deflation represents the bigger risk for the coming years. Economists are split on this….”

Following a detailed analysis of the current and likely future economic environment and potential influences on inflation or deflation (which is well worth reading) the article covers the Implications for Asset Allocations.

Inflation or Deflation: Implications for Asset Allocations

The article makes the following observations as far as asset class performance in different inflation environments, based on historical observations:

  • Deflation like in the 1930s, is negative for equities but positive for Bonds.
  • If inflation picks ups, or even stagflation, that would be negative for real returns on financial assets and real assets may be favoured.

They conclude: “the current uncertainty highlights the importance of holding diversified portfolios, with exposure to a range of traditional and alternative assets and strategies with the potential to deliver returns in different market environments.”

Current Environment

Abbey Capital anticipate greater co-ordination of policy between governments (fiscal policy) and central banks (monetary policy). 

As they note, “many economists draw a parallel between the current scenario and the substantial increase in government debt during World War II. One of the consequences of higher debt levels is that we may see pressure on central banks to maintain interest rates at low levels and maintain asset purchases to ensure higher bond issuance is not disruptive for bond markets i.e. coordination of monetary and fiscal policies.”

I think this will be the case.  The Bank of Japan has maintained a direct yield curve control policy for some time and the Reserve Bank of Australia has implemented a similar policy recently.  Direct yield curve control is where the central bank will target an interest rate level for the likes of the 3-year government bond.

In the environment after World War II debt levels were brought back to more manageable levels by keeping interest rates low (a process known as financial repression).

From a government policy perspective, financial repression reduces the real value of debt over time.  It is the most palatable of a number of options.

Financial repression is potentially negative for government bonds

With interest rates so low, and likely to remain low for some time given policies of financial repression the real return (after inflation) on many fixed income instruments and cash could be negative.

A higher level of inflation not only reduces the real return on bonds but potentially also reduces the diversification benefits of holding bonds in a portfolio with equities.

The diversification benefits of bonds in the traditional 60 / 40 equity-bond portfolio (Balanced Portfolio) has been a strong tail wind over the last 20 years.

The more recent low correlation between bonds and equities is evident in the Chart below, which was presented in the article.

The Chart also highlights that the relation of low correlation between equities and bonds, which benefits a Balanced Portfolio, has not always been present.

As can be seen in the Chart, in the 1980s, when inflation was a greater concern, inflation surprises were negative for both bonds and equities, they became positively correlated.

What should investors do?

“Investors are therefore left with the challenge of finding alternatives for government bonds, ideally with a low or negative correlation to equities and protection against possible inflation.”

The article runs through some possible investment solutions and approaches to meet the likely challenges ahead.  I have outlined some of them below.

I think duration (interest rate risk) and credit can still play a role within a broad and truly diversified portfolio.  Within credit this would likely involve expanding the universe to include the likes of high yield, securitised loans, private debt, inflation protections securities, and emerging market debt as examples.

The key and most important point is that a robust portfolio will be less reliant on tradition asset classes, traditional asset class betas, to drive investment return outcomes.  This is likely to be vitally important in the years ahead.

Accordingly, investors will need to be more active, opportunistic, and maintain very broad and truly diversified portfolios.  Not only within asset classes, such as the fixed income example provided above, but across the portfolio to include the likes of real assets and liquid alternatives.

Real assets

Abbey Capital comment that “Real assets such as property and infrastructure should provide protection against higher inflation for long-term investors but may not be attractive for investors valuing liquidity.”

Although the maintenance of portfolio liquidity is important, Real assets can play an important role within a robust portfolio.

For the different types of real assets, their investment characteristics, and likely performance and sensitivity to different economic environments, including economic growth, inflation, inflation protection, stagflation, and stagnation please see the Kiwi Investor Blog Post, Real Assets Offer Real Diversification.  The extensive analysis has been undertake by PGIM.  

Liquid Alternatives

Abbey Capital provide a brief discussion on liquid alternatives with a focus on managed futures.  Not surprisingly given their pedigree.

They provide the following Table which highlights the benefit of liquid alternatives and hedge funds at time of significant sharemarket declines (drawdowns).

Concluding Remarks

Being a managed futures manager, it is natural to be cautious of Abbey Capitals concluding remarks, being reminded of the Warren Buffet quote, “Never ask a barber if you need a haircut.”

Nevertheless, the Abbey Capital’s economic analysis and investment recommendations are consistent with a growing chorus, all singing from a similar song sheet. (Perhaps we could call this a “Barbers Quartet”!)

Without having an axe to grind, and in all seriousness, I have covered similar analysis and comments in previous Posts, the conclusions of which have a high degree of validity and should be considered, if not a purely from portfolio risk management perspective so as to understand any gaps in current portfolios for a number of likely economic environments.

The key and most important point is that robust portfolios will be less reliant on traditional asset classes, traditional asset class betas, to drive investment return outcomes.

Accordingly, investors will need to be more active, opportunistic, and maintain very broad and truly diversified portfolios

Therefore, it is hard to disagree with one of the concluding remarks by Abbey Capital “To account for the competing requirements in a portfolio of returns, low correlation to equities, liquidity and possible inflation protection, investors may need to build robust portfolios with a broader mix of assets and strategies.”

Other Reading

For those interested, previous Kiwi Investor Blog posts of relevance to the Abbey Capital article include:

Preparing your Portfolio for a period of Higher Inflation, this is the Post of most relevance to the current Post, and covers a recent Man article which undertook an analysis of the current economic environment and historical episodes of inflation and deflation.

Man conclude that although inflation is not an immediate threat, the likelihood of a period of higher inflation is likely in the future, and the time to prepare for this is now.  Man recommends several investment strategies they think will outperform in a higher inflation environment.

Protecting your portfolio from different market environments – including tail risk hedging debate, compares the contrasting approaches of broad portfolio diversification and tail risk hedging to manage through difficult market environments. 

It also includes analysis by PIMCO, where it is suggested to “diversify your diversifiers”.

Lastly, Sharemarket crashes – what works best in minimising losses, market timing or diversification, covers a research article by AQR, which concludes the best way to manage periods of severe sharemarket decline is to have a diversified portfolio, it is impossible to time these episodes.  AQR evaluates the effectiveness of diversifying investments during sharemarket drawdowns using nearly 100 years of market data.

Happy investing.

Please see my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Hedged Funds vs Equities – lessons from the Warren Buffet Bet Revisited

“The Bet” received considerable media attention following the 2017 Berkshire Hathaway shareholder letter in 2018.

To recap, the bet was between Warren Buffet and Protégé Partners, who picked five “funds of fund” hedge funds they expected would outperform the S&P 500 Index over the 10-year period ending December 2017. Buffet took the S&P 500 to outperform.

The bet was made in December 2007, when the market was reasonably expensive and the Global Financial Crisis (GFC) was just around the corner.

Buffet won.  The S&P 500 easily outperformed the Hedge Fund selection over the 10-year period.

There are some astute investment lessons to be learnt from this bet, which are very clearly presented in this AllAboutAlpha article, A Rhetorical Oracle, by Bill Kelly.

Before reviewing these lessons, I’d like to make three points:

  1. I’d never bet against Buffet!
  2. I would not expect a Funds of Funds Hedge Fund to consistently outperform the S&P 500, let alone a combination of five Funds of Funds.
  3. Most if not all, investor’s investment objective(s) is not to beat the S&P 500. Investment Objectives are personal and targeted e.g. Goal Based Investing to meet future retirement income or endowments

This is not to say Hedged Funds should not form part of a truly diversified investment portfolio.  They should, as should other alternative investments.

Nevertheless, I am unconvinced Hedge Fund’s role is to provide equity plus like returns. 

By and large, alternatives, including Hedge Funds, offer a less expensive way of providing portfolio protection as their returns “keep up” with equities, see the previous Kiwi Investor Blog Sharemarket crashes – what works best in minimising losses, market timing or diversification

One objective in allocating to alternatives is to add return sources that make money on average and have low correlation to equities.  Importantly, diversification is not the same thing as “hedging” a portfolio

Now, I have no barrow to push here, except advocating for the building of robust investment portfolios consistent with meeting your investment objectives. The level of fees also needs to be managed appropriately across a portfolio.

In this regard and consistent with the points in the AllAboutAlpha article:

  1. Having a well-diversified portfolio is paramount and results in better risk-adjusted returns over time.

Being diversified across non-correlated or low correlated investments is important, leading to better risk-adjusted outcomes. 

Adding low correlated investments to an equities portfolio, combined with a disciplined rebalancing policy, will likely add value above equities over time.

The investment focus should be on reducing portfolio volatility through true portfolio diversification so that wealth can be accumulate overtime. 

Minimising loses results in higher returns over time.  A portfolio that falls 50%, needs to gain 100% to get back to the starting capital.  This means as equity markets take off a well-diversified multi-asset portfolio will not keep up.  Nevertheless, the well diversified portfolio will not fall as much when the inevitable crash comes along.

It is true that equities are less risky over the longer term.  Nevertheless, not many people can maintain a fully invested equities portfolio, given the wild swings in value (as highlighted by Buffett in his Shareholder Letter, Berkshire can fall 50% in value).

100% in equities is often not consistent with meeting one’s investment objectives.  Buffet himself has recommended the 60/40 equities/bond allocation, with allocations adjusted around this target based on market valuations.

I am unlikely to ever suggest to be 100% invested in equities for the very reason of the second point in the article, as outlined below.

  1. Investment Behavioural aspects.

How many clients would have held on to a 100% equity position during the high level of volatility experienced over the last 10-12 years, particularly in the 2008 – 2014 period.  Not many I suspect.  This would also be true of the most recent market collapse in 2020.

The research is very clear, on average investors do not capture the full value of equity market returns over the full market cycle, largely because of behavioural reasons.

A well-diversified portfolio, that lowers portfolio volatility, will assist an investor in staying the course in meeting their investment objectives.

An allocation to alternative strategies, including a well-chosen selection of Hedge Funds, will result in a truly diversified Portfolio, lowering portfolio volatility.  See an earlier Post, the inclusion of Alternatives has been an evolutionary process, not a revolution.

Staying the course is the biggest battle for most investors.  Therefore, take a longer-term view, focus on customised investment objectives, and maintain a truly diversified portfolio.

This will help the psychological battle as much as anything else.

I like this analogy of using standard deviation of returns as a measure of risk. It captures the risks associated with a very high volatile investment strategy such as being 100% invested in equities:

“A stream may have an average depth of five feet, but a traveler wading through it will not make it to the other side if its mid-point is 10 feet deep. Similarly, an overly volatile investing strategy may sink an investor before she gets to reap its anticipated rewards.”

Happy investing.

Please see my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

We will get through this – coronavirus

One of the better discussions available on the coronavirus is the CFA Institute interview between Laurence B. Siegel and Andrew “Drew” Senyei, MD.

The most important point to take away is the concluding remark “the advances in medical knowledge and molecular biology, especially in the last decade, and with the full focus of the world on this one challenge — we will get through this.”

The discussion is wide ranging and will help in providing clarity on several issues e.g. the importance of testing, how the virus impacts on the body, and the trade-off between preventing or slowing the spread of the disease at all costs versus the cost on the economy and people’s mental health, including what testing is required to get people back to work.

 

The interview begins by acknowledging that although our knowledge of the virus is increasing there is still lots to learn about it. It is evident that this coronavirus is different from previous coronaviruses.

One important unknown is how lethal it is. This relates to the case fatality rate (CFR). This is the number of people who die of the disease, expressed as a percentage of the number of people who have it.

As you may be aware, there are a number of problems in measuring this currently:

  • More testing is needed to know how many people who have had it, especially asymptomatic patients – tested positive for the virus but showed no symptoms.
  • The reporting of deaths has also been problematic, did they die because of the virus or was there an underlying ailment e.g. cancer or heart disease. The difference between died with and died from.

The best estimate currently is that the CFR of the coronavirus is higher than the flu, but it is unlikely to be as high as SARS.

Also, the CFR for the coronavirus is likely to fall as further testing is undertaken, this was the experience with SARS.

The experience on the cruise ship, The Diamond Princess, provides an insight into the likely CFR, and interestingly, over half those tested were asymptomatic. This is discussed in more detail in the article.

The issue of incomplete statistics is highlighted in comparing the outcomes between Italy and South Korea. This comes down to the level of testing and the variations in the way different countries are testing.

Social distancing is having a positive impact. Particularly from protecting the health care system. Ideally, we want “the density of new cases presenting in any geographic area at any given time to be as low as possible and over as long a time period as possible to prevent a surge on the health care system.”

There is a great discussion around the issues with testing. There are a lot of variables.  At the risk of sounding repetitive we need lots of testing, “We need to know how much of the disease is out there so we can have the health care resources and physicians to respond to that surge, where and if it occurs.”

 

Economic Trade-off

The latter half of the article covers the issue of the trade-off between preventing or slowing the spread of the disease at all costs versus the cost on the economy and people’s mental health.

The argument being, should we ease up relatively quickly on policies that discourage work and income and social interaction, otherwise we will severely injure the economic life.

Is there an optimum or balance between the two extremes?

 

Initially, given the unknows, erring on the side of caution would appear appropriate.

Nevertheless, there is an argument for considering “a rational middle ground and that is: We have to first understand if this is peaking. And remember when you look at new case rates, you’re actually lagging by two weeks.”

Understanding more about the virus will help in getting the economy back up and running.  More testing is needed.

“I would look at those [new case rates], and then at hospitalizations and intensive care utilization, and see if that’s peaking because that is the most pressing problem. Then I would look at the rates by population density and see where the wave is happening more locally and usher resources there.”

The discussion comes back to more but different testing, to get a better sense of who’s had the infection, who’s over it, and who’s protected at least for a while.

This is an interesting discussion and highlights a likely path to getting people back to work. .

The key is to identify those individuals already immune and not likely to get infected or infect others back to work.

Protecting the elderly is important, therefore it is suggested “to look at the density of the elderly and make sure resources are adequate for that particular region — not just equipment and supplies, but personnel.”

Senyei concludes “I would invest really heavily in the basic biology and in vaccine development which is two years out. I think you’re going to need a vaccine and you’ll probably need a new vaccine like you do for the flu every year. This virus will mutate.”

“Now all that takes money, time, and coordination — but people are working on it and I think, if we did that, we could sort of get back to the economy being an economy.”

As highlighted above, they conclude by acknowledging that we will get through this.

 

Stay safe and healthy.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

 

 

Balanced Fund Bear Market and the benefits of Rebalancing

Balanced Funds are on track to experience one of their largest monthly losses on record.

Although this largely reflects the sharp and historical declines in global sharemarkets, fixed income has also not provided the level of portfolio diversification witnessed in previous Bear markets.

In the US, the Balanced Portfolio (60% Shares and 40% Fixed Income) is experiencing declines similar to those during the Global Financial Crisis (GFC) and 1987.

In other parts of the world the declines in the Balance Portfolio are their worst since the   1960s.

As you will be well aware the level of volatility in equity markets has been at historical highs.

After reaching a historical high on 19th February the US sharemarket, as measured by the S&P 500 Index, recorded:

  • Its fastest correction from a peak, a fall of 10% but less than 19%, taking just 6 days; and
  • Its quickest period to fall into a Bear market, a fall of greater than 20%, 22 days.

The S&P 500 entered Bear market territory on March 12th, when the market fell 9.5%, the largest daily drop since Black Monday in October 1987.

The 22 day plunge from 19th February’s historical high into a Bear market was half the time of the previous record set in 1929.

Volatility has also been historical to the upside, including near record highest daily positive returns and the most recent week was the best on record since the 1930s.

 

Volatility is likely to remain elevated for some time. The following is likely needed to be seen before there is a stabilisation of markets:

  • The Policy response from Governments and Central Banks is sufficient to prevent a deepening of the global recessions;
  • Coronavirus infection rates have peaked; and
  • Cheap valuations.

Although currently there are cheap valuations, this is not sufficient to stabilise markets. Nevertheless, for those with a longer term perspective selective and measured investments may well offer attractive opportunities.

Please seek professional investment advice before making any investment decision.

For those interested, my previous Post outlined one reason why it might be the right thing for someone to reduce their sharemarket exposure and three reasons why they might not.

 

The Impact of Market Movements and Benefits of Rebalancing

My previous Post emphasised maintaining a disciplined investment approach.

Key among these is the consideration of continuing to rebalance an investment Portfolio.

Regular rebalancing of an investment portfolio adds value, this has been well documented by the research.  The importance and benefits of Rebalancing was covered in a previous Kiwi Investor Blog Post which may be of interest: The balancing act of the least liked investment activity.

Rebalancing is a key investment discipline of a professional investment manager. A benefit of having your money professionally managed.

Assuming sharemarkets have fallen 25%, and no return from Fixed Income, within a Balanced Portfolio (60% Shares and 40% Fixed Income) the Sharemarket allocation has fallen to 53% of the portfolio.

Therefore, portfolios are less risky currently relative to longer-term investment objectives. A disciplined investment approach would suggest a strategy to address this issue needs to be developed.

 

As an aside, within a New Zealand Balanced Portfolio, if no rebalancing had been undertaken the sharemarket component would have grown from 60% to 67% over the last three years, reflecting the New Zealand Sharemarket has outperformed New Zealand Fixed Income by 10.75% per year over the last three years.

This meant, without rebalancing, Portfolios were running higher risk relative to long-term investment objectives entering the current Bear Market.

Although regular rebalancing would have trimmed portfolio returns on the way up, it would also have reduced Portfolio risk when entering the Bear Market.

As mentioned, the research is compelling on the benefits of rebalancing, it requires investment discipline. In part this reflects the drag on performance from volatility. In simple terms, if markets fall by 25%, they need to return 33% to regain the value lost.

 

Investing in a Challenging Investment Environment

No doubt, you will discuss any current concerns you have with your Trusted Advisor.

In a previous Post I reflected on the tried and true while investing in a Challenging investment environment.

I have summarised below:

 

Seek “True” portfolio Diversification

The following is technical in nature and I will explain below.

A recent AllAboutAlpha article referenced a Presentation by Deutsche Bank that makes “a very compelling case for building a more diversified portfolio across uncorrelated risk premia rather than asset class silos”.

For the professional Investor this Presentation is well worth reading: Rethinking Portfolio Construction and Risk Management.

The Presentation emphasises “The only insurance against regime shifts, black swans, the peso problem and drawdowns is to seek out multiple sources of risk premia across a host of asset classes and geographies, designed to harvest different features (value, momentum, illiquidity etc.) of the return generating process, via a large number of small, uncorrelated exposures

 

We are currently experiencing a Black Swan, an unexpected event which has a major effect.

In a nutshell, the above comments are about seeking “true” portfolio diversification.

Portfolio diversification does not come from investing in more and more asset classes. This has diminishing diversification benefits over the longer term and particularly at time of market crisis.

True portfolio diversification is achieved by investing in different risk factors (also referred to as premia) that drive the asset classes e.g. duration (movements in interest rates), economic growth, low volatility, value, and market momentums by way of example.

Investors are compensated for being exposed to a range of different risks. For example, those risks may include market risk (e.g. equities and fixed income), smart beta (e.g. value and momentum factors), alternative, and hedge fund risk premia. And of course, “true alpha” from active management, returns that cannot be explained by the risk exposures just outlined.

There has been a disaggregation of investment returns.

US Endowment Funds and Sovereign Wealth Funds have led the charge on true portfolio diversification, along with the heavy investment into alternative investments and factor exposures.

They are a model of world best investment management practice.

 

Therefore, seek true portfolio diversification this is the best way to protect portfolio outcomes and reduce the reliance on sharemarkets and interest rates to drive portfolio outcomes.  As the Deutsche Bank Presentation says, a truly diversified portfolio provides better protection against large market falls and unexpected events e.g. Black Swans.

True diversification leads to a more robust portfolio.

 

Customised investment solution

Often the next bit of  advice is to make sure your investments are consistent with your risk preference.

Although this is important, it is also fundamentally important that the investment portfolio is customised to your investment objectives and takes into consideration a wider range of issues than risk preference and expected returns and volatility from investment markets.

For example, level of income earned up to retirement, assets outside super, legacies, desired standard of living in retirement, and Sequencing Risk (the period of most vulnerability is either side of the retirement age e.g. 65 here in New Zealand).

Also look to financial planning options to see through difficult market conditions.

 

Think long-term

I think this is a given, and it needs to be balanced with your investment objectives as outlined above.

Try to see through market noise and volatility.

It is all right to do nothing, don’t be compelled to trade, a less traded portfolio is likely more representative of someone taking a longer term view.

Remain disciplined.

 

There are a lot of Investment Behavioural issues to consider at this time to stop people making bad decisions, the idea of the Regret Portfolio approach may resonate, and the Behavioural Tool Kit could be of interest.

 

AllAboutAlpha has a great tagline: “Seek diversification, education, and know your risk tolerance. Investing is for the long term.”

Kiwi Investor Blog is all about education, it does not provide investment advice nor promote any investment, and receives no financial benefits. Please follow the links provided for a greater appreciation of the topic in discussion.

 

And, please, build robust investment portfolios. As Warren Buffet has said: “Predicting rain doesn’t count. Building arks does.” ………………….. Is your portfolio an all-weather portfolio?

 

Stay safe and healthy.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

Navigating through a Bear market – what should I do?

To all Kiwi Investor Blog readers, I hope you are staying safe and healthy. My thoughts are with you from a health perspective and for those facing the economic consequences on businesses and families from the spread of the coronavirus.

 

In the current market environment there is much uncertainty and many are wondering what to do with their investments.

The key questions being asked are should we switch to a more conservative investment or get out the markets all together.

 

One of the best discussions on why to remain invested is provided by FutureSafe in a letter to their client’s 15th March.

FutureSafe provide one reason why it might be the right thing for someone to reduce their sharemarket exposure and three reasons why they might not.

They have reproduced the letter in the hope that it might be helpful and of interest to the broader investing community.

As they emphasis, please consult your advisor or an investment professional before making any investment decisions. In New Zealand, the FMA has also provided recent guidance on this issue, KiwiSaver providers should be providing general (class) advice to members at this time. Their full guidance on Kiwisaver Advice is here.

 

I have provided the main points below of the FutureSafe letter to clients, nevertheless the letter is well worth reading in full.

The first question is do you have too much invested in the market?

As FutureSafe highlight, the average declines of bear markets since WWII have been over 30%, with some declines as large as 60%. It has generally taken on average 2 years to recover.

 

My last Post, What to expect, navigating the current Bear-Market, presented research from Goldman Sachs on the historical analysis of bear markets in US equities going back to the 1800s. At this stage, we are likely experiencing an Event-Driven Bear market.  These Bear markets tend to be less severe, but the speed of the fall in markets is quicker, as is the recover.

However, as Goldman Sachs note none of the previous Event-Driven Bear markets were triggered by the outbreak of a virus, nor were interest rates so low at the start of the market decline.

Historically Event-Driven bear markets on average see falls of 29%, last 9 months and recover within 15 months. Nevertheless, the current Bear could transform into a cyclical bear market if containment efforts lead to a larger global recession than anticipated.

 

Back to FutureSafe. You should only take the risk you can stomach, or technically speaking, is aligned with your “risk appetite”. Which is a level of risk that does not keep you awake at night.  Unfortunately, we often don’t know our risk appetite until we experience significant market events like we are experiencing currently. We are often over-confident as to the level of market volatility we can tolerate.

FurtureSafe conclude “Now that we are in a downturn, if you have come to the conclusion that your risk appetite is not what you thought it was, it’s perfectly OK to acknowledge that and change your safety net accordingly.”

However, before you do anything, FutureSafe ask you to read through and consider a few reasons why not to do anything at this time might be appropriate.

Reason 1

If management of risk appetite is not your motivation, perhaps you are planning on selling now, with the conviction markets will continue to fall, and you plan on buying back in later.

You are essentially making an active investment decision and attempting to time markets.

Timing markets is very hard to do. Professional Investors are not very good at it.

The data on the average mutual fund investor is also not very complimentary. As FutureSafe note the “the average mutual fund investor has not stayed invested for a long enough period of time to reap the rewards that the market can offer more disciplined investors. The data also shows that when investors react, they generally make the wrong decision.”  A mutual Fund is like a Unit Trust or KiwiSaver Fund in New Zealand.

I depart from the FutureSafe article and provide the graph below from PIMCO.

As PIMCO highlight, “Through no fault of their own – and especially when market volatility strikes – investors tend to be their own worst enemy.”

The graph below highlights that investors do not capture all of the returns from the market, which can be attributed to behavioural biases that leads to inappropriate timing of  buying and selling.

This investor behavioural gap is well documented.

In reference to market timing and in one short sentence, FutureSafe say “We’re probably not as good at these active calls as we think we are, and it might hurt more than help.”

PIMOC Behaviour gap

Reason 2

A large portion of returns are earned on days markets make large gains.

Although the extreme volatility being witnessed currently is very painful to watch, amongst them are explosive up days. Attempting to time markets might cause you to miss these valuable up days.

The research on this is also very clear.

As outlined in the Table below, if you had missed the top 15 biggest return days your yearly return would have been 3.6% compared to 7% per year if you had remained fully invested (this is over the period January 1990 to March 2020 and being invested in the US S&P 500 Index).

Missing large daily returns

Of course, the same can be said if you missed the largest down days. Nevertheless, good luck at avoiding these days and still being able to fully capture the returns from equity markets.  The down days represent the risk of investing in shares.

Most important is having a disciplined investment approach and an investment portfolio consistent with your risk appetite and is truly diversified so as to limit the impact of the poor periods of performance in sharemarkets.

In summary, FutureSafe note, “Missing just a few of the top up days, can cost you a large chunk of the market’s returns.”

 

Reason 3

Take a long-term perspective.

Overtime, and with hindsight, large market declines look like minor setbacks over the longer term, the very long term.

This is quite evident from the following graph.

Remember, the stock market fell by 20% over one day in 1987, the dot-com crash of 2000 or even the Great Financial Crisis of 2008 don’t look to bad with a longer term perspective.

Take a longer term perspective

As FutureSafe conclude “If you really don’t need the money for a long period of time (e.g. 10 or 15 years) these are best to ride out because they look a lot better in the rear view mirror than when you are going through it.”

“If you have a long enough horizon (10 to 15 years or more), the chances of doing well in the stock market is still quite good.”

 

Therefore, the key points to consider are:

  • Risk Appetite should primarily drive your allocation to sharemarkets, not the current market environment;
  • We can’t time markets, not even the professionals;
  • Be disciplined and maintain a well-diversified investment portfolio, this is the best way to limit market declines, rather than trying to time markets;
  • Take a longer-term view; and
  • Seek out professional investment advice

 

Keep safe and healthy.

 

Happy investing.

 

Please read my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

What too expect, navigating the current Bear Market

After reaching a historical high on 19th February the US sharemarket, as measured by the S&P 500 Index, recorded:

  • Its fastest correction from a peak, a fall of 10% but less than 19%, taking just 6 days; and
  • Its quickest period to fall into a Bear market, a fall of greater than 20%, 21 days.

The S&P 500 entered Bear market territory on March 12th, when the market fell 9.5%, the largest daily drop since Black Monday in October 1987.

The 21 day plunge from 19th February’s historical high was half the time of the previous record set in 1929.

S&P500

Source: ETF.com

This follows the longest Bull market in history, which is a run up in the market without incurring a 20% or more fall in value. The last Bear market occurred in 2008 during the Global Financial Crisis (GFC).

The 11-year bull market grew in tandem with one of the longest economic expansions in US history, this too now looks under threat with a recession in the US now looking likely over the first half of 2020. Certainly, global recession appears most likely.

 

Global sharemarkets around the world have suffered similar declines, some have suffered greater declines, particularly across Europe.

Markets lost their complacency mid-late February on the spreading of the coronavirus from China to the rest of the world and after Chinese manufacturing data that was not only way below expectations but was also the worst on record.

A crash in the oil price, which slumped more than 30%, added to market anxieties.

 

Extreme Volatility

The recent period has been one of extreme market volatility, not just in sharemarkets, but currencies, fixed income, and commodity markets.

As the Table, courtesy of Bianco Research, below highlights, three of the five days in the week beginning 9th March are amongst the 20 biggest daily gains and losses.

After the 9.5% decline on 12th March, the market rebounded 9.3% the following day. The 7.6% decline on the 9th March was, to date, the 20th largest decline recorded by the S&P 500.

2020 is joining an infamous group of years, which include 1929, 1987, and 2008.

Extreme volatility

Where do we go from here?

Great question, and I wish I knew.

For guidance, this research paper by Goldman Sachs (GS) is helpful: Bear Essentials: a guide to navigating a bear market

To get a sense as to how much markets are likely to fall, and for how long, they look at the long-term history of the US sharemarket. They also categories Bear markets into three types, reflecting that Bear markets have different triggers and characteristics.

The three types as defined by GS are:

  • Structural bear market – triggered by structural imbalances and financial bubbles. Very often there is a ‘price’ shock such as deflation that follows.
  • Cyclical bear markets – typically a function of rising interest rates, impending recessions and falls in profits. They are a function of the economic cycle.
  • Event-driven bear markets – triggered by a one-off ‘shock’ that does not lead to a domestic recession (such as a war, oil price shock, EM crisis or technical market dislocation).

They then plot US Bear Markets and Recoveries since the 1800s, as outlined in the following Table:

Historical US Bear markets

Source: Goldman Sachs

From this they can characterise the historical averages of the three types of Bear markets, as outlined at the bottom of the Table:

GS summarise:

  • Structural bear markets on average see falls of 57%, last 42 months and take 111 months to get back to starting point in nominal terms (134 months in real terms (after inflation)).
  • Cyclical bear markets on average see falls of 31%, last 27 months and take 50 months to get back to starting point in nominal terms (73 months in real terms).
  • Event-driven bear markets on average see falls of 29%, last 9 months and recover within 15 months in nominal terms (71 months in real terms).

 

In their opinion GS currently think we are in an Event-driven Bear market. Generally these Bear markets are less severe, but the speed of the fall in markets is quicker, as is the recover. However, as they note none of the previous Event-Driven Bear markets were triggered by the outbreak of a Virus, nor were interest rates so low at the start of the market decline.

Therefore, they conclude, a fall of between 20-25% can be expected, and the rebound will be swift.

This makes for an interest couple of quarters, in which the economic data and company profit announcements are sure to get worse, yet equity markets will likely look through this for evidence of a recovery in economic activity over the second half of this year.

 

Happy investing.

 

Please read my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

 

Why is the Multi-Asset Portfolio so Popular?

The rise of the Multi-Asset Portfolio can be traced back to the Global Financial Crisis (GFC) in 2008, when many investors “grew disenchanted with the long-time investment mantra that equities were the one true way to wealth. That smug bromide rang hollow when the financial crisis slashed many stock portfolios in half”, according to recent Chief Investment Office (CIO) article, How Multi-Asset Investing Became So Popular.

Following the GFC, the mantra became diversify your holdings. As a result, Multi-Asset Portfolios, which combine equities, fixed income, and an array of other assets, gained greater prominence.

Multi-Asset Portfolios grew more popular on promises of greater capital preservation and sometimes the delivery of superior returns.

As CIO note, the increased prominence of the Multi-Asset Portfolio can be attributed to David Swensen, Yale’s investment chief since 1986. Yale has generated an impressive performance record by investing outside of just equities and fixed income. Their portfolio has included high allocations to private equity, real estate, and other non-traditional assets. (For more on the success of the Endowment model and the fee debate please see this Post.)

 

The CIO article also noted that Multi-Asset Portfolios are most prominent among target-date funds (TDFs), which have become the default offering among 401(k) plans (e.g. US superannuation schemes such as KiwiSaver in New Zealand).

“TDFs have grown five-fold since the financial crisis, reaching $1.09 trillion in 2018, a Morningstar report concluded, with an estimated $40 billion added last year.”

 

The Concept: Absolute returns and better risk management

The Multi-Asset Portfolio is based on the concept of absolute returns, where the focus is on generating a more targeted and less volatile investment return outcome. There is a greater focus on risk management relative to that undertaken within a traditional portfolio. The intensity and sophistication of risk management employed depends on the type of absolute return strategy.

The absolute return universe is very broad, ranging from Multi-Asset Portfolios to those with a much greater focus on absolute returns such as the plethora of Hedge Fund strategies, including Risk Parity as discussed in the CIO article.

This contrasts with the traditional balanced fund, which are generally less diversified, portfolio risk is dominated by the equity exposures, and returns are much more subject to the vagaries of investment markets. The management of risk is more focused on relative returns i.e. how performance goes relative to a market benchmark, rather than returns relative to an absolute return outcome.

A Multi-Asset Portfolio generally has more of an absolute return focus than a Traditional Portfolio. It achieves this by having a more truly diversified portfolio, moving beyond the traditional Balanced Portfolio (60% equities and 40% Fixed Income), to incorporate a greater array of different investment strategies and risk management approaches within the portfolio.

As the CIO article comments, “There’s a strong argument for Swensen-like multi-asset funds that range beyond stocks and bonds, adding solid helpings of commodities, real estate and all kinds of other asset classes. With such an array, the thinking goes, you’re best protected when recessions thunder in.”

 

Return Expectations

The CIO article made the following observation, Multi-Assets Portfolios are “expected to return 4.5% annually through 2024, according to Casey Quirk, an arm of Deloitte Consulting. That isn’t a daunting growth rate, but the figure should have a decent chance of holding steady, while public markets lurch around, especially in the next recession.”

To put this into perspective, a recent CFA Institute article estimated that a Balanced Portfolio will return 3.1% over the next 10 years.

It is highly likely we are heading into a “Low Return Environment”.

 

As a result, a different investment approach to that which has been successful over the last 20-30 years is likely needed to invest successfully in what is expected to be a Challenging Investment Environment.

As the CIO article notes, “But multi-asset now goes far beyond the simple stock-bond duality, which seems insufficient to deliver the best diversification. The most salient problem with the basic pairing nowadays is that bonds are paying low interest rates. Their ability to score capital gains is limited because rates don’t have much left to fall before they hit zero. “These don’t work as well as they used to,” observed Deepak Puri, CIO Americas for Deutsche Bank Wealth Management.”

 

I fear the lessons from the GFC and 2000 Tech Bubble are fading from the collective memory, as equity markets reach historical highs and investors chase income from within equity-income sectors of the sharemarket.

In addition, more advanced portfolio management approaches have been developed over the last 20 – 30 years.

It would seem crazy that these learnings are not reflected in modern day investment portfolios. In a previous Post: A Short History of Portfolio Diversification, it is not hard to see how the Multi-Asset Portfolio has developed over time and is preferred by many large institutional investors.

Meanwhile, this Post: What Portfolio Diversification looks like, compares a range of investment portfolios, including the KiwiSaver universe, to emphasis what a Multi-Asset Portfolio does look like.

 

Growth in Multi-Asset Portfolios to continue

Increasingly the Multi-Asset Portfolios are taking market share from traditional portfolios.

Institutional investors are increasingly adopting a more absolute return investing approach. This has witnessed an increased allocation, and growth in Funds Under Management, in underlying strategies, “such as private equity, hedge funds, real estate, natural resources, and other strategies whose assets aren’t publicly traded.”

 

An underlying theme of the CIO article is the Death of the Balance Portfolio, which I covered in a previous Post.

Personally, I think the death of 60/40 Portfolio is occurring for more fundamental reasons. The construction of portfolios has evolved, as noted above, more advanced approaches can be implemented. For those interested I covered this in more detail in a recent Post: Evolution within the Wealth Management Industry, the death of the Policy Portfolio. (The Policy Portfolio is the 60/40 Portfolio).

 

Concluding Remarks

The current market environment, of low expected returns, might quicken the evolution in portfolio construction toward greater adoption of Multi-Asset Portfolios and a more absolute return focus.

Therefore, the value is in implementation, identifying the suitable underlying investment strategies to construct a truly diversified portfolio, within an appropriate fee budget.

Wealth management practices need to be suitably aligned with this value adding activity.

 

Happy investing.

Please read my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

How good will the next decade be for Investing?

“Adjusted for risk—or, more precisely, the volatility stock investors had to bear—gains in the S&P 500 index since Dec. 31, 2009, are poised to be the highest of any decade since at least the 1950s.” as outlined in a recent Bloomberg article, The Bull Market Almost No One Saw Coming.

Who would had thought that back in 2009?

 

As the Bloomberg article highlights, it has been a relatively smooth ride of late; equity market volatility has fallen in line with the sharp decline in interest rates over the last ten years.

Also assisting the smoother ride in US equity markets has been the lower volatility in US economic activity. The US economy has expanded by 1.6% to 2.9% in each of the previous nine years, a similar level of economic activity is expected in 2019. According to Bloomberg, based on standard deviation, that’s the smallest fluctuation over any 10-year stretch in data going back to 1930.

 

In fact, the 2010s were the first decade without a bear market, defined as a 20% drop from any peak.

For the record, US equities:

  • experienced six separate 10% corrections over the 2010s (to date!); and
  • In total have returned 249% in the past 10 years, about 1.2 times the historical average.

The US is amid the longest bull market ever (longest period in history without a bear market).

These gains have come when least expected.

 

They also follow a -20% decline over the previous decade (2000 – 2009). Which includes a -52% decline of the Great Recessions (Global Financial Crisis (GFC) – measured over the period October 2007 – February 2009. As at October 2007 the S&P 500 Index had only climbed 11% since the beginning of the decade.

 

How Good has it been?

As Bloomberg note, based on the Sharpe ratio, which tracks the performance of equity markets relative to Government Bonds, adjusted for the volatility of equity markets, the current Sharpe Ratio of the S&P500 is the best among any decade since at least Dwight Eisenhower’s presidency.

The last decade has not been all plain sailing and includes the following market events: May 2010 flash crash, Europe’s sovereign debt crisis in 2011 and ’12, and China’s currency devaluation in 2015.

A previous Post covered these market declines: Equity Market Declines in Perspective

More recently global markets have had to endure an ongoing trade and technology dispute between the US and China.

Central Bank actions, including the lowering of interest rates and quantitative easing (i.e. buying of market securities, mainly fixed income) has helped ease markets anxiety. This is reflected in the decline of market volatility indices, such as the VIX Index.

 

What does the next decade look like?

The sharemarket and economy are linked.

Generally a bear market (i.e. 20% or more fall in value) does not occur without a recession (a recession is often defined as two consecutive quarters of negative economic growth).

Currently there are no excesses within the US economy, that normally precede a recession e.g. elevate inflation, excessive house prices, and high household debt levels.

This would tend to indicate that global equity markets can move higher.

 

Nevertheless, US equity market valuations are high, as are those of global Fixed Income markets.  This environment has resulted in many reporting the death of the traditional Balanced Portfolio (60% listed equities / 40% fixed income).

There are growing expectations that returns over the next decade will be lower than those experienced over the last ten years, as highlight in a previous Post: Low Return Environment Forecasted.

That Post has the following Table, GMO’s expected 7 year returns as at 31 July 2019. They estimated the real returns (returns after 2.2% inflation) for the following asset classes as follows:

Share Markets Annual Real Return Forecasts
US Large Capitalised Shares -3.7%
International Shares 0.6%
Emerging Markets 5.3%
Fixed Income Markets
US Fixed Income -1.7%
International Fixed Income Hedged -3.7%
Emerging Debt 0.7%
US Cash 0.2%

As GMO highlight, these are forward looking based on their reasonable beliefs and they are no guarantee of future performance.   Actual results may differ materially from those anticipated in forward looking statements.

 

It is very rare for decade of strong returns to be followed by a similar like decade.  Only time will tell.

Nevertheless, there is little doubt that a challenging investment environment is likely in the not too distant future. This Post outlines how to prepare and consider investing for such a challenging environment: Investing in a Challenging Investment Environment.

 

Happy investing.

Please read my Disclosure Statement

 

For a historical perspective of previous sharemarket corrections and bear markets please see my previous Post: History of Sharemarket corrections – An Anatomy of equity market corrections

Meanwhile, this Post, Recessions, Inverted Yield Curves and Sharemarket Returns, outlines the inter-play between the economic cycle and sharemarket returns.

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

Could Buffett be wrong?

As has been widely reported Warren Buffett frequently comments on the benefits of investing in low-cost index funds.

He’s reportedly instructed the trustee of his estate to invest in index funds. “My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund,” he noted in the Berkshire Hathaway’s 2013 annual letter to shareholders.

 

Not that I want to disagree with Buffett, I have enormous respect for him, incorporate many of his investment insights and philosophies into my own investment approaches. Albeit, I think he might be wrong on this account.

And this is not to say Index Funds do not have a part to play in a portfolio, nor that investment fees are not important. They are. I do think more portfolios should be invested along the lines of Endowments. Broad diversification is the key.

 

Following Buffett could be the right advice for a young person starting out with many years until retirement.  Such an investor would need to weather the volatility of being largely invested in equities, which is no mean achievement when equity markets can suffer falls of over 40%. A high equity strategy can become horribly undone.

Nevertheless, as one gets closer to retirement and is in retirement Buffett’s strategy is unsuitable.

Similarly Buffett’s strategy is not appropriate for a Pension Fund or Endowment. These Funds are in a similar position to those in retirement. Meanwhile, the equity allocation should be reduced as one gets closer to retirement.

The short comings of a higher equity allocation was highlighted in a recent article  by Charles E.F. Millard, who is a consultant to AQR Capital Management, LLC.

 

Once an investor needs to take capital or income from a portfolio volatility of the equity markets can wreak havoc on a Portfolio’s value, and ultimately the ability of a portfolio to meet its investment objectives.

The key point that Millard makes is that Pension Funds and Endowments are required to make periodic payment obligations. So do those in retirement, they either draw capital or income from the portfolio to sustain a desired standard of living.

 

Ultimately, it the drawing of an income or the payments by Endowments that consume most of the investment returns. “This is why assets don’t just mushroom over time.”

As Millard explains, “each year endowments usually pay out at least 5% of their holdings, and the institutions they support tend to count on those funds. That changes the situation an awful lot.”

Let’s look at the math. Millard explains”

and assume that each year the endowment pays out 5% of its assets. In that case, starting at $1 million, the endowment would not have the $5.3 billion Buffett imagines. Rather, after having paid out almost $145 million along the way, the endowment would have less than $150 million remaining”

Still a great result, but far from the billions assumed by Buffett.

It is also worth noting that a Pension’s obligation (liability) can continue to grow as employees retire and live longer. The Pension Fund has no ability to reduce its payouts and must manage this risk.

 

This is where market volatility comes into play, particularly drawdowns – a large fall in the value of the market.

“In a prolonged stock market drawdown, those growing benefit payments will consume a larger share of the shrunken plan assets.  So, they can’t take too much solace in long-run optimism when in the intermediate run they’re already paying out much of their capital.”

 

This is a key point. You can’t take comfort in the long-term returns from equities when you are running out of money!

Equity markets do fall in value and this is why institutions with meaningful annual pay-out obligations are not invested only in equities.

 

No argument that equities will not outperform over the longer term, this is highly likely. Yet this observation fails to recognise the volatility inherent in equities.

Millard:

“Over Buffett’s 77 years investing, the endowment CIO would see fund assets decline in 23 out of 77 years (when equity returns didn’t cover the 5% distribution), and in the average bad year, the fund would shrink by -12%. But at least an endowment may be able to reduce its spending; a pension fund can’t, so in a bad year, the fraction of pension assets that must be paid out increases substantially. This is why most institutional investors subscribe to a concept that Buffett seems to hate – diversification. He’s said it’s “a protection against ignorance.” We think it is more a protection against hubris.”

Diversification is key.

“It is worth noting that Institutions do not seek to maximize potential long-term returns, without regard to risks. They often seek to maximize the likelihood that they can meet their payout obligations. They seek to be reliable payers of those obligations. And in the case of pensions, they also seek to make it possible for the employer to have somewhat predictable and affordable contribution obligations. A portfolio of stocks alone doesn’t do that. That’s why asset class diversification is a bedrock principle of modern investing.

 

In short, institutional investors have different goals and obligations to Buffett.

For those in retirement, their goals and obligations are more closely aligned with the Pension Fund and Endowment, than Buffett and Berkshire Hathaway. Those closer to retirement need to make sure that market volatility does not impact them and their ability to sustain the standard of level they wish to maintain in retirement.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.