I Could Not Have Said it Better Myself…
In honor of 2010, the Wall Street Journal provides a year-long guide to fixing your finances. (See article). While I would normally enjoy pontificating over these common sense steps, I have very little to add here…but..oh wait, I do feel the need to put in a word here about retirement savings.
The past couple of years have been rough for retirement savings. While most will likely stay the course in 2010 and continue saving,
some may be tempted to cash out and play to lottery or try a Madoff-style investment in order to get rich quick. The fact of the matter is nobody gets rich quick. There is no magic bullet. If monthly retirement saving seems boring, well, that's because it often is. If the quarterly 401(k) or IRA statement is not jumping out at you with a 25 percent rate of return, that is to be expected.
Let 2010 be the year of common sense…save regularly, don't time the market, and as Warren Buffet once said, “Beware of geeks bearing formulas.”
I’m very confused when it comes to retirement advice. Most all pension and investment pundits take the balanced approach i.e. index funds/passive management and an asset allocation mimicking a well diversified pension fund.
Is this proper advice? Yes if everybody has the same:
1. risk preference/risk tolerance
2. same average age, years to retirement
3. same level of income demands at retirement
4. Same amount of overall assets
So in fact it is not proper advice it, fits the average person and therefore fits none!
In fact lately there has been developments in the pension fund area that support an old theory of mine. Pension funds are now seeing equities as more safer long term investments than bonds, cash. The long term investment period, saving for plus 50 years, savings 30 and payout 15, stands the traditional view of equities and bonds on its head. I’ve always held that the longer the total time is the higher portion of real assets you must hold, not only that but that a much higher portion of super high risk assets is needed.
I’ve also held the view that pensions should not be viewed on as a balanced portion of your portfolio, instead you should view all your investment as one portfolio and as a result put your absolutely most risky assets there i.e. Emerging Markets and Frontier Markets as well as Emerging Technologies.
I’ve have adhered to this philosophy since 1999. In my pension accounts I have an annualized rate of return of 11 %. I invested before the crash of 2001. I lost more than 50 % of my portfolios value in the 2001 IT crash, I’ve seen large ups and downs since then and my portfolio lost 60 % in value in the crash of 2008. They are today back on track, a 100 % gain since all time low and at 80 % of 2007 all-time high value. I invest nearly nothing in the US in my pension portfolios.
As regards to the type of markets and funds I invest in are active managers, in my view active always beat passive ones in hihg risk markets. The reason is that the theory behind passive, index management are research and studies done in near perfect and transparent markets and/or done on major indices such as the S & P 500. The less transparent and less developed and/or more risky a market is active managers have an edge. I ‘m also vindicated in this my theory by the fact that in the bear market of 2008-9 active value managers outperformed. The reason in my mind is that index trackers are more over invested in the equities that are hit by asset bubbles, their exposure increases more towards high returns stocks as in the IT crash and the Financial meltdown, The indices were overblown with tech and financial stocks.
My last comment is on “beware of geeks bearing formulas”. Without the geeks there would be no asset allocation, no Asset Liability Modeling (ALM), investing would be purely emotion driven mumbo jumbo. As a matter of fact geek driven investment strategies have outperformed nearly all other investment styles in particular during the 2008 crash and vastly outperformed Warren Buffet and his Berkshire Hathaway. Formulas and geeks are not the root cause. Geeks are technicians and formulas are tools. The NRA has a slogan: “Guns don’t kill, people do”. So who did “kill”? The shamateurs that should never have used the models for investment purposes i.e. the big banks.
Who made tons of money? The hedge funds that used geeks and formulas, that new the risks and had adequate risk controls. Lesson 101 in alternative asset management is the “Fat Tails”, risk and reward is not a perfect Bell Curve. The risk is mitigated but can blow up in your face, is leverage in catastrophic scenarios.
Pundits should be very careful in spreading in my opinion myths about balanced asset allocation and passive investment strategies. They are false prophets if they don’t tell the full story.