Monday, December 30, 2013

Deep Risk

William Bernstein just wrote a book called "Deep Risk: How History Informs Portfolio Design".  I haven't read the book but in the January issue of Financial Planning magazine there is an article talking through the concepts.  Bernstein defines deep risk a negative real (inflation adjusted) return over a 30 year period.  This can be caused by four things---inflation, deflation, confiscation, and devastation.   According to the article the only area that an investor should have constant protection against is inflation, the other risks are too low in probability and/or have a high cost of insuring against them.  This is a better idea than the permanent portfolio concept of having fixed allocations to things like gold, silver, treasuries, real estate, stocks, etc.  but it is still flawed.  Bernstein argues that to protect against inflation investors should own global equities, commodity producing stocks, gold, and tips.  These assets may protect against inflation but they can also do poorly in other environments, like gold did in 2013.  

We know that markets will go up and down, interest rates will go up and down, inflation will do up and down, commodity prices will go up and down, etc.  We just don't know when.  Having fixed allocations to protect against any of these risks is like using a sledgehammer to kill a bug--it may work but it is overkill and can cause collateral damage.  None of these markets events happens overnight.  If you keep in harmony with market trends you will automatically adjust your portfolio to be responsive to anything that could and will happen.

Friday, December 20, 2013

Gold Set For First Annual Loss in 13 Years

Just read an article in the WSJ this morning about how Gold is down 29% YTD and is set for its first annual loss in 13 years.

Can't help but remember all the people who told me how Gold was a sure thing or how Gold never went down.  The lesson here is pretty simple---don't get caught up in all the fundamental reasons why something should go up or down and don't get caught up in the sales sizzle of people who have a vested interest in trying to get you to buy something.  All of that stuff is rarely right, the market is always right.  Follow the trends and counter trends and you will be ok.  There will be a time when it makes sense to buy Gold again but don't try to pick the bottom, you may get lucky here and there but that is rarely a winning strategy.

Tuesday, December 17, 2013

Outlook for 2014

As we get closer to the new year, my inbox is starting to get flooded with different market outlooks for 2014.  Because of this I thought I would chime in with my own outlook:

1. Most of the outlooks that come out will be completely wrong so I will delete all of them immediately except for the ones that come with funny comics.

2. One or two will be right, not because the authors have any special insight, but for the same reason a broken clock is right twice a day.   With enough people making predictions, statistically speaking, one or two will guess right.

3. The one or two who guessed right will be paraded in front of the financial media as great experts.  The media will also probably ignore the fact that they probably guessed wrong every other year.

4. The US market will probably fall somewhere between up 35% and down 35%

5. It will be no easier to predict what the market will do (impossible) in 2014 than it is any other year.

6. Bonds will either be up or down

7. Markets will continue to move in recognizable trends and counter trends

8. Instead of trying to predict what the market is going to do investors will be better of investing with these trends and counter trends.

Thursday, December 12, 2013

Ultimate Success Formula

The two areas were people are given the most mis-information are nutrition and finance.   I was recently listening to an expert on nutrition who espouses a view that is far different than the mainstream and he recommending people use the following formula in trying to find out what works for them:

Step 1---Try what everyone says should work
Step 2---If it doesn't work then throw it out
Step 3---Try the opposite

This advice carries over to finance as well.  You tried the traditional asset allocation approach in 2002 and 2008, how did that work?  If it didn't work well then toss it and try the opposite.  The opposite of fixed allocations decided by your risk tolerance and age is to have flexible allocations determined by the market, or Tactical Asset Allocation.