Asset Allocation: It is not like Poker!
In the ongoing debate about prospects for various asset classes, there is a misleading question.
Are you in the market, or out?
The investment decision is not like the World Series of Poker, where players win by going "all in" at the right moment. No one really knows what will happen in the next few months, and there is no reason to make an unhedged bet. The investor may choose stocks, bonds, commodities, real estate, cash, emerging markets, or the latest Wall Street product asserting uncorrelated returns. Why not a Chinese restaurant approach? Get some stock exposure — -right now!
A few years ago many investors (fortunately not mine) were feeling the sting of losses from the 2000-01 post Y2K tech crash. They were stampeding into real estate, since there was a limited supply of land. We all "knew" that these prices could not go down.
Here is a quotation from July, 2005.
The major problem facing investment advisors is helping clients with
asset allocation. Your client is intelligent and engaged. The problem
is that they are focused on what worked last year, and your job is to
help them with what will work next year….People have the
idea that real estate cannot decline in value — a dangerous notion.
It may surprise some recent readers to learn that the source is "A Dash" from five years ago. I am going to wait to announce our official five-year anniversary until later in the year, when I took this up in earnest. Before that my investment commentaries went only to clients.
I will do some reliving of five years ago, and this is a start. I warned many clients and friends who were buying three or more properties. Like many others, I was early in this warning.
Current Investment Implication
There is an overwhelming reaction to losses, especially those suffered recently. As a new investment advisor in 2000, despite more than ten years advising big-time traders, I struggled to gain new clients. They could all double their money by throwing a dart at a list of Internet IPO's. Logic and traditional metrics were irrelevant.
A few years later, investors missed a great rebound in stocks since so many had gone "all in" on the NASDAQ and lost 90% of their assets. That was no fun at the cocktail party!
The most recent investor reaction is to 2008. My greatest fear, shared by many excellent advisor colleagues with whom I correspond, is that a generation of investors will overreact to the 2008 experience. It is beyond my scope here to analyze everything that happened. Regular readers know that I am reviewing all of the books and the official findings, but too many are simply turned off on the prospects for major companies and too pessimistic on America.
Investors who wait for the final verdict on what went wrong in 2008 will miss the party.
It is not Poker
You do not need to go "all in." You need to find a handful of good stocks to buy at a good price.