Tag Archives: cullen-roche

The Cash Is King Playbook

We’re seeing something really unusual in the financial markets this year. As I’ve noted recently , there’s almost nothing that’s working this year. No matter where you’ve diversified your savings you’ve likely lost money with the exception of cash. If we look at the two primary asset classes, stocks and bonds, cash has only outperformed both in the same year 10 times in the last 90 years. So this is a pretty unusual event. But there’s some potential good news on the horizon. When this occurs both stocks and bonds tend to bounce back very strong. In the 10 times this has occurred in the last 90 years stocks have followed up with average 1, 2, and 3 year returns of 14.34%, 18.76% and 16.72%. Bonds have done a bit worse with a 1, 2 and 3 year average return of 10.24%, 7.7% and 6.17%. A balanced portfolio has also generated abnormally high returns with a 1, 2 and 3 year average return of 12.29%, 13.23% and 11.44%. As is often the case with diversification, it’s not timing the market that counts. It’s time in the market. So, while cash looks particularly smart today the historical figures say that cash won’t be king for long. Share this article with a colleague

Are Low-Yielding Bonds Still A Good Stock Market Hedge?

One thing that’s stood out during the most recent stock market turmoil is that bonds aren’t performing all that well either. US Treasury Bonds are up just 3.5% since stocks peaked and the aggregate bond index is up less than 1%. The concern here is that ultra-low yielding bonds can’t decline sustainably below 0% and are therefore unlikely to provide much downside protection in the future, whereas environments like the 2008 financial crisis and before offered investors far more protection because yields were higher. There’s some sad math behind the reality of falling bond yields [ insert sad trombone] . As yields approach the 0% mark they produce less and less potential upside. Here’s a general guideline for how much protection you’ll get from 10-year yields falling by 50% from 6% all the way down to 0.19%: As your yield gets cut in half so too does your upside protection. In other words, low yielding bonds become a worse and worse hedge as the yields decline. And herein lies the problem of a diversified portfolio. Investors who are used to a portfolio like the 60/40 of the 80s, 90s and 00s are in for a nasty surprise. Their 60% stock slice is now generating even more “permanent loss” risk than ever. And their bond slice is acting more and more like a true cash component. This puts the traditional 60/40 investor in a bind. They’re going to have to start deviating from 60/40 if they want to generate the same type of nominal and risk-adjusted returns because there is simply no way their bond component can protect them to the same degree that it once did. In fact, if rates become more positively skewed in the years ahead, the bond piece might contribute more “permanent loss” risk in the near term than many of these investors are hoping for. This doesn’t mean that bonds can’t still be a good hedge for stocks, but it does mean that diversified investors are likely to increasingly deviate from 60/40 as they realize that this allocation doesn’t offer the same types of returns that it did in a high and falling interest rate environment. Share this article with a colleague

3 Things I Think I Think – Crashing Up And Down Edition

Here are some things I think I am thinking about recently: 1) What a boring year! The Global Financial Asset Portfolio is down about 1.2% year to date. This might come as a shock to people who are glued to financial TV all day and think of the “market” as the stock market. Yes, some stock markets are down quite a bit, but the aggregate “markets” really haven’t budged much. And this goes to show how damaging it can be to constantly be obsessing over the daily moves of your investments. (click to enlarge) More importantly, it shows how crucial it is to remain diversified and to avoid paying too much attention to the media’s infatuation with every minute-by-minute move in the stock market. Stocks are an important, but relatively minor slice of an aggregate portfolio. Odds are, if the stock market’s daily moves are driving you mad, you have misinterpreted your personal risk profile and might need a change… 2) The S&P 500 (NYSEARCA: SPY ) has value because of people like Donald Trump. I notice a lot of Donald Trump wealth bashing in the media. This story usually goes something like this – “Donald Trump isn’t nearly as wealthy as he claims”, or “Donald Trump is only rich because his daddy was rich”. These statements might be true to some degree. But there’s a good bit of hyperbole going on here. For instance, take this piece in VOX today claiming that Trump would have been better off if he’d just invested his inheritance in an index fund. The author writes: ” Trump is one of five siblings, making his stake at that time worth about $40 million. If someone were to invest $40 million in a S&P 500 index in August 1974, reinvest all dividends, not cash out and have to pay capital gains, and pay nothing in investment fees, he’d wind up with about $3.4 billion come August 2015. ” This is unreasonable on so many levels. First, Trump probably didn’t inherit a lump sum of cash. He probably inherited part of the family business, real estate and many other assets valued at $40 million. Second, NO ONE just invests their whole net worth in a zero-fee, zero-tax, zero-withdrawal all-stock portfolio and lets it ride. So, the assumptions here are totally unfair and reflect nothing more than a fiction. But let’s go further and apply something somewhat realistic. Let’s assume Trump had decided to be a “fat loser” (his words, not mine) and just let his daddy’s inheritance ride in the S&P, while spending a small portion of his net worth each year. For instance, if he’d withdrawn 5% of his portfolio per year so he could do nothing all day every day, he’d have compounded his S&P 500 portfolio into about $400,000,000 as of August 2015. Not bad, but well below the misleading billions that many assume. And keep in mind, that’s before taxes and fees. He’d likely have less than half that if he’d been paying taxes and fees every year. The more important point is that Trump inherited a lot of money and DID SOMETHING with it. He didn’t just turn into a slacker, like a lot of people do when they inherit money. He took a successful company and built it into something bigger and better. And that very production is why index funds have any value in the first place. The S&P 500 doesn’t just rise because some slacker waves a magic wand at higher prices. It rises over time because people like Donald Trump work their butts off to make companies more valuable. I find myself in a weird position here, because I think Trump has said a lot of awful things about people recently. So, there’s no denying he’s been rude to a lot of people and could benefit from a bit more humility. But people who try to make Trump out to be some rich, lazy slacker are barking up the wrong tree. 3) Stop the currency hedging madness! Vanguard has a wonderful piece of research out on currency hedging (see here ). Their conclusion – it’s just more fees cloaked in complexity. They conclude: ” For us, hedging equity exposure isn’t worth the added costs in those strategies that still have considerably less than half their assets in international equities and that have broader investment objectives than controlling volatility. ” This makes a lot of sense to me. If you’re using a passive long-term vehicle like an index fund, then why would you layer on a short-term, zero-sum trading vehicle on top of it? This is a total contradiction of strategies! Low fee indexing and currency hedging are not synonymous. After all, when you hedge currencies, you are essentially timing a zero-sum relative market. Over long periods of time, we should expect that currencies will generate a negative real return because they are zero-sum relative markets. It makes no sense to layer on a currency hedge if you’re adhering to a low-fee indexing strategy. I’ve noticed a lot of these currency hedging products coming on the market lately. They’re very likely just high-fee versions of index funds that come with a slick marketing campaign and little more.