I’ll have another slice of assets please
One of my favorite Yogi Berra quotes describes his trip into a New York pizzeria. When Yogi was asked whether he wanted his pizza sliced into six or eight pieces, Yogi eagerly replied eight because he was feeling extra hungry that day .Over the length of this secular bear market which has been punctuated by occasional bear market traps where the bull comes out to play and the market rallies such as March 2009 to the present, the individual investor has been conspicuously absent. Believe it or not though we believe at Annuity Think Tank , if the investor had followed the cardinal rules of diversification of actually picking six or eight slices of the capital markets assets, the returns with 40% allocated to bonds or an alternative like annuities would have been over 5%. Our problem as investors or professionals in the industry is that we emotionally get grounded through believing that CD diversification is owning a 3 month, 6 month and 12 month CD at three different banks. The stock investor believes in many cases that owning some blue chips along with tech stocks is diversification. Many real estate agents and investors believe a little rental property, commercial property, and land will do the trick. Currency traders are the same way. In a tighter knit Global economy, diversification aims to reduce the risk of specific types of investments but when those investments move in the same direction, it’s time to look at six pieces and all of the above play a role and enhance diversification and reduce risk. Further, I remember when mutual funds in the 80s were all the rage and professional management was sold because you and I did not have the time, resources, emotions, and expertise(T-R-E-E) to pick individual investments but because of technology and greater productivity, someday we would follow Europe’s lead and work 30 hours a week. How’s that working out.
In the next blog, I will talk about an ideal to get 6 pieces of the capital markets, that cuts risk to 60% of equities and would have generated over 10% in the last ten years. If we live in a new economy as PIMCO calls it, then maybe it’s time to think differently about where the next ten years will take us. Diversification plans must change over time, especially when the balance between the supply of core assets like stocks changes so rapidly because of shifting demographics. Thornton Parker saw this clearly in the early 90s in his book “What if Boomers can’t Retire” There are modern day prophets pointing us in the right direction. We just need to take a limb off the tree of time and seek out pundits with credible records. Ibbotson got it right when his groundbreaking study found that asset allocation is responsible for over 93% of performance in a portfolio. He just did not include enough assets. That’s kind of like the great baseball manager for Yogi Berra, Casey Stengel saying ‘baseball is 90% mental, the other half is physical”