Investing Defensively

My Comments: I posted recently that we had better revise our investment expectations downward if we are planning to use our retirement savings to sustain our standard of living for the next twenty years or so.

I attributed the likelihood of lower growth and investment return numbers on demographics and a rising interest rate environment. http://wp.me/p1wMgt-1Qz

The article below by James Hickman is long, full of charts, and technically ripe. You may easily get lost. But he echoes the same message as mine but mostly for those of you who are OK with playing the markets by yourself. If that’s not you, there are other ways to be defensive.

Below is his introduction to Part I of II. If you click on his name, you’ll also find Part II.

May 31, 2017 \ James Hickman

Retired Or Retiring In Next 15 Years? Better Get Defensive (Part I Of II)

Summary

  • Market timing is sensible in certain circumstances – like reducing US equities exposure now.
  • Always passively invest in public equities and fixed income – not alternatives – but asset allocation still requires active approach.
  • Financial healing power of “the long-term” is no remedy for max drawdowns in the retirement plan homestretch.
  • Portfolio implications of 3% ROI for another decade, 2% US GDP forever.

“Market timing is a loser’s game” is a misleading marketing slogan peddled by the long-only mutual fund machine. The mass cash movements in and out of public equity markets that cause market timing failure are rarely driven by disciplined, value-based decisions about asset allocation but rather by emotional investor capitulation to protracted trends at precisely the wrong times. The trite phrase is invariably trotted out when markets are most over-valued and risky – when investors should be selling but rarely are. Now is one of those times.

Recognizing that you should always use low-cost, passive vehicles in certain asset classes and pay for skill in others is not news. But the more important question is: How much should be allocated to each asset class? Asset class and investment strategy exposures, beyond just equities and fixed income, is critical to portfolio diversification and return variation (Brinson, Hood and Beebower – 1986; and Xiong, Ibbotson, Idzorek and Chen – 2010). But can asset classes be timed? The answer is yes.

The professional investment industry has always been animated by failed attempts to systematize alpha generation – to create a better mousetrap for delivering repeatable outperformance of the market and justify higher active management fees. Active managers continued their interminable streak of underperforming the broader markets in 2016. According to S&P Dow Jones Indices’ SPIVA US Scorecard for 2016, “Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.”

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