The world is full of uncertainty. The US economy is struggling; not growing much, but not declining either. Job growth has been slow, but steady, particularly in the private sector. The European Union continues to face more significant challenges.
Interest rates are at all-times lows. The 10 year US Treasury bill yield has ranged from 1.45-1.60% recently, which is actually a negative "real" return. This means that after inflation and taxes, the net return is negative.
What is an investor to do?
Many prominent stock and bond market "gurus" are decrying stocks, with comments similar to the "death of equities." Bill Gross, one of the world's largest bond fund managers, in his August, 2012 Investment Outlook, started his essay stating "the cult of equity is dying."
A few days ago, one of the largest hedge fund managers in the world, Louis Bacon, announced that he would be returning $2 billion to his investors (for which he was charging 3% annually, plus a 25% performance fee), citing his underperformance and inability to cope with worldwide market conditions.
There have been huge stock market redemptions from mutual funds over the past few years. Per Morningstar, since the beginning of 2009, investors have redeemed $200 billion from US stock market funds. During the same period, $700 billion has been added to bond funds. Usually, mass inflows or outflows of mutual funds tend to be leading indicators.....of the opposite direction of the markets.
These are all signs of stock market pessimism, which are actually positive, for long term investors.
We view the current environment as a long term opportunity, for many reasons. For our current clients, we have developed investment plans and are adhering to them. We do not think it would be advisable to react to current economic issues by making major, sudden portfolio changes. We agree with the philosophy of Warren Buffett, when he wrote that "we attempt to be fearful when others are greedy and greedy only when others are fearful." He is frequently a contrarian, and has been very successful doing so. As the stock market redemptions reflect, this has been a period when many others are fearful of stocks.
We work with our clients so they avoid making major financial mistakes, so they are better able to meet their financial and personal goals. We advocate broad, global diversification.
- US markets and many global stock markets are positive for 2012, though many people would not think so, based on media reports.
- We have avoided the huge losses that many have incurred by not buying IPO's in stocks such as Facebook or Groupon (including some very wealthy and prominent individuals and some of the largest stock market mutual funds).
- We have taken advantage of certain market volatilities, by rebalancing and tax loss selling many times already this year (and not just waiting to do this at year-end).
While we cannot predict how worldwide stock markets will perform, we know that we are providing advice for our clients that are in their best interests. We rely on academic and historical research, not unproven forecasts, or crystal balls, for our investing strategies and how we structure portfolios. We are confident that these strategies will continue to be successful over the long term.
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