Monday, 4 April 2022 — Queensland

By Vern Gowdie Editor, The Daily Reckoning Australia

[6 min read]

• Spoilt for choice
• Regrets
• Time in or timing?
• Keep the investing process simple

Dear Reader,

Whether it’s food, wine, entertainment, fashion, or home designs, we are well and truly spoilt for choice these days. 

Options are good, but too many can trigger an acute attack of paralysis by analysis.

Information overload causes the thought processes to shut down. Inertia takes hold. People become fearful of making the wrong choice…so they do nothing.

Which, ironically, is a choice in itself.

When it comes to the world of investing, the choices are almost endless:

• Asset classes: Shares, property, fixed interest, cash, precious metals, currencies, cryptos, futures, etc.
• Each asset class then have their own sub-sectors: large-, mid-, or small-cap shares, and residential, industrial, or commercial property, and government or junk bonds, and gold or silver, and AUD or USD or GBP, and Bitcoin [BTC], Ethereum [ETH], or Ripple [XRP].
• Do you invest directly or via a managed product?
• How much should be allocated to each asset class and sub-sector?
• What’s the appropriate balance between income and growth?
• What’s the best structure for tax purposes: individual name, trust, or superannuation?
• If it’s superannuation, what’s better: public offer or SMSF?
• What’s best for age pension purposes?
• And then, the BIGGIE: Where are we at in the investment cycle?

The choices we make can sometimes change our life’s fortunes…good and bad. Going all-in on shares in mid-1929…not so good. However, three years later, buying shares with your ears pinned back would’ve been a stroke of genius.

With an almost endless list of investment choices on offer, it’s easy to understand why people outsource these decisions to financial planning professionals.

But then, you’re faced with another decision.

Is the adviser independent or a tied salesperson?

With so many decisions to make, I really can appreciate why people find the planning process so overwhelming.

In an effort to assist you with your decision-making process, here’s some things I’ve learnt along the way…

Regrets

One of the things I’ve learnt from my 35-plus years in the business is that investing ALWAYS comes with regrets.

Regret not buying at all.
Regret not buying more.
Regret buying too much.
Regret buying too early or too late.
Regret selling too early or too late.

We’ve all had those ‘shoulda, woulda, coulda’ moments. Comes with the territory.

Accepting regret as part and parcel of the investing process can help keep the emotions in check.

The FOMO (fear of missing out) phenomena of recent years is driven by regret. Decisions based on fear or greed tend to create the greatest amount of regret. As much as possible, try to take emotion out of the equation.

When making decisions, the best any of us can do is gather the best information available at the time, then weigh this up against your situation: age, risk profile, stage of life (far from, close to, or in retirement), experience, and capacity to handle volatility and loss.

Over the course of my career, I’ve had my fair share of regrets.  

The positive side of these negatives is the experience and wisdom you gain. Each disappointment or setback is a learning opportunity.

Making the choice to manage your emotions, your reactions, and your downside, is crucial to long-term financial success.

Time in or timing?

Countless academic studies have determined most investment gains come from being in the right asset class/s at the right time.

To quote from the Ibbotson Associates research paper, ‘The True Impact of Asset Allocation on Returns’ (emphasis added):

‘…we looked at the impact of asset allocation policy on balanced mutual funds and pension funds. We can extrapolate from the study that for the long-term individual investor who maintains a consistent asset allocation and leans toward index funds, asset allocation determines about 100 percent of performance — regardless of whether one is measuring return variability across time, return variation between funds, or return amount.’

Going all-in on shares in 1929 was (with hindsight) a lousy time to adopt a ‘time in’ the market mindset.

The amount of time you’d have to have been in the market to breakeven was 25 years.

Go in at 60 and have your dollar made whole again at 85…there goes your retirement years.

From 1966–83, ‘time in’ the market proved to be another exercise in frustration:

‘Time in’ the market works exceptionally well when the market is moving through the under to overvalued phase of the cycle.

However, when the market is on the cusp of rotating from over to undervalued, what follows is the worst of times to be invested.

This time is spent regretting…

Buying too much.
Buying too late.

John Hussman’s Margin-Adjusted PE (MAPE) is one of the most accurate measurements of where the US market is in the valuation cycle.

The current reading puts the Fed’s sponsored ‘everything bubble’ in a league all of its own…dwarfing the valuation excesses of the 1929 and dotcom bubbles:

The choice investors are now faced with is simple…stay (time in) or go (timing)?

If you stay, you’re assuming the time-honoured mathematical principle of reversion to the mean is no longer relevant, and history won’t rhyme (or, at least, not just yet).

If you go, you’re assuming this will not end well…but if this market defies gravity for a while longer, be mentally prepared for the regret of selling too soon.

At this stage in the valuation cycle, the choice you make about time in or timing is going to be crucial to your longer fortune. 

Keep the investing process simple

If you don’t have the time, inclination, desire, or temperament to trade shares or invest in individual stocks, then you may want to heed Warren Buffett’s advice…

‘A low-cost index fund is the most sensible equity investment for the great majority of investors.’

And:

‘By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.’

In 2007, Buffett put his money where his mouth is when he made a US$1 million wager with a hedge fund manager. He bet that over the next decade, an S&P 500 Index fund would outperform the high-priced stock pickers.

As reported by CNN in February 2018:

‘One decade ago, Warren Buffett took a $1 million wager that stashing money in an index fund would make you richer than if you entrusted it with hedge fund managers.

‘He won — big time — and in his annual letter on Saturday, the billionaire Chairman and CEO of Berkshire Hathaway (BRKA) Inc. outlined the final tally. He also took a jab at the hedge fund folks at the losing end.

‘His pick, the S&P 500 (OEX), gained 125.8% over ten years. The five hedge funds, picked by a firm called Protégé Partners, added an average of about 36%.’

Index funds are a simple, uncomplicated, and inexpensive way to gain exposure to asset classes that are in the ascendency phase of the market cycle.

While markets portray an outward calm, underneath the surface there is significant tension…recent pricing in debt markets indicates trouble ahead.

The choices you make today on where to invest your capital and in what percentages, are going to have a profound effect on your financial situation.

Choose carefully.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

There was so much going on these last couple of weeks. It was easy to get waylaid or delayed. Each headline demanded attention. Was it important? Or just more nonsense?

• Russia, Russia, Russia — bad, bad, bad. Ukraine, Ukraine, Ukraine — good, good, good.
• Mortgage rates are touching 5% again. Is the great ‘refinancing machine’ breaking down?
• Tax the rich; they need to pay their fair share! But wait, more than half of American households — 57% — paid no federal income tax last year. What’s fair about that?
• And there’s the US$5.8 trillion budget proposal…the biggest spending extravaganza ever…the largest tax increase ever; even the Pentagon, which has wasted trillions over the last 60 years, is getting more loot.

Oh…and Will Smith smacked Chris Rock!

And here’s a story from MarketWatch:

‘U.S. government bonds are about to complete one of their worst quarters for total returns in the past 157 years.

‘That’s according to Deutsche Bank AG’s Jim Reid, head of thematic research, who cites data stretching back to the U.S. Civil War. Thursday will mark the end of what’s set to be the worst quarter for the 10-year U.S. Treasury since the early 1980s, he says. The only other period with even worse total quarterly returns for 10-year Treasurys or their equivalents was the fourth quarter of 1931, during the Great Depression, according to data since 1865.’

Does it matter?

Yes, it probably does.

Choppy waves

As you recall, there are always choppy waves on the surface of the markets. And there are big tidal forces underneath. The surface chaos hardly matters. But the ‘yield cycle’ — like the movement of Earth itself — changes water to ice…like sunshine to driving snow.

In July of 2020, the yield on the benchmark 10-year T-bond reached a record low at 0.51%. Yesterday, it was four times higher — at 2.4%. This could be more surface ‘chop’. Or, more likely, the tide has turned.

The last epic low tide in interest rates was in the late 1940s. Then, the economy boomed, and interest rates headed up. They didn’t reach a top until nearly 40 years later — in 1980. It was then that Paul Volcker — eager to get control of inflation — pushed up the Fed Funds rate to where it briefly touched 20%.

Tops and bottoms are uncommon. They are like the smartest kid in the class…and the dumbest. In between, are most of them. Neither smart nor dumb…it’s not clear which way they will go in life.

We only find out years later — when they run for Congress — that they are complete morons.

Bottomed out

Now, 40 years after the last high in yields, interest rates have bottomed out again. And, just as Paul Volcker pushed them up to smother inflation, Jerome Powell and his merry band of economic ignoramii pushed them down to inflame it. So what’s ahead? Might investors now expect another long period — 40 years perhaps? — of rising yields?

Will zombie corporations — that depend on rolling over debt to stay alive — go broke? Will jobs be lost as companies cut payrolls to survive? Will investors turn away from overpriced FANGMAN stocks…risky ‘new tech’ companies…‘meme’ favs...NFTs…cryptos…?

In practical terms, we suggested to readers yesterday that, if the yield cycle has turned, mortgage rates may rise for a long, long time. That would most likely mean falling (real) house prices, too. So sellers may suffer 40 years of declining prices…and wait another 40 years for prices to recover to today’s bubble highs. The next high in house prices? Plan for it — in 2100!

It might be better to start packing boxes now.

Regards,

Bill Bonner,
For The Daily Reckoning Australia