Amen of the Week:
“The great enemy of the truth is very often not the lie -- deliberate, contrived and dishonest -- but the myth -- persistent, persuasive and unrealistic.”
- John F. Kennedy
Is your life savings in Wall Street mystery meat? Does your adviser speak in terms like “non-correlation” and show you pretty pie charts with your money spread across a dozen “asset classes”? Be honest with yourself: Does this really make sense to you? Or have you reached the point that you’re simply saying, “I just trust my adviser to put my money where it'll benefit me.” If so, I implore you to do two things: First, fire your adviser and then seek a therapist to begin your de-programming.
Don’t count on Wall Street advisers for this de-programming. Most haven’t been trained to actually invest – that is, to take a stand on what specific investments they like. Besides, the “own a bit of everything” business model is simply too profitable for Wall Street to abandon. As this chart below suggests, folks are paying the Street more than ever. Yet in my mind, they're getting far less value…
The Asset Allocation cult that has come to power over the past three decades on Wall Street is, in my mind, the most dangerous threat to people’s wealth. With practically all financial asset prices artificially inflated, this danger has never been greater. The origin of any cult is a premise that is easy to accept. For the Asset Allocators, that premise is that diversification makes sense. From this starting point of “don’t put all your eggs in one basket”, folks have been led down a garden path, where each successive step makes complete logical sense – yet ends up in a dangerous place they never would have logically intended at the outset. People have ended up over-diversifying their life’s savings into hundreds of securities. It’s “diworsification”, as Peter Lynch calls it. If you own 500 stocks and your best idea triples, it contributes less than ½% to your returns. Meanwhile, you remain exposed to the downside of a stock market that is pricey by historic standards.
Owning the “market portfolio” has worked for the past 35 years, as all financial asset classes have risen dramatically. In the past five years, much, if not most, of this asset inflation has been artificially orchestrated by central bankers (or central planners, more accurately). That hasn’t worked in China recently, nor has it worked historically anywhere else for any sustainable period. So far, it has continued to work here in the West, though this past week should be a wake-up call. If history is any guide, the odds are high that we too will learn that artificial price controls don’t last – and ultimately do far more harm than good.
The future will not be won by asset allocators and closet indexers. My bet is that they’re in a very precarious spot today. Rather, there is a great future ahead for investors who buy shares in great businesses run by great people – but only when available at good prices. Otherwise, there is no place like cash. Too bad that’s advice few advisers have a financial incentive to give you. This is why Fielder’s business model, as an independent fee-only adviser, is the future. People need unbiased, off-the-Street advice today more than ever.
Yours in the Field,
Frank Byrd, CFA
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