My vote goes to investing in stocks for the long term. Gambling isn't for me when it comes to taking care of and increasing the purchasing power of MOM.
So while nobody knows whether the stock market's average annual return will be 6%, 8%, 10% or something else during the next several years and perhaps even decades, to me one thing is clear.
Investors in fixed income instruments will be very fortunate indeed if they're able to earn anything more than the stated interest rate on bonds. And the return on cash equivalents won't exceed and may not even equal the annual rate of inflation.
As a result, for the foreseeable future bonds and cash equivalents are likely to prove to be a terrible investment for both individuals and institutions seeking to achieve an otherwise realistic overall portfolio annualized return of 6%, 8% and up to 10% on 401(k)s and other investment vehicles, including retirement plans.
How Practical is 'Tactical'? puts the 'old fogey' buy-and-hold opportunity this way:
"Buy-and-hold is beating dodge-and-weave.
After years of being mocked as "buy and hope," the patient strategy of holding stocks and bonds is paying off again. By contrast, many "tactical" funds, which seek to smooth out short-term market swings through more-frequent trading, are coming up short.
Still, it is worth asking whether funds that take a short-term outlook are the best way to achieve long-term goals.
The classic "balanced" portfolio favored by prudent investors—60% in stocks, 40% in bonds—is up 11.2% over the past 12 months and 10.4% annually for the past three years.
Over the past decade, this no-brainer portfolio earned 6.3% annually. Even over the past five years, as stocks barely got back to where they stood before the financial crisis, a buy-and-do-nothing investor gained an average of 2.8% a year—thanks to the strong returns on bonds.
Even so, investors have flung money at tactical funds. These portfolios don't place bets on stocks, bonds or other assets and let them ride. They trade in and out, seeking to earn positive returns as markets go up and to limit losses when markets go down. If buy-and-hold investors are tortoises, tactical funds are hares.
Two-thirds of these funds didn't even exist before the financial crisis erupted in 2008. The terror of watching their stocks lose 40% or more in 2008 and 2009 has driven investors to tactical funds in droves, industry experts say. . . .
As usual, investors appear to have stampeded into a trend at an inopportune time. Mutual funds with "tactical" in their name are up 6.9% this year—an average of five percentage points less than the various indexes they follow, according to Morningstar. Over the past three years, these funds have gained an annual average of 4.9%, or more than six points a year behind their benchmarks.
With U.S. stocks doing so well, that isn't surprising. In fact, say tactical managers, it is all but inevitable. These funds can't predict the future. By bailing out of falling markets, they seek to do better when stocks or other assets do badly. Conversely, they are likely to lag behind in bull markets, because they rarely put all their money to work in one place.
"The last few years have been pretty daunting for our strategy," says Ricardo Cortez of the $1 billion Forward Tactical Growth Fund . "Our model tries to follow the market, but the market's kept going up"—so funds that aren't all stocks, all the time, have been left behind.
When U.S. stocks are surging, says Mebane Faber, co-manager of the $70 million Cambria Global Tactical ETF "we'll look worse by comparison, because we have such a small weight there." At last count, his fund had only about 12% in U.S. stocks, versus 24% in commodities and 21% in real estate, on the belief that U.S. stocks are relatively overvalued.
The managers argue that they can reduce risk by cutting exposure to investments that are no longer cheap. "We focus on trying to be in the right asset class at the right time," says Jeffrey Mellas, manager of the $422 million Wells Fargo Advantage WealthBuilder Tactical Equity Portfolio.
Some of these funds are designed to be able to shift virtually all their holdings into cash; others can go only part way. The ability to raise cash also reduces risk, say tactical managers. Unlike stocks, cash doesn't fluctuate in value (leaving inflation aside). But anyone—including you—can smooth the ups and downs of a stock portfolio by holding some cash alongside it.
Meanwhile, almost none of these funds are old enough to have been tested in both bull and bear markets. Some "hold" their positions for only weeks at a time. Their annual expenses average a steep 1.46%, according to Morningstar—or nearly 15 times the cost of the Vanguard Balanced Index Fund.
That tortoise portfolio, which plods along with a steady 60% of its assets in U.S. stocks and 40% in bonds, is up an annual average of 7.15% over the past 10 years. Over the past three years, it has earned 11% annually—more than twice the hares' average return.
Mind you, the stock market could crash again tomorrow. And much of the good performance of the balanced tortoise strategy came from its 40% position in bonds.
As Mr. Faber points out, with bond yields near record lows, the buy-and-hold strategy isn't going to benefit from that tailwind in the future—so its partisans should ratchet their expectations downward.
A tortoise would be lucky to earn a 4% annual return over the next decade on a balanced portfolio.
How will the hares do? Who knows?"
Summing Up
A combination old fogey buy-and-hold and always out-of-favor individual investor with 100% in stocks is what I am and long have been.
It's a low cost long term oriented approach to owning the asset class -- stocks -- that increases in value by the most over any other asset class over any extended period of time.
This approach also accepts it as fact that market timing is both expensive and largely a matter of luck. Sometimes it works and sometimes it doesn't.
And since I'm not worried about firing myself for any short term personal portfolio underperformance, Im willing to ride the inevitable ups and downs of the market over time.
Although there is always lots of volatility in the short term, the market's tendency to go up over time provides great comfort that I'm doing the right thing.
The conclusion is a simple one. Stocks will beat bonds by a huge amount over the next thirty years. It's just part of the risk and reward equation. In other words, who would take the risk of owning stocks if there were to be no reward for doing so? Nobody, that's who.
In 1980 inflation was running at double digit rates. Bond coupon rates were in the double digits as well.
Subsequently, the stated amount of bonds gained in value as interest rates declined over the next few decades. Of course, buying bonds at the peak of inflation and interest rate levels is a no brainer.
The exact opposite situation of high inflation and high interest rates exists today. Rates are at historic lows and the value of bonds will become worth less as interest rates increase over the next several years and decades.
Thus, the next thirty years for bond investors won't be a repeat of the past thirty years. In fact, the next thirty years will be just the opposite.
Thus, our individual investing approach needs to stay away from bonds. My advice is to stay with stocks and be patient. In the end, you'll be happy you did.
I realize fully that that this view isn't one you'll be hearing from the "experts" or may intuitively believe yourself. However, it doesn't make it wrong. Just unconventional. Following the crowd it's not.
Just think about it. How probable is it that interest rates won't be higher than they are now in another three years, five years, ten years or even twenty years? Not very, I would argue.
Thanks. Bob.
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