Wednesday, January 7, 2015

Here Come The "Experts"

Bill Gross, the former manager of the world's largest bond fund:

“When the year is done, there will be minus signs in front of returns for many asset classes,” Gross, 70, wrote in the outlook. “The good times are over.”

VIX
  • He may be right (or not).
  • But it is only one year and therefore this is a short-term perspective.
  • The 60/40 balanced fund has enjoyed above average returns for 5 of the last 6 years (the historical long-term average, before fees has been approximately 7.5%).
  • 2011 was a slightly negative year and volatility levels were high (see VIX chart above).
  • So we are going to possibly get a year of lower returns at some point.
  • As Investors we have to focus on the long-term. 
  • Inevitably, over time, there will be economic forces that will have negative impact on global financial markets.
  • What we do not want in these times of higher volatility are big losses, because the recovery to get back to average returns takes significantly longer.
  • Anyone who is borrowing to invest is more susceptible because the downside will be magnified. 
  • Low interest rates made this a viable strategy over the last few years.
  • But as an investor you need to be very careful to impose discipline, wait for the negative markets to redeploy this strategy.
  • And of course that brings up the issue of "Market Timing".
  • Trying to time exit and entry points with certainty may work, from time to time, however the academic research suggests that it does not work over the long-term.
  • It may be a good strategy for putting "new" cash to work, i.e. waiting for market "dips", but for your whole portfolio: one "miss" can be extremely costly.
  • Of course, this is where an experienced portfolio manager can be extremely helpful.

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