"There are essentially two forces influencing returns; growth and inflation. The task, is building a portfolio that can weather any scenario, regardless of what these factors are doing... You should be building a diversified portfolio with assets that are balanced according to their risk rather than their dollar amounts." - Ray Dalio, Founder, Bridgewater Associates, LP
We humans tend to herd, and boy are investors herding. Much like investors did in 1999. Then it was the tech stock craze. More buyers than sellers and prices go up. More buyers into the same few stocks and prices really go up. Until they don't. Minus 75% and 15 years to get back to break even was the cost of that error. Were value plays a better pick then? Yes. Were utilities a better pick then? Yes. Were bonds a better pick? Yes. Was portfolio diversification a better plan? Yes. But everyone wanted that shiny red Ferrari.
So when clients call and want to buy a Ferrari, I point him or her back to their risk assessment and investment strategy. And if goals and risk objectives have changed, then ok consider the Ferrari. But, one can't expect a minivan to drive like a Ferrari or a Ferrari to provide the benefits of a minivan... two different things. As Dalio said, "You should be building a diversified portfolio with assets that are balanced according to their risk rather than their dollar amounts." Tech was the Ferrari of 1999. Passive S&P 500 Index exposure is today's Ferrari. Well, actually FAANGs are today's faster Ferrari but you see the point.
I came across the following quote in a piece from CMG's Stephen Blumenthal that further illustrates today's market mood.
"There is always a disposition in people's mind to think that existing conditions will be permanent... when prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which makes it unlike its predecessors and gives assurance of permanency. The one fact pertaining to all conditions is that they will change." - Charles Dow
Dow's quote is from the late 1920's. In 1928, Roger Babson advised investors to get out of the market. People thought he was nuts. He was early on his call as the market went about 40% higher. What was overvalued grew to be more overvalued. He advised again. People thought he was even more nuts.
The market crashed, rallied and went on to ultimately lose nearly 89% of its value by 1932. While I'm not calling for anything near that degree of financial destruction, I can't help but wonder if in a few years from now investors might be looking back asking their advisors how they could have let that happen. I don't intend to let this happen on my watch.
I think there is a better way. I believe Benjamin Graham was right on when he said, "The essence of investment management is the management of risk, not the management of returns."
We will need to buckle the seats of our "minivan", but it will take the bumps a lot better than a Ferrari.