Why today it can be difficult to do what you need.


For the first time in my career as an advisor I am witnessing the largest divergence between client and commercial needs in the field of investment management.

To see things clearly, sometimes distance and perspective can help. If you migrated to Mars (Elon Musk & SpaceX will make sure you arrive) it is likely you would take a broader and detached view of life on Earth and its recent events. And in doing so you might at some point decide to name the last seven or so years as “The Era of Obligatory Gambling”.

Whatever you think of this thought experiment, you can’t deny that we are living in a period of at least “highly recommended” gambling. Why “gambling” and not “investing”? Because the actions taken by investors are not driven by investment considerations. Let’s say you need a certain income flow from your capital – and you did not have the clairvoyance nor the guts to build a portfolio of long term assets before 2008, and kept it intact through the crisis.  In this case, today you have no choice but to buy riskier assets than you would otherwise – hence, you’re are gambling. You are forced into it because central banks have dispossessed you from one of the few – until recently – certainties: for “sleep-well” money you can always earn something in cash or in short-term bonds.

How can a period of forced gambling end? Probably not well. I don’t mean necessarily with a crash or something dramatic, but more like with a string of simple run-of-the-mill unpleasant and consistently disappointing results. And it is here that client and commercial needs (of investment managers) part company.

As the client you can choose to stop the game, put a good portion of your capital in cash or short-term bonds and dip into it for living purposes. This is not ideal but it may not be such a silly move if you think that when the music stops and rates go up there will be far fewer chairs than dancers in the hall. (And, unlike Citibank, you don’t have to keep dancing.)

The problem is that this course of action represents a borderline disaster for the majority of investment managers (the kind of stuff that really keeps them awake at night). For two reasons: first, dipping into capital means that assets under management go down; and second, going into cash and short-term bonds means mostly lower fees. It doesn’t get too much worse than that. Hence, the strenuous attempts to keep you “dancing” with arguments about long-term versus short-term results, active versus passive alternatives, “thematic” ideas, sector rotations, constrained versus unconstrained bond portfolios and the search for alpha with hedge funds. Anything, in other words, but the simple and sound solution you should at least consider.

Syms, a clothing store in New York, used to run a commercial which ended with the owner proclaiming “An educated customer is our best customer.” Unfortunately, in investing as in clothing yourself, there is no easier way out.

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