Are Investors Worried About the Right Risk?

Monday, July 30th, 2012

by Seth Masters, Chief Investment Strategist, AllianceBernstein

Individual and institutional investors alike have been shifting their capital from stocks to cash and bonds at a rapid rate in recent years, despite extraordinarily low interest rates. But if investors stop to weigh the importance of two different types of risk, they’ll see they still need stocks.

It’s tempting to give up on stocks after more than a decade of high volatility and low returns from stocks—and lower volatility with higher returns from bonds. But we think that 10 years from now, investors who do so will wish they had stayed in stocks—or added to them.

That’s not to say we think investors don’t need bonds. Despite extremely low current yields, we think bonds should still play their usual roles in the portfolios of most long-term investors: providing income, preserving capital and providing protection in times of stock-market distress (because bond prices tend to rise at such times). Bonds will be especially important if the market outcomes are at the extreme low end of our forecast range of potential outcomes.

But most investors are likely to need stocks to feel confident that they will have enough to live on, despite the high volatility of recent years. Remember that volatility isn’t the only type of risk. There’s also shortfall risk: not having enough money to meet your spending requirements. Investors must weigh both types of risk when making strategic asset-allocation decisions.

If you’re just thinking about market volatility, bond-oriented portfolios may look very appealing, especially today. We estimate there is less than a 2% chance that a portfolio with a 20% allocation to stocks and an 80% allocation to bonds will suffer a 20% peak-to-trough loss at some point over the next 10 years, compared with the 15% chance of such a loss for a portfolio with 60% in stocks (Display, left), as the left side of the display below shows. But if you’re just thinking about shortfall risk, a portfolio with 60% in stocks looks more attractive (Display, right).

We estimate that a 65-year-old retired couple planning to withdraw only 3% of their portfolio, grown with inflation, has a 12% chance of running out of money if they invest in the portfolio with 60% in stocks. That may not sound great, but it is materially better than the 24% odds of running out of money if they invest in a portfolio with 20% in stocks.

Today, uncertain macroeconomic conditions make large stock-market drops more likely than usual, and very low bond yields provide a thinner cushion. As a result, market risk can’t easily be avoided. And trying to avoid market risk is not a good strategy if it increases shortfall risk too much. A 20% loss is certainly painful, but it doesn’t hurt as much as running out of all of your money. Many investors who are currently focused on market volatility should be paying at least as much attention to shortfall risk.

The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Seth J. Masters is Chief Investment Officer for Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.

The Bernstein Wealth Forecasting System,^SM driven by the Capital Markets Engine, uses a Monte Carlo model that simulates 10,000 plausible paths of return for each asset class and inflation and produces a probability distribution of outcomes. The model does not draw randomly from a set of historical returns to produce estimates for the future. Instead, the forecasts (1) are based on the building blocks of asset returns, such as inflation, yields, yield spreads, stock earnings and price multiples; (2) incorporate the linkages that exist among the returns of various asset classes; (3) take into account current market conditions at the beginning of the analysis; and (4) factor in a reasonable degree of randomness and unpredictability.

Copyright © AllianceBernstein

Tags: Asset Allocation Decisions, Bond Prices, Bonds, Chief Investment Strategist, Current Yields, Enough Money, Institutional Investors, Low Interest Rates, Market Outcomes, Market Volatility, Portfolios, Rapid Rate, Seth, Shortfall, Stock Market, Stocks, Strategic Asset Allocation, Term Investors, Trough
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China’s Effect on Copper

Saturday, October 16th, 2010

LME Week is an important tradition in the global metals industry calendar that takes place each year in London during the fall. This year’s event kicked off on Monday and the spotlight on industrial metals couldn’t be brighter, especially for copper. With prices up around 13 percent so far this year, copper’s notched a spectacular rebound off its lows and currently sits about 10 percent below its all-time high set in 2008.

China’s role in the copper market rebound can’t be overstated. World consumption of copper has increased 14.9 percent from 2003-2009. But remove China from the equation and world copper consumption swings in the opposite direction to a 14 percent decline over the same time period. Meanwhile, the other BRIC countries (Brazil, India and Russia) combined have seen their copper consumption grow 15 percent since 2003.

China and emerging nations need the copper because it is the most important metal for a rapidly industrializing nation. The average single-family home uses 439 pounds of copper in construction, an air conditioner uses 52 pounds and a refrigerator uses 4.8 pounds. The average vehicle contains more than 50 pounds of copper stretching nearly a mile, and Chinese auto sales have been booming.

In order to meet its ever-increasing demand for copper supply, China has looked beyond its borders for new sources. This chart from BMO Capital Markets illustrates the rapid rate in which Chinese copper imports have risen since Beijing announced the $586 billion stimulus plan in November 2008.

BMO expects Chinese copper imports to remain robust and on the rise and says “China is commanding a significant influence over the price of copper.”

Last year’s spike in Chinese copper imports left copper in short supply for everyone else, just as demand in the developed world is beginning to turn around. Morgan Stanley (MS) reports that consumption in the U.S. is up 5 percent in 2010 versus the same time period last year, with the European Union up 12 percent and Japan up 37 percent.

MS is estimating that this rise in demand coupled with a weak supply response will have the global copper market poised to shift into a deficit this year and remain there until 2013.

This could mean we haven’t seen the end of rising copper prices. BMO just revised its 2010 price forecast up 6 percent to $3.39 a pound, as well as its forecasts for 2011 and 2012.

Tags: Air Conditioner, Auto Sales, BMO, BMO Capital Markets, Brazil, BRIC, Bric Countries, BRICs, China, Copper Consumption, Copper Lme, Copper Market, Copper Prices, Global Metals Industry, India, Industrial Metals, Industry Calendar, Lows, Market Rebound, Morgan Stanley, Price Of Copper, Rapid Rate, Russia, Same Time Period, Significant Influence, Supply China, World Consumption
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Jim Rogers Outlook – Inflation, China, and the US

Monday, October 5th, 2009

Jim Rogers visited CNBC last week in Singapore (where he lives) to discuss his outlook on global markets.

Click play to view:

Among other things, Rogers discussed the notion that the US is prone to hyperinflation, as in the 1970s, as a result of its money printing operations. Rogers also said the US has been lying about inflation, that the actual rate of inflation in the US is around 6-7% currently. He added that it would be nice to know where the government shops, because we all know the price of things has been doing nothing but going up.

Rogers also pointed out the best places in the world to invest are countries which are rich in agriculture and natural resources and added that he is not currently buying the shares of any companies in Asia as most markets are up around 100% year-over-year such as China and Sri Lanka.

He added also that America is debasing its currency at a terribly rapid rate and this is never good in the medium to long term – sometimes it helps in the short term – but longer term he’s pessimistic about the fate of the US dollar.

Here are some of the earlier clips from Roger’s visit the same day:

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8:10 am – How Best to Play China – With China’s pace of growth set to surpass that of the developed world, Kirk West, MD of Principal Global Investors & Jim Rogers, chairman of Rogers Holdings reveal how they capitalizing on this.

8:20 am- China Boosted by Stimulus – Stimulus measures are working on China’s domestic economy, says Kirk West, managing director, at Principal Global Investors. He speaks to Jim Rogers, chairman of Rogers Holdings.

8:30 am – China will Float Yuan – China is freeing their currency more and more each quarter, and this is a sign that a free-float of the yuan is not far, Jim Rogers, chairman of Rogers Holdings tells Thomas Harr, senior FX strategist at Standard Chartered Bank.

Tags: Best Places In The World, China, China Economy, Cnbc, Cnbc Asia, Commodities, Domestic Economy, energy, ETF, Free Float, Global Markets, Harr, Hyperinflation, Inflation Rate, Jim Rogers, Managing Director, Money Printing, Natural Resources, Places In The World, Principal Global Investors, Printing Operations, Rapid Rate, Rate Of Inflation, Standard Chartered Bank, Stimulus, Strategist, Yuan China
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