Posts Tagged ‘Wealthtrack’
Tuesday, January 29th, 2013
Financial Thought Leader, Andrew Lo, renowned professor of finance at MIT and hedge fund manager says the markets are more complex and challenging than ever before. He shares strategies to survive and prosper.
Andy Lo’s “The One Investment”
“The One Investment…”
A managed futures product that includes commodities & financials
“I think that for the coming years, probably some kind of managed futures product, something that involves commodities, but also financials. But that are futures contract based, so that they’re betting on trends as well as dynamically readjusting their risk to take into account some of these macro factors… Managed futures has often been called crisis alpha, because they tend to do well when there are big shocks in the marketplace. Now, they didn’t do well last year when the S&P was up 16%.I think managed futures may have been down five or ten percent. But that’s just the point. The point is that they do well when the stock market doesn’t, and so they provide a nice counterweight to the traditional stock-bond investments.”
- Andrew Lo
Thursday, January 24th, 2013
by Consuelo Mack, Wealthtrack.com
Game Changers for 2013! In part 2 of WealthTrack’s annual exclusive with Financial Thought Leader, Ed Hyman, Wall Street’s number one ranked economist for an unprecedented 33 years running, he and Great Investor Dennis Stattman, long-time portfolio manager of BlackRock’s Global Allocation Fund identify the three big issues they predict will make a huge positive difference to investors this year.
“The One Investment…”
Ed Hyman, Chairman and Founder, ISI Group
Guggenheim China All Cap (YAO)
Price: $26.31 on 1/16/13
52-week range: $20.92 – $26.56
“I think I would pick the Shanghai Composite. It’s … what, 10,000. It’s really down. It’s been the worst stock market in the world. It’s now up about 15, 20 percent. But I think that might be a good play for 2013… ETFs would be the best play.”
- Ed Hyman
Dennis Stattman, Portfolio Manager, BlackRock Global Allocation Fund
WisdomTree Japan Hedged Equity (DXJ)
Price: $37.84 on 1/16/13
52-week range: $30.07 to $38.91
“Japanese stocks. You could buy the Wisdom Tree, a hedged Japanese equity fund, symbol DXJ, which gives you exposure to Japanese stocks with the currency hedged.”
- Dennis Stattman
Tuesday, January 15th, 2013
WealthTrack’s annual exclusive with Financial Thought Leader, Ed Hyman, Wall Street’s number one ranked economist and BlackRock’s star Global Allocation Fund manager, Great Investor Dennis Stattman.
They will assess the U.S. economy, markets and investment opportunities for 2013.
During Wealthtrack interviews, guests are asked to share their one top investment idea:
Ed Hyman, Chairman and Founder, ISI Group
“The One Investment…”
Price: $95.19 on 1/11/13
52-week range: $78.25 – $116.95
Dennis Stattman, Portfolio Manager, BlackRock Global Allocation Fund
SUPERIOR GROWTH PROSPECTS
Total SA ADR (TOT)
Price: $52.88 on 1/11/13
52-week range: $41.75 – $57.06
Copyright © WealthTrack
Saturday, August 18th, 2012
CONSUELO MACK: This week on WealthTrack, legendary Financial Thought Leader Charles Ellis and award winning financial advisor Mark Cortazzo show us how to cut sky high investment fees to save money and grow our nest eggs over time. Controlling your investment costs is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. How much do you pay in investment fees every year? What is the actual dollar amount you pay to your financial advisor, let alone the mutual funds you own and the firms that have custody of your investments? How much do they really take away from your portfolio and its performance over the years? According to a ground breaking article by legendary financial consultant and WealthTrack guest Charles Ellis, “investment management fees are much higher than you think.”
As Ellis points out the little over 1% of assets paid by most individuals and little less than one-half of 1% paid by institutional investors are “seen as so low that they are almost inconsequential” It turns out they are anything but! As Ellis points out “investors already own those assets so investment management fees should really be based on what investors are getting in the returns that managers produce.” Considered that way, fees are much higher. Pension giant CalPERS, the California Public Employees Retirement System, earned just one percent on its $233 billion dollar investment portfolio in the past fiscal year. If it were to pay the average half a percentage point charge on assets under management, the fee would equal 50% of their return for the entire year!
The financial toll investment fees take on portfolios over the years is stunning. Last year, financial advisor and WealthTrack guest Mark Cortazzo introduced a flat fee portfolio product for individuals with smaller and less complex portfolios than his usual high net worth clients. He compared the ten year costs for two clients, each with a $500,000 portfolio- one paying the not unusual annual fee of 1.5% of assets; to another, a flat fee client paying his $199 a month charge. With all other things being equal, the flat fee portfolio saved more than $80,000 in fees over the ten year period.
This week we are going to examine investment fees and how you can reduce them with Charles Ellis and Mark Cortazzo. Financial Thought Leader Charley Ellis is a world renowned investment consultant to governments, institutions and the financial industry. He has authored or co-authored some 18 books including the investment classic, Winning the Loser’s Game, and more recently, with Princeton economist Burton Malkiel, The Elements of Investing . He is devoting a great deal of his time to helping individuals become better investors. Mark Cortazzo is founder and senior partner of MACRO Consulting Group, a 20 year old financial advisory firm catering to high net worth, and now Main Street, clients. Mark has been recognized as a top advisor by Barron’s, Worth, and Fortune magazines among others. I began the interview by asking Charley Ellis how much higher investment management fees are than we think.
CHARLES ELLIS: It depends on what you’re thinking, but most people, honestly, most people think the fees are roughly one percent. That is low, compared to anything else. You buy and sell a house, one percent commission, you think, “My, God. That’s really low.” It just doesn’t happen that way. And if you look at it that way, fees are low.
CONSUELO MACK: Right. And it’s one percent, based on the assets under management, for instance. So you a $100,000 portfolio, it’s a $1,000 fee. Ah, nothing.
CHARLES ELLIS: Right. The problem with that way of thinking is that it doesn’t reflect any economic reality. For an example, if you’re an investor, you already have the assets, so you’re not getting the assets. You’re getting something else. What are you getting? You’re getting a return on the assets. Okay. So what’s the fee on return? If you take the kind of return people are expecting from now, out over the next 10 or 15 years, you’re paying about a 15% fee. That’s not low. That’s a pretty high fee. That’s twice as much or more than most people, say, would pay for a house sale or transaction. It starts to look like a pretty good profit margin, even for a pharmaceutical company. That’s a lot. But that’s not the right way to look at it, and that’s not the whole story. It’s actually a great deal higher than that.
CONSUELO MACK: So Mark, you run an advisory firm and you have seen what a lot of your competitors are doing as well, and, basically, the one percent of assets under management, as a fee, that’s the standard, right? Some are higher. So what’s your response to Charley’s critique that, in fact, fees are much higher than you think, when you just look at the returns you’re getting?
MARK CORTAZZO: I agree, and I think that the one percent is even wrong. We’ve had a lot of people come to us to review the fees on their portfolios to compare to what we’re doing, and they have a million-dollar account, and we ask them what’s their fee, and they said it’s one percent, because at a million dollars the fee goes to one percent. We looked at the fee schedule, and it was actually two percent for the first $250,000, 1.75 for the next 250, and one-and-a-half for the next $500,000. And when we did the math on a $1.1 million account, they thought they were paying one. They were paying 1.63%. So it’s 60% higher than what they thought was one, which in and of itself might have been a very high cost for a $1.1 million account.
CONSUELO MACK: And is that common practice, do you think, in the industry?
MARK CORTAZZO: The most common fee structure that we see at big brokerage firms and investment advisories is a blended- not back to dollar one- it’s a blended fee, you know, where we think that it’s not obvious to the client what they’re paying.
CHARLES ELLIS: One thing you should pay attention to is if you went to Canada, the fee normal would be something just over two percent, and if you go to all the major countries in Europe, it ranges between that two percent and one percent. And if you go to Japan, it can get even higher. So our fees are low relative to the world norm and behavior.
CONSUELO MACK: And that’s a change, Charley. You have been in the financial business for 50-some-odd years. You started as a very young child. And essentially, it was not always this case. So how did we get here? I mean, how did we get to where one percent is the norm, and even that’s not real?
CHARLES ELLIS: Well, for 50 years I’ve been working with investment management firms, and the basic metric has always been the same. You can increase your fees, and if you do increase your fees, nobody seems to mind, and you can increase your fees again, and nobody seems to mind. Because everybody says you would never comparison shop for price if you needed brain surgery. If your family was faced with a major lawsuit, you wouldn’t concentrate on the price of a lawyer. You’re looking for skill. And if you want to get great skill, you have to be prepared to pay up. And those who traditionally have had the lowest fees for active management have been not particularly skilled and not particularly well represented as to what their capabilities were. So we’re looking for value. We look for– best indication of value in most markets is price. So we are prepared to pay a price in order to get good value. After all, my family is dependent upon it. I’m dependent upon it. I want the best. And if you want the best, you pay up.
CONSUELO MACK: So where is the flaw in that argument now? Because you have said that, in fact, the market has changed now. And so buying the best- whatever the best is- the best has changed. So how has the market changed, in which case, that model doesn’t really work anymore?
CHARLES ELLIS: Well, the main change is there are so many truly wonderful, brilliant, hardworking, well-educated, slaving away at it people trying to beat the market that they’re just too darn many of them for any one of them to be able to do better than the crowd. And if you believe, as I do, in the value of prediction markets, there’s been no prediction market in the world with as many people putting real money into it, and really doing the research, and being free to make any choice they want to make, and working at it all the time. So they’ve got it pretty well right. Not perfect, but so much better than it ever has been before, that it’s very hard for anyone to do better than the crowd. And it’s even harder to figure out who’s it going to be before it happens.
CONSUELO MACK: So you have a different approach at MACRO Consulting, the way you treat different asset classes.
MARK CORTAZZO: As an extension of what Charley was saying, trying to define who’s going to be the best manager, you’re starting to see a lot more model portfolios that are using indexes as their base to invest the portfolios. So my 60-40 mix of index-based funds isn’t going to have a big fundamental difference in performance versus somebody else’s 60-40 mix. We’re buying the same indexes and the same asset classes. The average fee for a $500,000 account, national average, is one-and-a-half percent. We, as well as other discounted firms, are at about half a percent for that $500,000 account, and at a million, that one percent fee, there’s plenty of firms that will manage an index portfolio for a quarter of a percent, and that’s a big difference net in your pocket.
On the low return, one of the things that’s very frustrating for us is, we see people coming to us with fees that are 1.5, 1.75 percent, and they have half their money in fixed income, and the ten-year treasuries at 1.5, 1.45, their fee is more than their yield, so, you know, to Charley’s point, not 15%. It might be 100% of the earnings on half their portfolio is the fee. And so we’ve talked to clients about calling out part of the portfolio, put it in a money market. You know, money market, you can shop it around and get one percent net, FDIC insured, and then have the equity portion managed or, you know, an 805 equity portfolio managed, where you’re reducing your fees, and you’re reducing your risk.
CONSUELO MACK: So Charley, are some of the most influential institutional clients, probably at your behest, starting to question the fee structure? Is there any change occurring?
CHARLES ELLIS: Gently questioning would be about as far as most people take it.
CONSUELO MACK: And why is that?
CHARLES ELLIS: But there is a different way of answering your question, which takes us to the, well, what about active management versus passive management, which is a really important proposition. And if you look at the data, it’s very clear that institutional investors and individual investors, but particularly institutional investors, have been increasing. The number who invest in passive has gone up, and up, and up…
CONSUELO MACK: Yes.
CHARLES ELLIS: …every year. The percentage of their assets individually that goes into passive, goes up and up every year. So two of the major forces are increasing steadily and never reversing. Now, the reason for that is partly fee and partly the imperfectability of active management. So that if you really want to get a reliable result, and you would like to save money in doing it, going to what bothers most of us as individuals quite a great deal, I don’t want to settle for average in anything else, why should I settle for average in this? It turns out that is not average. That is comfortably above average.
This last year, for an example, 80% of actively managed funds underperformed the benchmark they were aiming for. You say, “Well, what happens over a long period of time?” It’s pretty grim again. Roughly, 70% of funds have been underperforming over every decade, and make it 20 years to make it longer. The data is not so good. It goes up towards 80% underperform. That’s a very powerful message, and people are getting it. And even though they’d like to have above-average children, and above-average automobile driving skills, and above-average dancing skills… we’d all like to have everything be above average. The fact of the matter is, if you can have an average flight on an airplane, you’d take it, because an average flight may be a yawner, but that’s just what you want in flying an airplane. And in the same way, if you really want to concentrate on what’s important in investing, you’ll concentrate on what you’re trying to retrieve, how much risk can you take, and what basic kinds of investing will do well, and then implement it through passive investing, either ETFs or index funds.
CONSUELO MACK: Mark, let me ask you about some other fees that we are not aware of. What are some of the most obvious that we should pay attention to?
MARK CORTAZZO: When we build Flat Fee Portfolios, we’re trying to eliminate as many of the conflicts of interest as possible. And you look at many of the asset management programs that are out there. They’re run by companies that are product manufacturers. So they also manage mutual funds. And so, you know, we’ve had examples where someone would come in, and they had 19 different mutual funds in their asset allocation model, and 16 of the 19 funds were a proprietary fund of the group that was doing the asset management. Now, there’s 26,000-plus mutual funds out there. They weren’t the best in 16 of the 19 categories. So they’re making additional soft dollar from the asset management fees. There are 12(b)(1) fees in additional costs that get passed on. And so the asset manager, if they’re receiving any other sources of revenue from that program, their objectivity to pick the best funds is compromised because of revenue. And so, the internal costs are very, very important to us, and when we do an analysis, we actually run that report for our client, and say, “Here’s all the funds. Here’s your expense ratio. And here’s what you’re paying internally in fees a year, in addition to the advisory fee.” And it’s usually a very surprising number to most people.
CONSUELO MACK: So what are the other kinds of red flags or even yellow flags that go up, if you’re an individual investor?
CHARLES ELLIS: Very large generality. The real problem for investment management was, 50 years ago, strictly a profession. It didn’t pay particularly well, but it was interesting work, and you could take some real pride in what you were doing, and you accepted it. It just didn’t happen to pay very well. Over the last 50 years, as fees have been increased, and the assets under management have gone up a great deal, and computerization has made it possible to manage substantially more money, the business pays very well. As a result, the focus on profession has gone down and the focus on business profitability has gone up. So you really ought to be watching is this firm in it for the business side or are they in it for the professional side.
And there are keys to the questions you can ask. What is the average length of employment of the people in your organization? How much do you invest in new people training and developing their skills and capabilities? How much of your time, Mr. Account Representative, do you spend every year in training programs? If you look at the senior people in your organization, how many of them are professional people, how many of them are business people? And by and large, organizations that are widely known and widely regarded for investment management tend to be pretty serious about the professional side.
CONSUELO MACK: How about naming some names? What companies would you say really have set a standard of professionalism that you would feel comfortable referring, an investment management firm or financial advisory firm, that you would feel comfortable referring friends to?
CHARLES ELLIS: I’ll start with Mark’s favorite and mine, Vanguard and DFA, two truly outstanding outfits. We can get into more detail in it, if you want to. T. Rowe Price, outstanding organization. Capital Group, which manages the American Funds- outstanding organization. I know, they’ve had in the last couple of years some imperfection in their results. Don’t worry about it. They are a great organization, and they will figure out what the problems are, and get right back on track, and you can always trust them in the long run. Dodge and Cox is also quite a good firm.
MARK CORTAZZO: I agree with virtually all the names that you listed. We use many of them, you know, in our asset management for our high net worth clients as well as our flat-fee program. But every one of those organizations has areas where they’re particularly strong. And working with an advisory group that’s independent, that’s not getting any money from any of them can help construct an all-star team, where you have each of those management teams do the position that they do best, and instead of having one fund family group managing every asset class within that portfolio, having them do their specialty I think can help…
CHARLES ELLIS: But Mark, that’s what you would say, because your business is to help sort it out and figure it out. You could also say any one of those firms, as a family of different funds, has consistent integrities, consistent discipline, consistent professional commitment, and they’re pretty darn good.
MARK CORTAZZO: Absolutely.
CHARLES ELLIS: So you could go either way.
CONSUELO MACK: Charley, you wanted to make another point. Because, you know, the active versus passive debate, and Mark, I’m going to find out in a minute where you come out on that, and we’ve had this discussion before, Charley, and I think it bears repeating, because you have had 50 years, basically, of analyzing professional managers, and to advise, you know, clients where they should put- big, big clients- where they should put their money, and it’s been a battle for you as well as to, you know, you finally said go passive. So what did you want to say about that topic?
CHARLES ELLIS: Finally, the epiphany. You’d think after 40 years you would get it. I didn’t. Forty-five years, somewhere in there I started to get it and realized. Part of it is by shifting from working with investment managers, to working with clients of investment managers, and watching what gets delivered, and you start paying a little bit more careful attention to it. Big stunning surprise for me was to find out mathematically that most managers underperform the benchmark they’re aiming for. Just happens to be the reality. Mathematically, nobody has been able to figure out who is going to do better in the future. Just can’t be done.
So okay, that’s pretty tough. What’s the third thing? The third thing is those who underperform, underperform by twice as much as those who outperform. So that doesn’t sound like a good deal. Then I’m looking at the numbers. Meeting, after meeting, after meeting, and it finally comes on like a light bulb. That string of numbers that are called fees is pretty big compared to that string of numbers called your extra return. In fact, the fees are huge compared to the incremental or extra return. I believe what the managers ought to be doing is adding investment advice and counseling, because there the value is tremendous, getting in the right direction, getting the basic structure right. That’s really valuable.
CONSUELO MACK: So Mark, active versus passive management, where do you come out in the debate?
MARK CORTAZZO: We also looked at the math. And if you think about this logically for a minute, all of the active managers put together are the market. So if you look at the collective performance of all active managers, their performance is the market. So the only differentiator is going to be their fees. So most index funds, the vast majority, almost 100% of them, underperform their benchmark, but it’s by a very little amount, where the active managers, that divergence can be greater. And for people who don’t want surprises, and, you know, good or bad surprises, I think that buying passive, it’s controlling some of the things you can control. Passive has much higher tax efficiency. You can control that. The fees you can control. You can control where you own, what you own.
So you’re taking a market that feels like it’s out of control, and at least empowering yourself with the ability to adjust the things that you have the ability to adjust. So we have an active model portfolio that we manage for clients that won’t take our advice to go to a passive strategy in our flat-fee model, but we frequently have follow-up conversations with them to see if they’ve learned the lesson. So we think that for model-based portfolios over long periods of time, control the things you can control, and costs, obviously, is one of the big variables.
CONSUELO MACK: So the One Investment for long-term diversified portfolio, and, of course, an investment can be an action that you take, whatever. So what would it be? What’s the one thing that we should do or the one thing we should invest in? Charley Ellis.
CHARLES ELLIS: Well, the best thing every single individual and probably every single institution can do is just sit down quietly and say, what do we really, really, really want to accomplish? What do we really, really want to avoid? And what is the most realistic way of getting where we want to go? That’s probably the best thing anybody can do.
CONSUELO MACK: So very much back to basics.
CHARLES ELLIS: Find out who you are, what are you trying to accomplish, and from there, it’s not all that difficult to get a pretty good answer, and to getting a brilliant answer to the wrong question would cause lots of harm.
CONSUELO MACK: In the context of our fee discussion, minimizing the fees, is there one action we should take to minimize our investment fees?
CHARLES ELLIS: Sure. Everybody, everybody who’s an individual investor should be actively seeking passive management. They can do it with ETFs. They can do it with index funds. And the best known, most widely capable index fund managers are the ones to go with.
CONSUELO MACK: Mark, same questions to you. One Investment, one action we should take for a long-term diversified portfolio.
MARK CORTAZZO: I’m going to go with controlling the things that you can control. And I’ll give you three quick examples. Things like money markets. The average money market is paying four-one-hundredths of a percent. You can shop that around and get FDIC-insured money markets paying over one percent right now. So that’s 25 times the yield. On your safe money, control the thing you can control. Making sure you’re looking at where you own, what you own. So tax-inefficient investments, make sure you own those in the tax-deferred accounts; tax-efficient investments, make sure you own them outside in your taxable accounts.
And the third and most important thing is making sure that you understand what you’re paying in fees, in dollars, as a percentage and relative to your portfolio size. And are you getting a good value for that? You know, it is something that people spend a few minutes to try to save a few percentage on their auto insurance. That’s hundreds of dollars. By taking the time to look at that and having it reviewed by someone, it could be tens-of-thousands of dollars, and maybe even a six-figure difference, even on a more moderate size portfolio over time, because it’s the effect of that compounding that’s being sliced off with those higher fees.
CONSUELO MACK: Mark Cortazzo, it’s so lovely to have you here from MACRO Consulting, and Charley Ellis, from numerous organizations, you know, author or co-author of 18 books, a new one on the way. Just great to have you on WealthTrack, always.
CHARLES ELLIS: It’s a pleasure to be with you.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is the essence of what Charley Ellis and Mark Cortazzo just discussed. It is: know what your investment fees are and take steps to minimize them.
Ask your financial advisor for an itemized list of the dollar amounts you are paying for all of their services, and the fees on each of your investments so you will know exactly what you are paying every year. If they won’t do it, start looking for another advisor. If you manage your own portfolio, analyze the costs yourself or pay another investment professional to do it for you. It can save you a ton of money in the long run. If you have a 401k, you are in luck. All 401k statements are now required to show the actual dollar amounts you are paying in fees.
Speaking of saving a great deal of money, during next week’s fund drive for public television we are re-running our must-see interview with social security guru Mary Beth Franklin on how to maximize your social security benefits. If you would like to watch this program again, please go to our website, wealthtrack.com. It will be available as streaming video or a podcast no later than Sunday night. And that concludes this edition of WealthTrack. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.
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Saturday, August 11th, 2012
CONSUELO MACK: This week on WealthTrack, why rock climbing government bond investor Robert Kessler says we still haven’t seen the peak of the generational bull market rise in U.S. treasury bonds and why other investment routes are much more dangerous to your financial health! Great Investor Robert Kessler is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Three years into an economic recovery, it sure doesn’t feel like one. We are even beginning to hear the dreaded “R” for recession word here in the U.S. A recent headline in the Financial Times read: “Blue-Chips Raise Recession Fears.” The FT reported that “estimates of revenue growth for the largest us companies are being scaled back sharply by Wall Street analysts, signaling a mounting risk that the world’s largest economy may enter recession later this year.”
It is a development we have talked about with many WealthTrack guests. Sales and earnings estimates are being scaled back by analysts and companies alike as the global outlook becomes murkier. Recession is already happening in Europe. The so-called peripherals- Greece, Spain and Italy- are there. Even mighty Germany is feeling the pressure from its weaker neighbors. Germany’s central bank recently estimated its economy had grown “moderately” in the second quarter. According to The Wall Street Journal, that’s “shorthand for growth between zero and five tenths of a percent.” Not exactly reassuring for Europe’s largest economy, which its finance minister rightly describes as the “Eurozone’s anchor of stability.”
So if global economies and company sales and earnings are slowing, what does it mean for the markets? That is a source of heated debate and both sides are being reflected in the stock and bond markets. On the one hand, investors have been buying dividend paying blue chip stocks for their dividend income and their financial strength. The S&P Dividend Aristocrats Index, which is made up of 30 companies that have consistently raised dividends for at least 25 years, has traded around record highs recently. How well will their prices and dividends hold up in a global slowdown?
On the other hand, yields on U.S. treasury bonds have extended their multi-decade long decline over the last year, lifting the prices of the underlying bonds, as global investors sought their safety and liquidity. It has also helped that Federal Reserve Chairman Ben Bernanke has clearly spelled out the Fed’s intentions to keep interest rates low. And he has reiterated time and again that the Fed is “prepared to take further action as appropriate to promote a stronger economic recovery.” As PIMCO bond guru Bill Gross put it, in explaining why he is holding 35% treasuries in his PIMCO Total Return Fund: “don’t underweight Uncle Sam in a debt crisis.”
This week’s WealthTrack guest has been overweighting Uncle Sam in his portfolios for the ten years plus that I have been interviewing him. It’s been an extremely profitable run and he is sticking with it. He is Robert Kessler, founder and CEO of Kessler Investment Advisors, a manager of fixed income portfolios for institutions and high net worth individuals with a concentration in U.S. treasury debt. I began the interview by asking him about his long standing and contrarian investments in treasuries. What is he seeing that Wall Street is not?
ROBERT KESSLER: I think Wall Street is seeing all the same things I’m seeing. We’re just really interpreting those things a little bit differently. I look at the interest rate environment that we’re in right now, and most people think that this is created by Ben Bernanke, the Central Bank, and zero is some artificial number. The fact of the matter is, zero is a number that exists all over Europe now, and, in fact, that number is negative in five, or six, or seven countries in Europe.
CONSUELO MACK: So this is zero interest rates or negative interest rates on government debt, short-term government debt.
ROBERT KESSLER: Short-term government. Actually, even longer term. In Switzerland, it’s minus .25. So people who have a lot of money, and they want to park it someplace, they actually have to pay the government to put it there. Now, we haven’t seen that before. If you look at the way Wall Street’s interpretation of that is, they’ll say that that’s totally artificial. That’s not reality. And the reality really is that big money right now doesn’t want to go anyplace with it. It doesn’t matter if it’s corporate money, where they’re sitting with trillions of dollars, or individuals. What they want to do with it is make sure it’s totally safe. And money has a real value. Most people don’t look at money properly.
Money is a commodity. Just like gold, or like grain, or corn, or anything else. To store it someplace, it costs you some money. So if you want to store it in Switzerland, they’re going to charge you a quarter of one percent. When we look at zero in the United States, to make this really interesting, and people say, “Well, where do you think interest rates really are going?” And now I really look at everyone and say, “I don’t know. But they certainly could go negative,” meaning that the whole treasury curve, which is two-year, five-year, ten-year, thirty-year, all of that curve could all go down to zero. And everyone thinks there’s so much out there to buy. Look at all those treasuries. Come on. We have so much debt. Someone has to support it. What actually is there is, if I don’t want to sell my treasuries and you don’t want to sell your treasuries, there aren’t that many treasuries. And that’s why rates really can go quite a bit lower.
CONSUELO MACK: I know that you hear from other people on Wall Street. And if someone on the other side were looking at you and saying, Robert, okay, so interest rates are at zero. Short-term interest rates are at zero. Investors have other choices. Zero is not a good rate. That’s what they’re saying. It’s not a good return. Therefore, even Ben Bernanke, who is keeping short-term interest rates at zero, which is a reality, and is saying that, I’m going to keep interest rates at zero probably through 2015, if not beyond; even he is saying the reason that I’m keeping interest rates so low, one of the reasons is I want people to invest in risk assets. I want people to go and buy stocks and, you know, finance the economy, where they get a higher return. I’m going to make investing in treasuries so unattractive that I want them to buy something else, and, therefore, help the economy.
ROBERT KESSLER: In the environment we’re in, which is a deleveraging, deflating environment, a real return on money may actually be negative, meaning that if inflation actually goes negative, one percent is a pretty good return. And the only reason all of this is happening is because there’s no demand in the marketplace. And as much as Japan tried to do something, you can’t create that demand. And that’s exactly what Ben Bernanke’s talking about. He’s saying, “If I get these rates low enough” … there was a Swedish experiment, which is interesting, when Sweden had a very difficult time, the Central banker said, “You know, we ought to think about going negative.” Imagine that. The rate overnight won’t be zero. It will be minus 50.
CONSUELO MACK: Right. So I pay you for the privilege of owning a Swedish government bond.
ROBERT KESSLER: A half of one percent. That will certainly induce everyone to go buy something else. And the answer is, when there’s no demand from the private sector, I don’t care how much money you produce, I don’t care how much you print- if the private sector doesn’t want to borrow it, you have no marketplace. We have what we call no velocity. No movement of money. So that’s the environment we’re in. And as to what an investor needs to look at, is not what the real return is on a treasury against inflation from last year, but where will it be next year. And next year looks like we’re going to be looking at, if not deflation, certainly lower prices.
CONSUELO MACK: Let’s talk about kind of, there are different things that you’re looking at. So one of the things that Wall Street would say is that, you know, number one, inflation isn’t going to continue to go down, because, like, it never does for any length of time, and, therefore, at least in our recent experience, and all our models are predicated on the fact that we’re going to get some inflation, and with all the stimuluses the Fed is doing, central banks around the world are doing, we will get inflation. You’re saying, no, the reality is we’re in a deflationary environment, and, in fact, you know, we’re not going to get inflation for a long time. Why?
ROBERT KESSLER: Let me give you the Japan example. The Japan example is a very good example, because we claim in this country that we would never do what Japan did.
CONSUELO MACK: Right. No one wants to be a Japan. That’s the blanket statement everyone makes.
ROBERT KESSLER: We are doing exactly what Japan did. And interestingly enough, in 1997, that’s seven years after the deep recession/depression hit Japan, an administration came in, 1997, and said, we’ve got to contract the economy. We’ve got too much stimulus out here. We’ve got to tighten things up. That will make things better. The rates on the ten-year in Japan at that point were around two percent. Within a year or two they dropped to .8, and the deficit went straight up, even though everyone wanted to bring it down.
And the reason was, you can tighten everything up, but again, if there’s no demand and people perceive that prices are coming down, cash looks very good. And now we’re talking money. And money is really important, because money takes on a tremendous value in a deflating economy. If you’re a gold bug, the argument is inflate, inflate, because that’s a terrific thing to happen. All of this stimulus is going to cause inflation. And, in fact, in this kind of an economy, it doesn’t matter what stimulus you put in, because stimulus only works if someone wants to spend the money. And the fiscal side of it, which is the government side of it, right now, looks like, as we get into the fiscal cliff that people love to talk about, the fact is that will be very contractionary on the economy. So I would argue that if we get into that position, you will see rates go even further down.
CONSUELO MACK: One of the realities that you’ve identified at Kessler Investment Advisors as well is that zero interest rates can stay zero for a long time, or go lower for a long time.
ROBERT KESSLER: I think in this particular case, there are so many people who keep saying we’ve never seen this before. We’ve never seen this exact same thing, but we’ve seen this before. And I suspect that interest rates will stay extraordinarily low until we get out of this balance sheet problem of individuals getting rid of some of the debt. It’s 25% of homeowners are underwater. You have this huge unemployment problem, and the number that came out today, the Philadelphia Fed Index, actually had an employment number that would suggest, in this month coming up on the employment news, that employment could go negative again. Now, if you stop and think about that, the argument has been quantitative…
CONSUELO MACK: You mean job growth could go negative.
ROBERT KESSLER: Job growth will go negative. If you stop and think about how serious that is, we’ve had quantitative easing one, quantitative easing two, and probably something more. None of that has helped. And it’s simply because money is going no place. And the people who have it are buying whatever sovereign they feel safest in.
CONSUELO MACK: So Robert, another reality that you have identified at Kessler Investment Advisors is that instead of what Wall Street is telling you- I’m going to make you money, and that the traditional investments that make money, like stocks, that have over the last, you know, 40 years, whatever it is, in the post-World War II period- that, in fact, that investors are saying, “No. No. No. You don’t understand. My first principle is I don’t want to lose money.”
ROBERT KESSLER: We have an enormous number of investors leaving the stock market now and going into fixed income. Obviously, they feel that that’s too volatile, and that slow transition is probably going to continue for some time. But the concept of an investor saying, “I don’t want to lose money,” it usually means I want to make a lot of money, but I don’t want to lose any money. And you have to be able to explain to make a lot of money you’re going to be at risk to lose a lot of money. I would suggest the big problem we all seem to have is we can’t distinguish between a savings account, your pension account, your IRA, and an investment account.
CONSUELO MACK: And you’re saying it’s very important to differentiate between your investing and your savings. What’s the difference?
ROBERT KESSLER: The purpose of a savings account, as we all grew up, and we saved something, is to know it will be there. So, obviously, the return isn’t important. It’s the return of the money. And so I look at a savings account or a pension account, you cannot lose there. And that’s why I’ve suggested for years that you buy a zero coupon U.S. Treasury, meaning that the treasury will pay off in a certain period of time, because you have to have that money. That’s a savings account. An investment account is, have a good time.
The odds are, these days, for the last ten years, no one has made any money in the stock market unless you happen to buy at the right time, sell at the right time, and buy… and none of us do that. We’re all random buyers, so we all make mistakes. So the average person really doesn’t distinguish between those two pockets of money, and I would suggest that’s becoming very relevant now, because suddenly, if you look at the average homeowner, let’s take the homeowner, you have a decrease of $7 trillion in the value of what they had over the last two, three, four years. $7 trillion. An enormous amount of money. And if you look at their median net worth of that same homeowner, it’s gone from $126,000, that’s the average person, down to 77. That means they lost 39% of their money, of what they really thought they had. So all of these questions become extremely relevant if we talk reality, and I think that’s what we should be talking.
CONSUELO MACK: The fact that rates are coming down all over the world gives fuel to the argument on the other side, and that is, I can’t tell you how many people have told me that somewhere around 60% of the companies in the S&P 500 now are offering dividend yields that are greater than the yields on the ten-year Treasury note, and this is a once-in-a-lifetime opportunity.
ROBERT KESSLER: And they should. And they should, because everyone has done terrible with all of these companies. So they should give you some of your money back. But the best argument I can use is that these are the same companies that don’t know what to do with the cash they have, and they’re not out there buying any other companies. There are mergers going on, but they’re not spending the money. So if they’re not spending the money, what are you spending the money for? And then at the same time, there are no big dividend payers. There are no big cap stocks that are not going to be affected by a global deterioration in the economies that we’re looking at. They all will be. And if the stock market comes down, which I suspect it probably will, they’ll come down, too.
What do you care if you’re getting 4% if it drops 40%? That is the risk you take. So you think, well, this is a terrific deal, because in the long term, four percent looks good. It doesn’t look that good if you go back to 2008. You had an AT&T that was paying a very nice dividend, and it dropped 47%. I don’t think that’s what you want. And so I suspect that if you didn’t want any of the other stocks, you probably don’t want those stocks either.
And, again, I’m back to the subject, you do not want to lose money, because in an economy where prices are coming down, there’s tremendous opportunity. Everyone thinks that I’m being pessimistic about this. If you have money, and the price keeps coming down, the money gets more and more valuable. That’s why people are parking it where they think they can get it back, which ends up being in sovereign debt or good sovereign debt.
CONSUELO MACK: So Wall Street would say this is an example of extreme pessimism, and the times of extreme pessimism are when you make the most money by buying the securities that everyone else is shunning.
ROBERT KESSLER: But that has to be the excuse that we use, otherwise you wouldn’t buy anything from Wall Street. It’s a silly argument. We’re faced with a real serious problem in this country, as it is in Europe, but in this country, especially right now, because we have a disorganized kind of Congress, we have a situation where no one can get together on what to do, and I suspect there really is a reason for that. No one knows what to do. You can take this side, or you can take this side. It really doesn’t matter. The net result is, there are no simple solutions, and we’re certainly not going to get one, from what I can see.
And so this thing is going to linger, and the question is, do you need a crisis to begin to really try to solve this? Maybe that’s what happens. Maybe you do get a crisis. But this is not being pessimistic. I’m just telling you what’s happening. And the only reason we can make money in this market is because we really don’t care about what anyone else says. The key to this market right now is to follow whatever your own instinct is. If you don’t understand it, and it doesn’t make sense, and you can’t sell your house, and all the terrible things that we all know are happening, happen, well then, why do you want to go out and buy stocks? I mean I’m not doing this just because I want to hit the stock market. But this is a very serious period of time, and I don’t think people are treating it as serious as they should.
CONSUELO MACK: So most investors, most individuals, in their retirement savings, have gone the traditional route, and they certainly do not own a lot of treasury securities. So what are you advocating? That they basically, you know, liquidate, pay the taxes, everything, and put them into treasuries? I mean, you know, what are our options?
ROBERT KESSLER: I’m going to do the same thing I did last time you were kind enough to have me on the show, I think, at the end last year, and I said, go out and buy long-term 20-year, that’s a good thing to do, zero coupon U.S. Treasuries. They will yield about 280, 2.8 percent. Nothing terrible about that. In the last six months, since I’ve said that, they have returned 11%.
CONSUELO MACK: In six months.
ROBERT KESSLER: In six months. Better than the stock market and everything else. I will make the assumption that 280, 275 is not a terrible return. If you have this opportunity that I’m talking about, that rates actually come down, because if rates come down, a lot of people feel that 30-year, 20-year treasury will come down a point; if they come down a point, then you make 25% return. Worst-case scenario? You’re making 280. Not so terrible. That’s your retirement fund. That’s your serious money.
As far as the other money goes, I would be in this wait-and-see attitude. I’m really not trying to be pessimistic, and I know it sounds pessimistic, when I’m saying negative things, but those negative things are happening regardless of what I tell you. They’re happening in Europe. And this doesn’t even count the fact that we could have an oil disruption. We could have all the usual things that seem to be on our plate all the time. So sure, I think for a retirement fund, right now I’d be out buying all the treasuries I could get my hands on. I mean, but I think when you talk about the investment money, the money that you have to invest, I think you want to stay very, very cautious.
CONSUELO MACK: All right. Very cautious at this point. So the One Investment for long-term diversified portfolio is?
ROBERT KESSLER: I would say zero coupon treasury, if it’s a retirement fund. If it’s in a retirement fund, there’s absolutely– there’s no issue about time. You’re keeping it for a long period of time. But the other money that you have is money that really has to be put to use now, and you don’t want to waste it. It’s not going to be there necessarily 20 years from now. It’s money you’re going to invest in. Well, I can’t find anything to invest in. So keep it in cash. I know I’m kind of escaping by saying that, but I don’t think there’s anything wrong with cash.
CONSUELO MACK: So, you know, you said earlier in the interview that you’re really not a pessimist, that you’re actually an optimist. So what are you optimistic about?
ROBERT KESSLER: I think that people needed to go through this change in attitude towards how they spend money, what they think of money, and that change is taking place. There’s a realism coming into the marketplace. I think that makes for a better country, and that makes for a better people in the end. It doesn’t mean it’s easy, and it doesn’t mean this is going to be a very comfortable change. But it will probably be, as it usually is, for the better. What we don’t want to see is some serious kind of crisis that makes it worse.
I think the problems in the United States are solvable, if we can get a Congress to probably do something together. There are things to do here. But you can’t have 20 million people without a job, 45 million people on food stamps, and a bunch of people without healthcare, and then say, “Well, we don’t really have any problems here, and I think we should buy some stocks.” I think that attitude is exactly the wrong attitude. I think the problem becomes you have to pick up demand, and there is no demand in our system right now, and with good reason. People are pessimistic.
CONSUELO MACK: So what is it going to take to turn around demand?
ROBERT KESSLER: I don’t know. I don’t know. It’s a process. And the process is this horrible deleveraging, this pay down the debt, and people have to consciously understand when you pay down the debt, you’re increasing the value, in this case, of the currency. Because remember, the currency can buy everything cheaper. The U.S. dollar is the place to be. I’m very optimistic about the dollar. I think that’s a great place. I think the treasury market looks terrific here. That is the country. In between, there are problems that have to be solved.
CONSUELO MACK: Well said. Robert Kessler, thank you so much for joining us from Kessler Investment Advisors. And we will have you on again, you know, in a year, and see how you’ve done, as you have done extremely well over the last seven years on Wealth Track. So thanks for joining us again.
ROBERT KESSLER: Thank you. Thank you for having me.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. As we did last week, we are recommending a book for summer reading. This one is the choice of guest Robert Kessler. It’s called The Great Depression: A Diary . It’s by Benjamin Roth and it was published by his son in 2010, many years after his death. Roth’s diary is a compelling and eye opening account of the Depression seen through the eyes of an ordinary middle -class American. You will recognize the policy debates about inflation, skepticism towards big government, and worries about too much stimulus, that as Kessler says were “prevalent, recurring, and in the end, all wrong.” You can make up your own mind.
I hope you can join us next week for a shocking discussion about the cost of investment fees. According to our two guests- legendary financial consultant Charles Ellis, who is exclusive to WealthTrack, and top financial advisor Mark Cortazzo- fees are much higher than you think. They’ll tell us how to fight back. If you would like to watch this program again, please go to our website, wealthtrack.com. It will be available as a podcast or streaming video no later than Sunday evening. And that concludes this edition of WealthTrack. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.
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Monday, July 23rd, 2012
David Rosenberg discusses how the 3 D’s (Deleveraging, Deflation, and Demographics) are hurting markets, and where investors can go for positive returns, with Wealthtrack’s Consuelo Mack.
Here is the full transcript:
CONSUELO MACK: This week on WealthTrack, the influential economist whose projections have been right on target. Financial Thought Leader David Rosenberg shows how the 3 D’s of deleveraging, deflation and demographics are hurting economies and markets and where investors can go for positive returns, next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. This week, we are sitting down for an in-depth interview with one of the handful of prognosticators who has gotten it right going into and through the rolling global financial crisis we are experiencing to this day. He is Financial Thought Leader David Rosenberg, chief economist and strategist at Toronto-based wealth management firm Gluskin Sheff. Dave returned to his native Canada in 2009 after spending many years as Chief North American Economist at Merrill Lynch, where Institutional Investor magazine placed him on their coveted “All American All Star Team” from 2005-2008.
Rosenberg took on the bullish Wall Street herd as early as 2004, when he started warning about the developing housing and credit bubble which, as he predicted throughout, would wreak havoc on the financial system and many world economies. Well he hit the nail on the head again last year, forecasting the global economy would slow and that treasury bond yields would fall- another homerun. In his influential and widely read daily “Breakfast With Dave” reports, he ranges across the globe covering everything from Europe and how “it is rather incredible that this rolling crisis is now going on 2-1/2 years and policy makers have yet to find a viable solution”; to emerging markets and “why the once mighty BRIC currencies are depreciating of late at their fastest pace since the 1998 Asian crisis”; to the financial markets and “how the “pattern of the past three years is unmistakable as each spring, the equity market corrected as stimulus measures wore off, to only then prompt more incursions by the fall.”
What other patterns are unmistakable to Dave Rosenberg and why did he write in a recent report that “the future is brighter than you think”? I asked him all of the above and more, starting with what he thinks the most important patterns for the economy and markets.
DAVID ROSENBERG: I think the primary trend is still one of deleveraging. It hasn’t really changed much from the last time that the two of us spoke; it’s become much more global in nature. So it started off in the U.S. four or five years ago, in the American mortgage market, the housing market, consumer loans in general, but now we’re seeing how it’s morphed into the survival of the welfare state and all the debt finance to prop up these peripheral countries in Europe, and even now there’s questions about whether China is going to have a hard or soft landing because of a perceived property bubble there.
So we’re still in this deleveraging cycle, still dealing with the impact of too much debt relative to the size of the global economy, and this is what’s creating all this market angst and instability that we’re still living with; notwithstanding the fact that the economy, the U.S. economy is three years in a recovery, we’re still stuck in a very slow growth mode, but recurring financial market instability at the same time.
CONSUELO MACK: So is there any way of knowing whether the second half is going to be worse, better, or the same as the first half? Because, I mean, I’m thinking of my audience out there, and myself included, and saying, “I don’t want to live through another three or four years like this.” So what’s it going to look like, do you think the second half?
DAVID ROSENBERG: Well, I’m going to sound like a classic economist here and say it’s going to be somewhere in between, and this is what I mean. Are we going to get another gut wrenching, you know, 7% decline in GDP, and lose another 8 million jobs? I don’t think we’re going to go through anything close to what we endured in ’08 and ’09.
CONSUELO MACK: And to back-to-back kind of 50% decline in the stock market?
DAVID ROSENBERG: It’s not going to be that bad. But then again, you have to take a look at the contours of the recovery. I actually think the recovery tells you a lot more than the actual gut-wrenching recession did, because normally when you do this with the economy, you do that.
CONSUELO MACK: You get to a V, right?
DAVID ROSENBERG: Well, even in that 1933-’36 period, you got a huge recovery, much bigger than we had this time around, and this time around we had basically a checkmark of left-hand person, that’s what we had. It was not a V-shaped recovery; it was a very meager recovery, especially when you consider everything that the government threw at this thing. Consider the Fed took rates to 0 in December of ’08, they’ve tripled the size of their balance sheet $3 trillion. We’ve had, what, $4 trillion, four years of trillion-dollar deficits, and…
CONSUELO MACK: The fiscal stimulus…
DAVID ROSENBERG: …and more foreclosure moratoria. We’ve tried everything. So we’ve had modest economic growth, but very unacceptable. And now what’s happening is the Fed is left now with all these uncreative tools. Like Ben Bernanke certainly believes that he can do more but, you know, in Economics 101 you learn about the law of diminishing returns, and it’s basically that you end up getting less and less and less incremental impact from the same policies over time. And so that was the same with QE1, QE2, with the LTRO that we had out of Europe. We were getting just a smaller incremental impact on the economy with each individual policy proposal.
CONSUELO MACK: So therefore three years into a quote, unquote “recovery”, so are we on the cusp of another recession?
DAVID ROSENBERG: Cusp or precipice, I don’t know if I’m quite there yet. The economy is extremely fragile. The underlying trend in the economy is barely 2%, it’s barely 2%. So when you have a trade shock that can wipe out 2 percentage points of growth, you’re left with 0. Now, maybe that’s not a recession in the classical sense because we’re not actually going in reverse, but the unemployment rate is going up in a no-growth environment. And then you talk about this so-called fiscal drag, this fiscal cliff that we’re going to see next year- it’s because, you know, we’re probably not in as bad as shape as the Europeans, but here in America, we’ve kicked the can down the road a lot in terms of the Bush tax cuts getting extended, in terms of payroll tax relief, extended unemployment insurance benefits, all these provisions expire December 31st. So just by the government taking back the parking permit from everybody, we have a drag on the economy next year from fiscal restraint, 4 percentage points of GDP, percentage points.
CONSUELO MACK: Which we don’t have. So listening to you, Dave, quite honestly, I do want to kind of bury my head in the sand and I’m thinking to myself, you know, that I want to be in incredibly safe assets, that this is no time to put risk on. And yet, you know, one of the things that you follow, as well, is investor sentiment and the fact that there is a growing despair out there that people are very frightened and worried. And as we know traditionally, that’s in fact, the time when it’s actually best to buy risk.
DAVID ROSENBERG: I mean, there are always opportunities. In a fat-tail world, you’ve got to be very cognizant of the risks. So it’s as much not just focusing on the gross returns, but we have to – and this is what we’re doing every day at my shop at Gluskin Sheff- is we are assessing the risk, identifying it, managing it, and pricing it. And frankly it’s not about, you know, being risk averse. You know, people think that somehow, you know, when you talk about risk all the time you’re risk averse. It’s always important to make sure as an investor that you’re getting paid to take on the risk, that you’re not paying…
CONSUELO MACK: Right, so it’s price is really…
DAVID ROSENBERG: Right. Like, for example, I would say, you know, the high-yield bond market right now is actually, I would argue, priced for a bad economic outcome. You want to buy the assets that you think have already discounted. What’s embedded, what’s the story in this particular asset class, what’s it telling you? So I’m taking a look at the high-yield market right now. I think it’s actually very attractive. We have a core portfolio of high-yield bonds, and the reason I say that is because ultimately when you’re buying corporate bonds, you’re staking a claim in the corporate balance sheet. And the one thing that’s not changed, despite the fact that we’ve got all this angst overseas, the fact that the U.S. economy has hit stall speed, corporate default rates are barely more than 2%, you’ve got corporate balance sheets in great shape whether you look at debt equity ratios, or interest coverage ratios- the fact that treasurers companies both Canada in the U.S. have locked in their maturity schedules, 80% of corporate debt is locked in. In some sense, the corporate sector is in better financial shape than the government sector is. So I like corporate bonds.
CONSUELO MACK: One of the things that you’ve told clients is that reliance and deriving a stable income stream while preserving capital is paramount right now. So in these uncertain times, stability of income stream is one of your major investment focuses.
DAVID ROSENBERG: Right. And it comes down to what my overall theme is called: the macro and market outlook in 3D. So I’m talking about the 3Ds. What are the 3Ds? Well, they’re deflation, there’s demographics, and there is deleveraging and we talked about the deleveraging. There’s also this demographic overlay because the first of the Boomers are 55 going on 56, that’s the median age. The first of the Boomers are in their mid-60s, and so they control the wealth. They’re in a different part of their investment life cycle right now, and so accumulating cash flows as opposed to relying on strictly capital appreciation for the Boomer class, the life cycles as far as investments are concerned, that’s altered. And we’re seeing it in our own business in terms of what our clients are telling us, how they would like their money managed.
So you’ve got the demographics talking about the deleveraging, but the deflation. And so people will say to me, “Well, I thought in a deflation, cash is king in a deflation.” And the answer is well, you know, historically that’s true. That’s the ultimate capital preservation- cash is king in deflationary environment except when interest rates are 0. And so then it’s not cash is king, cash flow is king. So it’s imperative. It’s not just about preservation of capital, which of course in the fat-tail world, which is the deleveraging world, capital preservation is key; but you have to overlay that with preservation of cash flows. That’s why MLPs have been so popular.
CONSUELO MACK: Right, Master Limited Partnerships.
DAVID ROSENBERG: That’s why muni funds. That’s right, and that’s why REITs, and that’s why dividend growth, dividend yield have been so popular now. People come back and say to me, “But these things look so expensive.” Well, they look expensive because that’s what’s in demand, you know? And it doesn’t mean because it’s expensive you don’t want to buy it. You know, the perfume I bought is expensive, yeah, but is it good? Yes. Well, okay, that’s why it’s expensive because it’s a good thing to buy. These are good strategies right now, and that’s why their prices have been up as much as they have.
CONSUELO MACK: So as far as this pattern that we’ve seen for the past three years in the stock market, and where it rallies until the spring and then it basically sells off. That has been very disheartening for investors. Are we locked into that for the foreseeable future?
DAVID ROSENBERG: I think what we have is this battle going on, got this battle. We have the secular forces of deflation coming from all this deleveraging and the deleveraging, of course, takes demand out of the global economy, you’ve got the deflation, and then you’ve got these governments fighting it hard. So the secular forces of deflation in the market place, and then the tug-of-war as governments come in and reflate- whether it’s China, or whether it’s the U.S. government, or whether it’s the ECB. And so what this does is creates tremendous volatility, tremendous volatility.
But once again, the question is for an investor, what do I do with this volatility? How can I sleep at night? And that’s why in conjunction with say income equity over here, and corporate bonds over there, there should be a slice in the portfolio in hedge funds that really hedge long-short strategies that can actually be…
CONSUELO MACK: And they exist? There really are hedge funds that really hedge?
DAVID ROSENBERG: Well, you know, hedge funds have been around for 50 years. They got a bad name in the last cycle because they weren’t hedge funds, they were leverage long-only funds. But there are firms out there that are either hedge funds. You know, Gluskin Sheff is not a hedge fund, but 20% of our business is managing these long-short strategies, and it’s actually a very effective way to be nimble in the market place when you get these dislocations.
It’s really just taking sectors and companies that you think are bad businesses, are going to cut their dividends, and you put a short position on them, and you couple that with long position of the companies that you think are going to grow the dividends over time.
CONSUELO MACK: So let’s talk about earnings, because I know that you’ve said that the E in the price earnings ratio, the earnings, they are problematical. So what is your outlook for corporate earnings? And again, what does that mean for the stock market?
DAVID ROSENBERG: Well, corporate earnings right now have hit an inflection point, and it’s not just that they’re slowing, they’re actually starting to contract. Earnings are actually, after a three-year period of steady increases off those lows in 2009, corporate profits are actually now starting to decline outright.
CONSUELO MACK: And you’re talking about the S&P 500?
DAVID ROSENBERG: S&P 500 and even bigger picture. When we got the GDP numbers a couple of weeks ago- the GDP numbers give you corporate earnings for all of America, not just for the large-cap companies- and corporate earnings are coming down. And my sense is that the earnings estimates by the analysts on Wall Street is still far too high. Earnings estimates are important. I’m noticing that fewer companies are giving guidance. Fewer companies are giving guidance. What’s that telling you? That corporate CEOs, very similarly, they have a very clouded crystal ball right now. Fewer companies are giving guidance, and then the ones that are giving guidance, for every one that’s saying something positive about their business, two to three are saying something negative about what the outlook is. And on top of that, the estimates are starting to come down. I don’t think they’ve come down enough.
What does it mean for the stock market? You know, I think that if we were to go into a recession, normally the market corrects 20%. I’m not going to say that we’re going into a recession, but my sense is that the stock market is going to remain at best in the range that it’s been in for the past several months. We have to respect the range, but we’re going to be still in for a lot of volatility, which is why I was saying before that hedge funds, they really hedged, totally appropriate. On top of that, you have to be nimble and as tactical as you possibly can be, but if you’re going to ask me do I think that there’s more downside pressure given the risks out there, and especially to corporate earnings, the answer is yes. I think at this stage, without getting into, you know, what’s your call on where we can get to, I think the balance of risks is at that the market goes down over the near term and then goes up. And if it does, I think it will be a great buying opportunity down the road.
CONSUELO MACK: Let me ask you just about another macro issue, which is what about Europe? And you’ve said, you wrote recently that, you know, you’re two and a half years in, you know, these rolling problems keep coming up in Europe, and there are no viable solutions.
DAVID ROSENBERG: Well, I mean, there are solutions. I don’t know how viable they are. I think it’s a matter of just looking at it realistically. The European Union was working just fine. You know, the whole notion that we were going to try and avoid another World War, another European war at all costs. I don’t think that we needed to have a currency union to achieve that. You can’t have a monetary union and not have the fiscal union, and an integrated banking union. You can’t have it.
CONSUELO MACK: So realistically, I mean, are the 17 countries going to sacrifice their sovereignty?
DAVID ROSENBERG: Hardly likely. I had breakfast recently with a CEO of a major Canadian bank, and he told me that they have a Eurozone breakup committee. And he said this is happening around the world. Any major multinational corporation, any business that is doing business in Europe has one of these Eurozone breakup committees, not unlike the pre-Y2K committees that you had in the late 1990s. So you can bet your bottom Euro that if that’s what they’re doing, the Eurocrats in Brussels are trying to come up with some sort of… you talk about viable, what’s a viable exit strategy? Unless the ECB steps up en masse and rapidly expands its balance sheet, and starts buying the bonds of Italy and Spain en masse at auction, you know, that’s pretty radical. I don’t know what the quick fix is. So I think that the end game will ultimately be that the Eurozone breaks up.
CONSUELO MACK: One of your investment themes that we’ve talked about basically has been capital preservation and income orientation, as well, and one of the themes that you and I have talked about in the past is what you call “SIRP”, which is Safety and Income at a Reasonable Price. Are you looking for SIRP investments? Is that still a major strategy theme?
DAVID ROSENBERG: I would say that SIRP has its thumbprints across all the portfolios we’re running at Gluskin Sheff. In fact, what’s interesting is that we, for years, since 2001 we’re running this one particular strategy that’s called “premium income”, which it’s a hybrid, it’s got dividends, and it could have REITs, it could have preferred, convertible bonds; it’s really a portfolio aimed at distribution, a portfolio aimed at generating monthly cash flows for our clients.
CONSUELO MACK: And that’s Safety and Income at a Reasonable Price.
DAVID ROSENBERG: Right. Well, when we say… for example, when I talked about corporate bonds, and we’re talking about “safety” in quotes; I mean, safety, it’s relative. When talking about corporate bonds, it’s because of the quality of the balance sheets are very strong. Because that’s inherently when you’re buying corporate bonds, it’s mostly about default risk. You want to minimize that strong balance sheets. When I talk about on the equity side, we’re talking about running portfolios that have a low beta, which means low correlations with the overall market direction.
CONSUELO MACK: Right. The overall stock market direction.
DAVID ROSENBERG: The overall stock market direction, so we’re talking about, so it’s not just about, you know, does this company have a consistent history of paying off dividends, and we like the business. It’s also how does it move relative to the overall market? So in a period like this where it’s very tumultuous, and where the market is more prone to go down than up, you want to run your portfolios with very low betas. And so that’s the safety part, that’s the “S” part of the SIRP.
CONSUELO MACK: And the low correlations of the markets, in a highly correlated market, which is what we’ve been in for the last several years, so what are the areas that aren’t correlated that have low betas?
DAVID ROSENBERG: Well, for example, one of the themes that we liked has been the consumer frugality theme. So it means consignment stores, it means private label, it means do-it-yourselfers. I mean, for example, you could actually say, wow, because a Home Depot, does it fall under that category as an example. I’m not going to go sell my home, I’m not going to move, I’m underwater in my mortgage, but you know what? I still want to have a fun life, so instead of buying a new home, I’ll spruce up my existing home. And so home repair, a do-it-yourselfer, and so you can find…
CONSUELO MACK: So can you match a name or two to, you know, the frugality theme? So, for instance, frugality, what’s a–
DAVID ROSENBERG: Well, I’ll tell you one area where we have been long, and it’s worked out well has been the dollar stores. And they’ve been phenomenal investments, and by the way, it’s not just because low income households shop there, you’d find… and what the studies are showing is that a greater share of middle income households are actually going to dollar stores. And that’s an area where we have focused on in terms of our consumer exposure.
CONSUELO MACK: Let me run down a couple of the other investment themes, noncyclical. So give me, you know, what’s the theory behind the noncyclical emphasis? And give me an idea.
DAVID ROSENBERG: Well, it’s all about generating stable cash flows. In an uncertain environment, what do you want in an uncertain environment? You want stability. What about utilities, regulated utilities? Regulated utilities. They have regulated pricing power. What about telecom? And it might not just be the stock, you might want to buy the bonds of these companies. Once again, if you have a single A telecom company that’s giving you a triple B yield, you know, I will be happy to take that all day long in terms of looking at the risk and reward. So telecom, utilities, consumer staples, these are the areas that will tend to outperform in the environment that I’m describing right now.
CONSUELO MACK: And one other category that you had was hard assets. So what are we talking about when you’re emphasizing hard assets?
DAVID ROSENBERG: Resources are not a bad place to be. They’re already corrected quite a bit, so resources, whether it’s raw food, or whether it’s, I would say energy, which is corrected quite a bit. ]If you’re a long-term investor, these are complements. They’re not going to generate a yield for you, but they are what you want to own, things you can see, touch and feel in a very uncertain world, and these things have cheapened up quite a bit, as a hedge against the income part of the portfolio.
CONSUELO MACK: So one question is One Investment for long-term to diversify portfolio, what is it that you would recommend that we all own some of?
DAVID ROSENBERG: Well, I’m still a big advocate of corporate bonds. As I said, I think balance sheets are in great shape, default rates are low, there is too much default risk priced in, and so I would say I would focus on, let’s try and generate equity-like returns without taking on the equity risk. And there is a part of the capital structure that can accomplish that, and it’s called “corporate credit”. That is still to me a happy medium between 0 percent treasury bills and going out in the riskiest part of the equity structure. So corporate bonds to me are a solid investment.
CONSUELO MACK: And Dave Rosenberg, you know, you have a reputation of being a permabear, which is not fair, because you were also known as a permabull in the ‘80s and the ‘90s, and in a recent report you said” the future is brighter than you think.” Why when others are despairing are you getting enthusiastic about the future?
DAVID ROSENBERG: Well, I’m not going to say I’m getting enthusiastic about the future. What I am willing to do is put out some checkmarks as to what can cause me to turn more optimistic. And so I see a flicker of light, and it’s realization that politics will lead the financial markets, which will lead the economy, and what leads the politics is the grassroots level, and so what happened last month, for example, I think in Wisconsin with the recall in San Jose, San Diego, and there seems to be this growing realization at the grassroots level that we have to get our public sector balance sheets in better shape; that these underfunded liabilities have to come under control. So we’re starting to see more of a groundswell of support.
What I’m thinking about is how things will change politically on November the 6th, understanding, coming from Canada; Canada went through what Europe is going through right now. Canada is going through what the U.S. was going through back in the early 1990s. You could never have predicted that Canada ten years later would be the poster child for fiscal integrity globally. But it took tremendous political courage.
CONSUELO MACK: We’ll see what happens, and that’s what you’re going to be watching, Dave Rosenberg.
DAVID ROSENBERG: I’m more than willing to reclaim my status of a permabull that I had in the ‘80s and ‘90s if I see those clouds part come November.
CONSUELO MACK: All right, Dave Rosenberg, so great to have you here from Canada, Gluskin Sheff. It always a pleasure to have you on WealthTrack.
DAVID ROSENBERG: Thank you.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s reiterates one we just talked about- Dave Rosenberg’s long-time income generating strategies which is S.I.R.P.: safety and income at a reasonable price. So this week’s Action Point is: seek safety and income at a reasonable price, or S.I.R.P.!
Everything we know about the financial markets right now points to ongoing volatility and headwinds for stock price appreciation. Among the areas Rosenberg recommends where you can find reliable dividend growth and dividend yields are: Canadian and U.S. preferred stock shares, which are senior to common stocks; energy infrastructure investments, such as natural gas pipelines; and utilities. All S.I.R.P. vehicles.
And that concludes this edition of WealthTrack. I hope you can join us next week. We are going to sit down with an investment professional who combines two disciplines: overall investment strategy and actual fund management. BlackRock consultant Bob Doll will join us to discuss macro trends and micro strategies. Until then, to see this program again, or others and read my Action Points and our guests’ One Investment recommendations, please visit our website, wealthtrack.com Have a great weekend and make the week ahead a productive one.
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Thursday, March 29th, 2012
Here is the full transcript:
CONSUELO MACK: This week on WealthTrack- how you can win in what one of our guests calls a losers’ game- the stock market- and how can you protect yourself from financial peril? These two wise men of Wall Street have skillfully navigated many financial storms. We revisit the late, great Peter Bernstein, a renowned expert on risk, and Charles Ellis on timeless investment strategies, next on WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Sometimes, to understand the present, you have to revisit the past. That is what we are doing this week. We are re-broadcasting a WealthTrack classic, interviews we did with two of Wall Street’s wisest men: one sadly no longer with us, the other very much alive and contributing.
The year was 2006, two years before the financial crisis hit full force. But storm clouds were gathering for those experienced and attuned enough to notice. One of those was Peter Bernstein, universally considered to be the authority on risk. He was an economist, money manager, seminal financial thinker, historian and author of many books, including the bestseller, Against the Gods: The Remarkable Story of Risk . His twice monthly analysis of the economy and the capital markets, Economics and Portfolio Strategy, was read by investors around the world. Even back in 2006, Bernstein expected relatively low returns from the financial markets in the years ahead. I asked him how we should invest?
PETER BERNSTEIN: As you know, I believe passionately in diversification, so you have a little bit of everything. The United States is kind of a very well worked over as an investment opportunity. So I think one goes abroad. Not only are securities abroad, both bonds and stocks, valued more cheaply than in the U.S. They’re no bargains, but more cheaply in the U.S. But in the emerging market world, in the developing world, exciting things are happening. Countries that were once in the doghouse are on a roll now, largely because they’re selling to us in such huge amounts. But even in Europe, which has been kind of laggard, things are stirring, governments are changing. Nobody notices this, but productivity growth in Europe is as good or better than in the United States. They’re giving it away in the social safety net rather than in growing their businesses. But this is beginning to change. And I think if something happens there, there’s huge opportunities. We see Japan finally coming up out of the doldrums.
So I think the opportunities are outside the U.S. Somebody once said to me, you’re not diversified if you’re comfortable with everything that you own. And we’re always comfortable with what we know. We buy, we live in New York, we buy Con Edison. If we live in California, we buy the California utility. But that means going outside the U.S. is very important. And it’s a big part of the world now. It’s not a little peripheral thing. It’s a major part of the world.
CONSUELO MACK: Now, let me ask you about that, Peter, because I know one of the things that you have advised clients, and you and I have talked about before as well, is the importance of being well diversified, and having a little bit of everything. And as kind of the least risky way to go, and also the best way again, to get the kind of returns that we expect more, that we want from our investments. But, so how should we diversify, though? Because the average U.S. investor has probably, you know, 60, 70, 80% in stocks. We’ve been fed this mantra that stocks provide long term growth, that’s where we should be. You disagree with that. About U.S. stocks at this point. But how do we diversify then? What should we be investing? I mean do so asset allocation for us.
PETER BERNSTEIN: I mean I guess, today I would have no more than half my assets in the U.S. if I was starting fresh.
CONSUELO MACK: In U.S. stocks.
PETER BERNSTEIN: Well, the U.S. stocks, maybe even U.S. stocks and bonds. One can do this quite easily. There are exchange traded funds- all kinds of, almost anything that you want. And exchange traded funds that will offer a whole big piece. For instance you can buy all the stocks in the world outside the U.S., and similarly, you can buy bonds outside the United States. And there’s one for gold. If you do, just go to iShares on the Internet. They have a very easy, easy site to work with, and to look. So I do not think that individuals say, I wonder what French stock I should buy, or what German stock. I wouldn’t dare do that myself. So it should be done in funds. And these are the best ways to do it. It’s worth looking at.
CONSUELO MACK: And talk a little bit about one of the things, again, one of your major themes has been in investing is that dividends matter.
PETER BERNSTEIN: Yes.
CONSUELO MACK: So dividends have mattered historically.
PETER BERNSTEIN: Yes.
CONSUELO MACK: I think the returns, the stock returns from reinvested dividends is, I don’t know, 50%.
PETER BERNSTEIN: Yes, that’s right. That’s right.
CONSUELO MACK: But in this day and age, with stock payouts low, and dividend yields low, do they matter as much, and will they matter as much in the future?
PETER BERNSTEIN: Yes. I think they matter, first, because it is cash in your pocket. And at a time when, who knows what earnings are, there’s been so much hanky panky all the way. Now they’re going to start expensing options, so that it gets a little more complicated. This, at least, you know what it is. And you can make more of a judgment about a stock, the growth rate dividends. But dividends at this point, I think, have two positive features that deserve attention. One is the tax rate is the same as on capital gains, 15%. Not a big number. I mean it’s 85% is yours.
CONSUELO MACK: Right.
PETER BERNSTEIN: And the other is that because the payouts are so low, and because of the tax thing and so forth now, there is pressure for companies to increase their payouts. I think dividends are going to increase faster than earnings. So if you’re in something where you think the earnings growth is there, and the dividends, that it is important. It is an important consideration. Even Microsoft is paying a dividend.
CONSUELO MACK: Yes, they are. They paid a big one as a matter of fact. Let me ask you about that point. Because a lot of analysts, or strategists that one talks to, will tell you that the companies that keep earnings, and don’t pay them out in dividends, you know, they can grow faster, and you know, they’ll give you better growth over the long term. You have found through your research absolutely the opposite.
PETER BERNSTEIN: That’s correct. That the lower the payout, and the bigger the reinvestment, the lower the future earnings growth. There’s nothing like having management a little starved for money. Because then they will only choose the best investments. Best things to do, if they’ve got lots of it. If they’re plowing back most of their earnings, oh, boy, that’s like, in a … I forgot the metaphor. But they can just pick anything. So they will be making less than optimal investments, because they have so much money. That’s how it works. Managements like to have money. They like to be expansive. They like to add the power. And there’s more discipline when there isn’t as much. This is a lot about the whole buyout business of the 1980s was about- corporations accumulating too much cash, and not using it properly. The companies that have to go into debt in order to expand will be much more careful about what they do. Much more selective in what they invest in. That’s very important.
CONSUELO MACK: A couple of more questions. You wrote a book about the history of risk. What you know, when you and I have talked, you were actually, it strikes me that you’re an optimist.
PETER BERNSTEIN: Yeah, I really…
CONSUELO MACK: And why, given the risks that all of us toss and turn about every night, why are you essentially an optimist?
PETER BERNSTEIN: I’m an optimist about the U.S. But I’m an optimist because problems do get solved. Maybe not one day you wake up, and everything is back in order. But it takes an awful lot to crush a system as vital, in many ways as flexible, as the U.S. economy. We went through, in 2000, when the bubble burst. I mean the bottom really dropped out of NASDAQ, and a big drop in the U.S. market, too. And word about bankruptcies, and people were saying that the derivatives were going to pull the whole… nothing bad happened, really. I mean, Enron, all of the scandals, those companies disappeared. We kept right on going. Now this Revco, an enormous, really terrible failure, though it’s a ripple. So there’s a lot of resilience. There’s a lot of youth in this country; a lot of new people coming in, who want to be part of it. Sure I’m an optimist.
CONSUELO MACK: So, one last question. And what is the … for individual investors, for successful, long term investing, what should our philosophy be? I mean what should our mantra be? What should our approach be, to really take advantage of the vitality that you see in the capital markets?
PETER BERNSTEIN: Well, the vitality, I mean vitality you get in the equity markets. I mean there’s no question about it. You must be there. All the scare stories about what might happen and so forth, you should still have some money in the equity markets. This is essential. As I say, I think big things outside the U.S. also. I am- since I don’t like stock picking, and I’m not very good at it- a big believer in funds, rather than in trying to do it yourself. And although- this occurred to me the other day- the mutual fund industry has been criticized, because their returns aren’t good enough, and so on. How much worse, the people who were in mutual funds, may be disappointed with what happened. But if they’d managed that money themselves, I know they would have done worse. So this may not be divine and perfect. But it’s better than doing it yourself. It’s worth the cost.
CONSUELO MACK: Peter Bernstein, thank you so much for your time and your just, brilliance. Thanks for sharing it with us.
PETER BERNSTEIN: Thank you.
CONSUELO MACK: Our second wise man of Wall Street is Charles Ellis. Charley is the founder and former managing partner of the international consulting firm, Greenwich Associates, from which he advised the world’s leading financial firms on strategy for decades. He’s found time to author 15 books, including Winning the Loser’s Game, Fifth Edition: Timeless Strategies for Successful Investing. And he’s also taught at Harvard and Yale’s business schools. He has chaired Yale’s investment committee, which oversees one of the best performing endowments of all time. I talked to Charley about why he thinks Wall Street is a loser’s game for most individuals.
CHARLES ELLIS: Active investing is the Loser’s Game, and the reason I call it Loser’s Game is the outcome is determined not by the winner but by the loser. And I like to use the analogy of tennis. The way some people play tennis. The winners with 120-mile-an-hour serves and brilliant shots at net and terrific placement, they win points. Game I play, we lose points. And who will come out ahead is determined by the person who loses the most points makes the other person the winner. And if you’re in a Loser’s Game, it’s important to know the right ways to play that game.
Give you another illustration. Teenage driving is a Loser’s Game. The kids all think if they’re really good with their steering, if they really take off when the light changes, if they’re clever about finding ways to bob and weave in and around traffic, that’s great. But as the father of a teenage driver, or the mother of a teenage driver, what do you really care about? Only one thing. No serious accidents. No serious accidents, your kid is a great driver. And if it’s my kid that’s driving your daughter, and my kid has no accidents, you’re very glad to have your daughter in my car. Same thing with investing. Active investing is, the outcome is driven by the behavior of the person that winds up, while they’re trying to get it right, trying to win, trying to get ahead, they wind up doing themselves more harm than good, and the net result is they lose relative to the market.
CONSUELO MACK: Why is that? What is it that individual investors do in trying to manage their portfolios that puts them in the Loser’s category? And you know, who are the winners, number one? And define what you mean by winning in the market.
CHARLES ELLIS: Well, to me, winning in the market is truly getting the results you really, really want, that are right for you over the long, long, long term. And I think of investing much more like marriages and most people who are active investors are doing more dating. And I have nothing against dating. But great relationships will be developed only by having a marital commitment and working together to have something of real importance take place. And I think anybody’s been married understands. This is a real difference, and none of us who are married want to go back to dating. Same way of investing. If you will think carefully about what are your real, long-term objectives and find a way to articulate those objectives, you can then find investments that match with what you’re trying to accomplish. And you’ll be relatively happy all the time and over the long term you’ll be very happy.
CONSUELO MACK: So, when I think about objectives, you’re talking about more than just, “I want to make money in the market.” You’re talking about really establishing an investment philosophy and discipline is key and then going out and seeking out the investments that will fulfill those goals.
CHARLES ELLIS: True.
CONSUELO MACK: Is that right?
CHARLES ELLIS: Yes. Most of us, most of us, our first objective is to not lose.
CONSUELO MACK: Actually…
CHARLES ELLIS: What Mark Twain used to call return of the money and then return on the money is the secondary thing.
CONSUELO MACK: So, that should be our first objective, is not to lose, as opposed to win?
CHARLES ELLIS: Yes.
CONSUELO MACK: Which is the way most people go about it. All right.
CHARLES ELLIS: Because we’re human beings, we do a whole bunch of stuff that there’s now in the field of economics being described as behavioral economics, we do crazy things that are not in our best interests. But that’s who we are. So might as well accept that that’s who we are and find a way to live with who we are. Those of us who get nervous when prices are coming down ought to study. You know, when prices are coming down, they’re less costly. You can buy more value for less money. This is actually, although you’re uncomfortable, it’s good news, and those of us who get excited about, “Look, my stock is going up, it’s really going up.” Well, yes, that’s right. But, Charlie, in the long run, if it’s gone way up, what’s the destiny? The destiny is, it’s going to come back to its average, long-term value to price relationship. It probably will come down. So it’s not necessarily good news for you that the stock has gone way up in price if you’re a long-term investor, and I’m only interested in being a long-term investor.
CONSUELO MACK: So, for long-term investors, you are a big proponent of index funds versus actively managed funds.
CHARLES ELLIS: I am.
CONSUELO MACK: Why? Why index funds; why not just go with the market?
CHARLES ELLIS: The data shows over and over and over again that most all active managed funds underperform the index, a sensible index. Now, if you’re a small-cap value manager, active, the right index to compare against is a small-cap value index. Not high-growth, high-priced index. You have to choose your index. But if you choose the right and fair index, 75 to 80% of the active managers over every ten year period underperform, plus- and this is worth keeping in mind- you have higher taxes because the turnover is pretty rapid, and so, you’re getting short-term taxes as well as more frequent long-term taxes. Index funds don’t do much. So they don’t have much taxes, and the combination of low fees, low taxes, and low errors, index funds keep coming up with a better result.
CONSUELO MACK: There are tons of index funds being created as we speak. The exchange-traded funds, which are index funds that trade like stocks, you know, I feel like there’s one being created every day practically. How do you pick the best index fund, number one, and what kind of diversification should you have in your index fund portfolio? Again, thinking as a long-term investor?
CHARLES ELLIS: Well, you’re asking several different questions at the same time. So, I’ll try to–
CONSUELO MACK: Yes. I am. Sorry.
CHARLES ELLIS: –pick it up. Now, first thing in index funds, you want to be with a highly-reputable index fund manager who has specialized in this field, has become proficient at it, because if you’re really good at doing index fund management in your trading activities, you’ll be a little bit less costly than anybody else. Secondly…
CONSUELO MACK: So, names- Vanguard, for instance.
CHARLES ELLIS: Vanguard, with whom I’m associated because I’m a director. I became a director because I so admire the work that they do. It’s not the other way around. But they do a great job. Second would be that the fees are low. It’s really upsetting to me, again, I’m back to Vanguard, they’ve got a low-fee strategy towards life, and their concept of value-delivered service to investors. Low fee of ten basis points. You get to some index funds .Exactly same index fund. Now, ten basis point but 100 basis points. And you’ll never get that money back. And you’re not getting anything for it. You’re just paying up for nothing.
CONSUELO MACK: So, don’t pay them basically and those costs can really add up over time?
CHARLES ELLIS: Over the long, long period, they do add up.
CONSUELO MACK: So, second part of that question: Asset allocation. Very important, right, for long-term investment results?
CHARLES ELLIS: Yes. If you think about your children or grandchildren or the people that you love and care about the most, and you said, “Okay, I could give them the ability to pick stocks really well or I could give them the ability to pick managers really well, or I could give them the ability to know which kinds of stocks to be investing in or whether to go international or go emerging markets or go large cap or go small cap, or I could help them get the asset mix right.” So, okay, those are five different decisions. I could get only one of them. They’re going to get, like, the others will get average experience. Which one would you choose? Absolutely- asset mix. If you get the asset mix right, you’d have to make a major mistake to get anything negative to get a bad result in the whole. Get the asset mix right, most everything else can take care of itself. Get the asset mix wrong. You don’t have a chance.
CONSUELO MACK: How do you get the asset mix right?
CHARLES ELLIS First, understand who you are and understand what the money’s purpose is in your life. If you’re a very wealthy person, you’re probably investing for philanthropic institutions that you’re going to give money to or your grandchildren and their children and their children’s children. Think about it that way, you’ll probably be entirely involved in equity investing. If, on the other hand, you have a modest amount of savings- maybe it’s in your 401k plan, maybe it’s in your own investment account- and it’s probably enough to make it through your life with financial security, then you should be more protective. If, as a human being, you just do like stability, you don’t like the ups and downs of the market, accept who you are and behave accordingly.
CONSUELO MACK: Final question. Actively managed funds, which, you know, many investors follow slavishly. How do you handle the actively managed funds? Do you invest in them at all? Under what circumstances? What percentage of your portfolio should you put with an active portfolio manager?
CHARLES ELLIS: The last question about what percentage. That’s a matter of personal judgment. The fundamental proposition that I would put to you is if you’re going to choose an active manager, choose someone that you’ll stay with for at least 20 years. If you’re going to stay with a manager for 20 years, you’re not going to choose because of their recent performance, you won’t choose because of the stocks they own now. Those will all be replaced. You won’t choose because of the individual fund manager. He or she will be replaced. You will choose character or culture or the value set of the organization. And as you know, and just slip in, I think there’s one such organization. They manage the American Funds. It’s called the Capital Group Companies. And I wrote a book about it because I wanted to understand: why were they so able over every long time period to outperform and compete so successfully? And I believe they understand how to manage professionals in such an effective way that they will achieve very substantial results. So, if you wanted to tease me a little bit, my wife owns the American Funds. And I own the Vanguard Index Funds. And we get along fine.
CONSUELO MACK: And the reason the American Funds- and Capital is the name of the book- that they do manage so successfully, why is it? What is it about them that’s enabled them for 75 years to do so well?
CHARLES ELLIS They start with a very strong conviction. Their purpose, and they recruit for it, and they train for it, and they believe it in deeply; they drink the Kool-Aid, as they say. Their purpose is to serve the individual investor- full stop. It is not to make money for the people who are working there, to make money for the owners. That is not their objective. Their objective is to serve the investor, and, as a result, they do some very interesting things. For an example, when money market funds first came out, they would not introduce one. Why not? Because they were afraid that money market funds came out in the early mid ‘70s, and that was the worst time to move out of stocks and into cash. And they didn’t want to make it easy for people to make that mistake. So, they wouldn’t offer them. Then, as a result, their investors stayed more in equities and get the ride in the best bull market the world has ever seen.
CONSUELO MACK: Charles Ellis, it is a treat and an honor to have you here. Thank you so much.
CHARLES ELLIS Thanks.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: put the power of dividends to work in your portfolio. Over the last eight decades, dividends have accounted for more than 40% of the total return of the stock market. How do you invest in dividend paying stocks? Obviously you can buy companies that have a history of paying and increasing dividends year after year. Standard & Poor’s publishes a list of what they call their Dividend Aristocrats- stocks with a 25-year history of increasing dividends. If you prefer mutual funds, you can buy an equity income fund or an ETF, such as the Morningstar recommended Vanguard Dividend Appreciation ETF- the symbol is VIG. The key to getting maximum returns from any of these investments is by reinvesting the dividends, thereby unleashing the power of compounding over time.
That concludes this edition of WealthTrack. Next week, we’ll be discussing how to maximize your benefits from social security with retirement income guru, Mary Beth Franklin. It turns out that timing is everything. Thanks for watching and make the week ahead a profitable and a productive one.
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Sunday, March 4th, 2012
MIT’s Andrew Lo, “Financial Thought Leader,” and the dean of Adaptive Market Hypothesis, discusses managing your portfolio’s risk in volatile times with Connie Mack.
Here is the full transcript of the interview, courtesy of Wealthtrack.com:
Consuelo Mack WealthTrack – February 24, 2012
CONSUELO MACK: This week on WealthTrack, keep your seatbelts fastened and prepare for turbulence! Financial Thought Leader, alternative investment manager and MIT Professor Andrew Lo says ongoing market volatility requires skillful maneuvers. He’ll tell us which ones to follow next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Investors are dealing with some really difficult choices. The Federal Reserve has kept short term interest rates near zero for three years and has told us it is committed to another three, until late 2014. That means savers are getting zilch- actually less than zilch when you subtract the affects of two percent inflation. So called negative yields don’t pay the mortgage, put food on the table or compound over time because there is nothing to reinvest. The result is that savers and retirees are being forced into riskier investments, that, to paraphrase Mark Twain, don’t guarantee either a return “on” or a return “of” your money.
As you know, many recent WealthTrack guests have been advocating investors return to the stock market and specifically to high quality, dividend paying stocks for capital appreciation and income. Companies are taking note. According to Standard and Poor’s, dividend increases reached $50.2 billion last year. That’s an 89% rise over the $26.5 billion in dividend increases announced in 2010. S&P predicts companies will set a new record for dividend payments this year. Among the reasons: dividend payout rates remain near historically low levels of around 30% of earnings- historically they average 52%, and companies still have robust cash reserves and cash flows. In addition, that much dreaded market volatility of the past four years seems to be abating. The CBOE Market Volatility Index, or VIX, a measure tracking price movements of the S&P 500, has fallen dramatically in recent months. But for how long?
This week’s WealthTrack guest is skeptical of the markets recent docility and believes investors need to be wary, vigilant and more proactive. He is Andrew Lo, a noted Financial Thought Leader, economist, Professor of Finance at the MIT Sloan School of Management, director of MIT’s Laboratory for Financial Engineering and a money manager. He is putting his research to work at AlphaSimplex Group, the investment firm he founded and now chairs, where he and his team run several alternative investment mutual funds under the Natixis ASG name. In his words, they are “designed to help investors achieve greater diversification than traditional stock and bond funds, while actively controlling risk and liquidity.”
I began the interview by asking Professor Lo why he believes market volatility has not disappeared.
ANDREW LO: Well, one of the things about volatility is that it’s triggered by real events. And I think probably the biggest issue hanging over markets today is political instability. It turns out that government has become the biggest source of systemic risk. And until we work out the implications of Dodd-Frank and what’s going on in Europe, I think we’re going to continue having that hanging over the heads of investors.
CONSUELO MACK: So give me a time frame for that, because I don’t have really any particular optimism that we’re going to solve the solutions of Dodd-Frank and government regulation in Europe anytime soon, so this is a multi-year process that you think we’re going to go through?
ANDREW LO: This is definitely a multi-year process. It’s probably going to take between two to five years before we see any real differences. For example, here in the U.S., we’re not going to see much movement on the political scene until after the 2012 elections. And even after that, it’s going to take some time for the new President, whether it’s the incumbent or the challenger, to be able to put in place his or her implementations of various different policies. At that point we’ll see a little bit more clarity, but even then it’s going to take years before the actual implementation of Dodd-Frank becomes clear enough for us to understand.
Even the Volcker Rule is something that is not going to be clear for another two or three years. And in Europe, my guess is that that’s going to be a very slow-burning fuse. Things might come to a head this year, but more than likely they’ll figure out a way to push it off for another year or so. And then we’ll see what happens with Greece, Spain, Portugal and other countries.
CONSUELO MACK: So therefore, get used to market volatility. It’s a way of life for now.
ANDREW LO: I think for now it’s the volatility of volatility that we have to be aware of.
CONSUELO MACK: So talk to me about, what is the volatility of volatility.
ANDREW LO: Well, the idea behind the volatility of volatility is that we’re really on a volatility rollercoaster ride. During periods of time when markets look calm, volatility will be low. The VIX will be at a reasonable range of, say, 15 to 20%. But within a matter of days, after any kind of political change, we may see that volatility going up to 25, 50, 60%. And at 60% volatility, investors are really going to have to be very careful about what’s going on with their portfolios.
CONSUELO MACK: So are there new rules of investing that we need to apply in this new market that we’re seeing?
ANDREW LO: Well, I think there are definitely some new rules. And I would probably focus on three of them. The first new rule is that markets are not stable. That they can change at a drop of a hat. So we have to be more active about managing our risks. So the case in point is volatility. In the past, if you had a 60/40 portfolio- 60% stocks, 40% bonds, you had an idea that you were going to be getting something on the order of overall, ten or 11% volatility for your overall portfolio.
CONSUELO MACK: And let me stop you there. So ten or 20% volatility’s within any given year. that the market would move or your portfolio would move up and down ten or 20%, that was kind of a range that you could depend upon.
ANDREW LO: Exactly. And what we’re seeing now is that even with a 60/40 stock/bond allocation, there are periods of time when your portfolio can have 30/40 percent volatility, which are swings that no investor has signed up for. So the first new rule is that we have to start getting more active about managing our risks and being aware of those risks.
The second new rule is that we all suffer from a disease that I call diversification deficit disorder. That means that we think we’re well diversified with some stock and bond funds, but in fact, we have to be much more proactive about getting diversification across stocks, bonds, currencies, commodities; across different asset classes, across different countries, and over time. So it’s actually harder work now to achieve the same level of diversification that we had before.
And that third new rule is that we have to be aware that while stocks may provide good returns in the long run, that in the long run, we may be dead and we have to make sure the short run doesn’t kill us first. That is that we have to manage our way around these market dislocations. And so it means that we have to pay more attention to our portfolio, we have to spend more time thinking about it. Basically we have to become more educated about our own finances.
CONSUELO MACK: One of the really interesting things, Andy, that you’ve written about and talked about, is the fact that there’s something called the efficient market hypothesis, which is that the markets are efficient. That we’ve been dealing with and have assumed it was going to be the case for the future. And then you’re now talking about something called the adaptive markets hypothesis. What’s the difference between the efficient market hypothesis and the adaptive markets hypothesis?
ANDREW LO: Sure. Well, let me first start by saying that the efficient markets hypothesis has been a very important part of modern finance theory. And it says that prices generally fully reflect al available information. It’s hard to beat the market. And I would say that that hypothesis is still very important, but it’s incomplete. It’s not wrong, but there’s a piece that’s missing. And the piece that’s missing is that, while most of the time, markets do work quite well, and they do reflect most information, and it is hard to beat the market, that every once in a while, markets can be punctuated by periods of dislocation and irrationality. And the important thing to note is that people react to these kinds of market conditions, they adapt.
And so the adaptive markets hypothesis starts with market efficiency as the baseline and asks the question, do investors maintain that baseline all the time? And from looking at the empirical evidence, or the financial crisis, the evidence is pretty clear that, no, they don’t. That when market conditions change abruptly, people react. And they react in fairly predictable ways. When there’s a fire, people will run out of the room. And when there are losses, people will unwind their portfolios and seek safer ground. So the adaptive markets hypothesis focuses on that dynamic. It tries to understand under what conditions are markets efficient, and what other conditions might make people panic and move into other asset classes, thereby changing the traditional risk-reward relationships.
CONSUELO MACK: So right now, are we in a situation where the markets are not acting as we had assumed they would, and they actually have for, let’s say, the last four years; and in fact, so that the adaptations that individual investors are making, that number one, we’re making possibly wrong decisions. And then are there right decisions? What kind of adaptive behavior should we be adopting?
ANDREW LO: Well, I think there’s definitely some change afoot. And the best way to look at it is by taking the great expanse of market history, say from the 1930s to the most recent period, and just looking at our experience with, say, U.S. equities. From the 1940s to the early 2000s, that six-decade period is a period that I call the Great Modulation. And the reason I call it the Great Modulation is because during that period of time, we had a relatively stable financial regulatory system. In fact, today’s regulatory structure for mutual funds was actually built in the wake of the Great Depression, the 1930s and the 1940s. And those regulations haven’t changed a whole lot since then. Over that six-decade period, we had a relative period of calm and very, very healthy growth. So that no matter what ten or 20-year period you pick in that six-decade-long period, you would have done probably equally as well in terms of investing money in equities. I think that that’s changed. Over the last five or ten years, we have had some very significant shifts.
CONSUELO MACK: So that’s where the stocks for the long run thesis, you know, looking back, it worked.
ANDREW LO: Absolutely.
CONSUELO MACK: So your traditional approach of buying large cap or U.S. stocks, and reinvesting your dividends on a yearly basis, that in fact that was a pretty good strategy to adopt. Now what kind of a market are we in, and what’s changed and what should our investment strategy be?
ANDREW LO: Well, so there are a couple of things that have changed, and I think those changes inform how we want to think about changing our investment approach. One thing that’s changed is population. In 1900, the estimate of the world population was about one-and-a-half billion people. The most recent estimates for our current population of the world is about seven billion people. That is a big difference. And if you think about those seven billion people, most of them are going to need to have some type of financing and saving activities throughout their lives. And so that makes markets much more complex, and much more interdependent.
The second thing that’s changed is financial technology. We now have the ability to invest in a variety of assets, but at the same time we also have the ability at the click of a mouse to wipe out half of our retirement savings. That’s a very dangerous set of technologies to give to ordinary investors who may not really understand all of these kinds of risks.
CONSUELO MACK: Even professional investors make big mistakes.
ANDREW LO: It’s complicated, no doubt. And so I think one clear implication is that we actually need to spend more time thinking about our finances, in the same way that we have to spend more time thinking about our health. In the 1950s we didn’t know about cholesterol, we didn’t know about carbs, we didn’t know about a lot of things that we know now. And so now, to be an intelligent consumer, you really have to spend time learning these new concepts.
CONSUELO MACK: So, Andy, from an individual investor’s point of view, how can we more actively manage our portfolio, realistically- what should we be doing?
ANDREW LO: Yes. Well, first of all it’s hard. It requires work. And what investors should not be doing is becoming day traders. That’s not going to be successful. One thing they can do, though, is to spend more time learning about the investments that they do make. In other words, asking questions like, “what kind of risk profile does this particular investment have over the last ten years, five years, three years,” as opposed to asking “what kind of risk profile it has right now.” Because what looks relatively calm and conservative today may have looked very differently in 2008 or 2009, and may look different yet again next year. So start asking questions about how stable the risk is for each of these funds, that’s the first thing.
The second thing to ask about is liquidity. We haven’t really talked much about liquidity for mutual funds, because by definition, they seem to be liquid. You should be able to get in and out of them every day. But as we saw from the last four years, there are certainly mutual funds that are much less liquid than others and could create all sorts of difficulties for redemptions, if and when they all occur at the same time.
Third, there are a variety of financial instruments available to investors today, including ETFs, and other kinds of fancy securities. Before getting too fancy, investors need to spend time trying to really understand the various different kinds of circumstances under which those products will help or hurt their portfolios. So in other words, each investor now has to become a bit of a financial manager. They are managing their portfolios, and ultimately they’re going to be responsible for those decisions.
CONSUELO MACK: Which is a terrible thought. A very scary thought.
ANDREW LO: It’s scary.
CONSUELO MACK: You have a concept, an approach that I think is really fascinating. We’ve done a lot of work on WealthTrack on asset allocation, and if you go to any financial advisor, they’re going to talk to you about asset allocation, and your risk tolerance, et cetera. But you’re saying that we shouldn’t just manage our asset allocation anymore, that we really need to manage our risk allocation. Can you tell me what it means to manage your risk allocation, and what the difference is?
ANDREW LO: Sure. Well, the first point to start with is that investors generally respond to changes in risk. Most investors are happy to take risk. They’re perfectly willing to take risk. They even, I think, understand what risk means. What they aren’t willing to do is to be uncertain about their risks. If you’re going to take a particular kind of risk- ten percent swings in your portfolio over the course of the year- you want to know that that’s by and large what you’re going to see: ten percent swings in your portfolio over the course of a year. If you see 30% swings, that’s not good news. And so the idea behind risk allocation is to reduce the surprises in risk. If you think you’ve signed up for ten percent swings, then you need to be given ten percent swings. And there’s a way to manage your portfolio to make sure that that’s more likely than less. And the way to do that is to start with a particular risk budget.
Say that ten percent figure that we talked about. And say that if ten percent swings are what I’m comfortable with, let’s divide that up into three percent of that for equities, another three percent for fixed income, another two percent for commodities, and so on. And it’s a little bit more complicated because the risks don’t necessarily add up to 100% because of correlations among these various different investments. But with some help from literature online, or from financial advisors, it’s actually pretty easy to work that out so that you put your money in categories where you know you’re going to get a certain amount of risk. And this way, after the fact, the surprises will be far fewer and far less extreme.
CONSUELO MACK: So if I look at all the asset classes that are available to me as an investor to invest in, are there certain risk profiles that I should be adding to a portfolio that might not be in the traditional portfolio? Are there certain assets that are actually going to steady and provide ballast to my portfolio that I really don’t know about?
ANDREW LO: Well, I think there are other assets and certainly other approaches to investing in different asset classes. Stocks and bonds are the most traditional asset classes that most people have in their portfolios, and we’ve seen over the last few years that the volatility of volatility of those asset classes is quite high. It’s very hard to predict where that volatility’s going to go. But if we now increase the universe of assets to additional alternatives- commodities, currencies, interest rates, and investing long as well as short- if you mix all of those into these new multi-alternative asset classes, I think that there’s a better way to make that kind of diversification and to be able to manage the type of risks across these different asset classes.
CONSUELO MACK: So let’s talk about what you’re doing at the Natixis ASG Funds that you’re replacing the traditional asset allocation approach with what you call a new narrative. And that is, it’s how many dollars that you invest in different asset classes, instead of that, it’s how much risk you allocate to different asset classes. So just give us an example of what you’re doing, for instance, with your flagship from the Natixis ASG Global Alternatives Fund, which you’ve established an eight percent volatility. That’s your goal. So how do you achieve that?
ANDREW LO: Well, it’s actually pretty easy. What we do is to use futures contracts, which are very liquid, and we invest in futures across a variety of asset classes; stocks, bonds, currencies and commodities. And we are trying to capture the broad exposures of the entire hedge fund industry. But what we do that’s different from what hedge funds do is that we manage our volatility on a daily basis; where we balance our futures exposures to these various different asset classes so that we’re achieving a relatively steady level of volatility of around eight percent. And so when the underlying instruments that we invest in become much more volatile, as they did during the fourth quarter of 2008 after Lehman went under, we will reduce our exposures to those contracts, and thereby achieve a relatively steady rate of volatility. When that volatility of the underlying instruments comes down to a normal level, we’ll put back that market exposure.
So it’s a lot like cruise control in your car. Your car knows when it’s going uphill, it’ll put on the gas; your car knows when it’s going downhill it’ll put on the brakes. All the while achieving a relatively steady speed of 60 miles an hour. And if eight percent volatility’s what you’re trying to achieve, by using this kind of cruise control mechanism and by doing it on a daily basis, you can actually manage your risks more effectively than if you just rebalanced once a month or once a quarter.
CONSUELO MACK: Basically you’re managing volatility on a daily basis. Individual investors really can’t do that. If I went to a traditional asset allocator, they would tell me, well, you know, what you need to do, Consuelo, is put more TIPS in your portfolio or more treasuries in your portfolio, or more managed futures in your portfolio. Is there any way to manage the volatility that we’re talking about, without actually managing it on a daily basis?
ANDREW LO: Well, I think it’s a matter of degree. So obviously managing it on a daily basis is one extreme. Not looking at your portfolio for a year is another year. Trying to be more sensitive to correlations is one way of managing it. So for example, you mentioned managed futures and TIPS. Those are two asset classes that are not part of the traditional investment portfolio which could actually help in terms of dampening some of those fluctuations and reducing the volatility of volatility. So by being more aware of different investment alternatives, by asking questions about how stable the risks are, by looking at the potential correlations of those risks, it is possible to put together a more robust portfolio than just simply picking stocks and bonds.
CONSUELO MACK: Are there any specific segments or products that are out there that we should have ourselves and our financial advisors look at?
ANDREW LO: The ones that I think might be most useful for an investor are these multi-alternative categories, managed futures, because they provide opportunities that are not easily accessible from the traditional stock/bond perspective. And many of these products are properly risk-controlled, so that they won’t provide the kind of unpleasant surprises that you might find in some traditional mutual fund products and ETFs. So I think that having a broad exposure to a variety of asset classes across different countries, across different securities, is really the best way to go and to spend more time thinking about these opportunities; to work with a financial advisor to get the best advice possible. But in the end, to answer the question, how much risk am I willing to take? What kind of portfolio swings can I withstand? And then to maintain as much of an investment in those types of securities with that level of risk that you can.
CONSUELO MACK: How important is it to pay attention to macro trends, number one? And to react to them, number two, in our portfolios? Do we need to time macro trends, not time the market, but possibly what’s going on in the macro level?
ANDREW LO: Well, I think it’s incredibly important to pay attention to macro trends. How we react to them is also critical, and there I think that most investors need help. I don’t think it’s possible for individual investors to understand, necessarily, how to interpret a European default. We need help from financial advisors, from various institutions, to understand how our reactions may or may not be beneficial to our portfolios. But I do think that it’s important for us to try to react in a sensible way as opposed to simply assuming things will work out in the end. Depending on what one’s horizon is, maybe that is true, but if your horizon is less than 50 years, I’m not sure that things will work out for you, with any degree of confidence. We need to think a little bit about how to change our behavior in the proper way to react to these market conditions.
CONSUELO MACK: And final question is for a long-term diversified portfolio, what is the One Investment or one strategy we should all adapt?
ANDREW LO: Well, I think that right now, the one idea that we should all adopt is to think very carefully about risk, is to manage risk actively. And that means thinking about diversification, thinking about broader asset classes like multi-alternatives or managed futures. Thinking about how our portfolio may change over time and over market conditions, and to do that soon. Not after the disaster hits, when we’re all going to be panicking. But rather do it now, while we’re relatively calm, and when we have some idea of what kind of consequences we can or cannot tolerate.
CONSUELO MACK: We will leave it there, Andrew Lo. Always wonderful to have you on WealthTrack.
ANDREW LO: Thank you, it was a pleasure.
CONSUELO MACK: Thought-provoking, you are an original thinker from AlphaSimplex Group and from MIT, thanks so much for being here.
ANDREW LO: A pleasure, thank you for having me.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point picks up on a major theme of Andrew Lo’s investment approach, which is to manage portfolio risk. So this week’s Action Point is: consider the risk allocation in your portfolio.
Investors have traditionally thought in terms of asset allocation, assuming relatively predictable returns and behavior in stocks and bonds over time. As Lo points out, for a number of reasons, the markets have changed. They have become much more complex, uncertain and volatile, so managing risk has become much more important. Building a portfolio around risk expectations for different asset classes can help you manage and control the risk according to your personal preferences.
Next weekend, as many public television stations start their spring fund raising drives, we will revisit our conversation with Sheryl Garrett and Mark Cortazzo, two top rated financial advisors who are catering to small investors. If you want to see WealthTrack interviews ahead of the pack, subscribers can do so 48 hours in advance. Go to our website, wealthtrack.com to sign up. And that concludes this edition of WealthTrack. Thank you for watching and make the week ahead a profitable and a productive one.
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Friday, February 17th, 2012
On this week’s Wealthtrack, Consuelo Mack features her exclusive interview with legendary “Great Investor” Charles “Chuck” Royce. Royce pioneered investing in small company stocks with his Royce Pennsylvania Mutual Fund forty years ago this year. He explains why high quality small cap stocks are undervalued compared to large cap stocks right now and the advantages they offer to investors from the vantage points of portfolio diversity, international exposure and income, three characteristics normally not associated with the small cap universe.
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Tags: Advantage, Company Stocks, Consuelo Mack, Copyright, Forty Years, High Quality, International Exposure, Investing Company, Investor, Investors, Mutual Fund, Pennsylvania, Portfolio Diversity, Portfolio International, Small Cap Stocks, Universe, Vantage Points, Wealthtrack
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Monday, January 16th, 2012
On this week’s WealthTrack, Consuelo Mack interviews Loomis Sayles’ Dan Fuss and BlackRock’s Peter Fisher. These two influential financial investment managers discuss the risks and opportunities in U.S., Europe and Emerging Markets.
Source: Wealthtrack, January 13, 2012.
Tags: Consuelo Mack, Dan Fuss, Emerging Markets, Europe, Financial Investment, Global Income, Interviews, Investment Managers, Loomis Sayles, Peter Fisher, Wealthtrack
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