In the middle of the last decade the investing world came to learn much more about so called endowment investing due primarily to the successful results put up by Harvard and Yale over the course of many years. Beyond equities and fixed income the endowments invest in private equity, timberland in New Zealand and other exotic holdings that retail investors can't really access. This lead to investment products that were marketed in such that they were selling the ability to create your own endowment portfolio; things like BDCs and Private Equity ETFs.
There were many articles and blog posts about how to use these products to create your own endowment. My stance all along was that there was much to learn from the how endowments look at the (investment) world but that anything beyond a very modest influence in retail account (I am also including the accounts I manage in this comment) would be a bad idea. Our most tangible influence from my study here was probably including Plum Creek Timber in the portfolio for several years ago although we did sell quite a while ago.
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I continue to believe that some sort of "normal" portfolio allocation continues to be the best way to go for the vast majority of investors. There are two refutations to the idea that stocks have not worked for 13 years. The first is that this is not unprecedented. The 1930s and the 1970s were both periods where stocks as measured by broad indexes didn't make any real progress.
The other point, made many times here before, is that there were plenty of markets that did just fine since the beginning of 2000. According to Morningstar the Vanguard Emerging Markets Stock Index Fund (VEIEX), this fund has been around longer than EEM, has almost tripled including dividends while the S&P 500 is about 25% (all from dividends).
The other leg to the "normal" allocation is fixed income and rates are of course close to all time lows. This creates risk for longer dated maturities whenever rates start to normalize. Similar to equities this does not mean bonds won't work it means that the old standby of something like TLT probably will have a very bad run at some point similar to how SPY has had a bad run for the last 13 years. When rates do turn it will be important to shorten maturities if you haven't already done so.
To the extent there is room in a diversified portfolio for endowment style holdings (this needs to be decided by each end user), 2008 taught us that these things are probably better off slotted into the equity portion of the portfolio (or maybe fixed income depending on the exposure). The reasoning here is the lament from four years ago (almost five now) about how correlations all went to one. There were actually a few things that held up like gold, managed futures, treasuries and of course inverse funds even if the inverse funds were not precise. Diversifiers that did not work as well were REITs, commodities besides gold and most currencies.
REITs not "working" in the context of being part of the equity portfolio is far less problematic than being viewed as some sort of island that would somehow go up in the face of a bear market. Ditto commodities. I don't know if anyone is still preaches putting 20% in REITs and commodities respectively but long time readers may recall I have been saying that was a bad idea before the crisis and I still believe that now; 20% is way too much.
6 comments:
Roger,
Good post, and I mostly agree that a "normal" stock/bond allocation is the way to go although tweaking it in the direction of say Endowment in terms of alternative asset classes makes sense in my view.
Couple of things/thoughts.
1. Gold actually did NOT work either as a portfolio diversifier during the financial crisis. It dropped from $1000 to a low of $680 at the October 2008 low so it dropped along with every other asset class. The big difference is it recovered much faster and was back at $1000 when the S&P 500 was still on its way to another low in spring 2009. Interestingly, for all the chitter chatter since the fall 2011 top in gold, gold has still outperformed the S&P 500 from their respective troughs (October 2008 versus March 2009). My interpretation is we've been in a successful reflationary cycle where the gains are nominal in terms of currency debasement versus real gains in wealth, but it sure beats real losses in holding cash paying 0%.
2. Whether U.S. stocks have done nothing for a decade depends on the measurement. Here is an interesting article that discusses something I was already aware of. The S&P equal-weight index did just fine and vastly outperformed the cap-weighted index:
http://www.fool.com/investing/general/2013/01/06/the-most-important-investment-chart-of-the-last-de.aspx
I can't find the article now, but it made the observation that historically secular bull markets are really basically outperformance cycles of large and mega-cap stocks. I believe small and mid-caps actually did OK in the 70s as well but that is off the top of my head. In this latest secular bull peak, it essentially consisted of the Microsofts, Ciscos, Cokes, GEs, and Walmarts all trading at 50 to 80x earnings. The next secular bull might start when those can all be had for single-digit P/E ratios.
Hi Mike
the context of my gold comments was for the calendar year of 2008 it was abut flat. from its peak in the spring that year though you are correct, it looks like it bottomed out with a 25% drop.
I'd argue that the 25% drop is basically just picking a timeframe.
for the calendar year of 2008, GLD was up 4% or 5%. (set aside the argument that it was up because it's worth more, or because people piled into GLD).
#2 doesn't mean anything if you can't buy it! Heh. I've owned RSP a bit here and there, but haven't made it a central part of my portfolio.
I'd argue that the 25% drop is basically just picking a timeframe
Of course, it is picking a timeframe. The timeframe is when the "financial crisis" was at its peak. Here is an interesting data point. Go look at the stock price of Berkshire in I think it was early September 2008. It actually was barely off its peak, and actually spiked one day up, but it melted down in October 2008 along with everything else. I'm too lazy to go check charts against headlines and votes, but I think the S&P 500 was still around 1200-1300 in August 2008. I believe it was one of the first Congressional votes either that second or third week in September that sent risk asset prices into complete meltdown. So my point stands that gold was not a diversifier against anticipated financial system implosion at least not in 2008.
#2 doesn't mean anything if you can't buy it! Heh. I've owned RSP a bit here and there, but haven't made it a central part of my portfolio.
When did RSP start trading? I do believe the small-cap and mid-cap ETFs have been around much longer so in a sense one could have had that exposure earlier in time. Point being, Roger highlighted that many foreign indices did OK to well during the "lost decade" and I was simply pointing out smaller and mid-cap U.S. did OK as well. Really, the "lost decade" really only applies to U.S. megacaps which started off 2000 at insanely high valuation levels that we will probably never see again in our lifetimes on U.S. mega-cap stocks.
I think my point is that, as an investor, I don't care about something being a diversifier for a specific date. I care that it was a diversifier over, I dunno how to put it, a longer term. So, to me, if it crashes in September or October 2008, I don't care. This is partially because I'm not a trader, and partially because, I guess, I rebalance at the end of the year. I get to the end of the year and I see that most stuff is down 25% or 40% but gold was up between 4% and 5%. So how could I not view that as a diversifier?
I guess I don't see performance on a specific date as proof of anything. Rather, I see "longer term" performance as proof.
RSP came out in 2003
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