June 3, 2013 Comments

At the end of the day the S&P 500 was up 0.6% and Toronto was down 0.3%.

We had Toll Brothers down 1.7%. But most of the stocks on our list were up.

I like to think that you the customers of InvestorsFriend Inc. are smarter than the typical investor. As do your selfers (albeit with a little help from your (Investors)Friend) I think you are more savvy then average.

Here’s what average looks like:

A bank employed senior financial advisor friend of mine was explaining to me today that he puts the vast majority of clients into pretty bland portfolios with usually a heavy allocations to bonds. He thinks they would be better off with more equity exposure in most cases. But he explained that when client accounts are up 20% in a year, no one calls to thank him. When they fall 5% they all call in to gripe and some leave. So investors have trained the advisor community to act very meekly and to travel in a herd. If you bet against the herd and win your client benefits and congratulates himself on his astuteness in choosing you. If you bet against the herd and loser, the client screams, calls you idiot, tells all his friends you are an idiot and then leaves with his money. So, investors who wish to do well on management fees and who want a sane life act meekly and follow the herd. Failing with the crowd, you still get yelled at but maybe not as loudly and the client may stay put as he sees most everyone failed.

This is not that intelligent. For one thing, long term bonds may be riskier than equities. Almost all long term bonds (except very recently issued ones) are trading above par. Some trade well above par like 30% above par. They WILL mature at only par. They WILL decline in price and market value. That is a mathematical fact. They could gain in value in the next year. But any bond that currently has a market value above par WILL suffer a capital loss eventually as it matures at par. (I set aside convertible bonds, I speak of plain bonds). And long term bond funds will be affected by this as well. Now perhaps the yield on the bonds will still make them acceptable investments but I doubt it.

Now it is possible that in say the next ten years equities will decline even more than a long term bond with 10 years left on it (Say a 30 year issued in 1983 that is trading way over par today). But I highly doubt that will be the case. For my money, equities are a safer bet than long-term bonds over say the next ten years.

And maybe rebalancing and investing new money will mean that the bond portion of the portfolio will do okay. But the math suggest to me that equities held today will almost certainly (but its not guaranteed) outperform long term bonds held today if we check back in say 10 years.

But Advisors are mostly going to recommend a hefty allocation to bonds including some long term bonds. That’s because the customers trained them to do so and when the long term bonds eventually fall in value at least the Advisors will fail with the herd and not on their own.

More intelligent investors (like most of you, I think) know that occasional losses, maybe even sizable percentage losses is just a part of the winding road up the hill to wealth. And if we are going to have losses either way (I’ll bet even balanced portfolios have some substantial losses in some years over the next ten years), then why not choose the route with the higher expected returns (more equities)?

With markets at record highs (at least in the U.S.) it’s a reasonable time to ask yourself if you can stand the heat and the volatility off equities. I am not in the business of setting asset allocations (the percentage of your portfolio in bonds, cash and equities). That is a personal decision and I don’t give personal advice. Periodically, it is good to reflect on what exposure to equities you are comfortable with. I would put the non-equity portion in cash and short-term stuff and I personally would avoid long-term bonds and most perpetual preferred shares for that matter.


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