Editor, Inside Information
I think there are four kinds of investors roaming the streets these days. First, there are the investors who were lucky enough to work with an advisor who sidestepped this mess, and we will see if their advisors are skillful enough to get them back into the market when it gets bullish--and that probably means navigating around who knows how many sucker rallies before we hit the real thing. Second, there are the clients of advisors who maintained their investment allocations and rode the roller coaster all the way down, but who are going to stick it out and give their clients the benefit of riding it back up--and I have yet to talk to anybody who thinks the market will stay down forever, so we seem to agree that there WILL be a recovery that will eventually make everyone whole.
In third place in this race are the consumers who panicked last September or October and fled the market, and who are probably boasting to their friends that stocks are just too risky. They'll watch a sucker's rally go by and enjoy the subsequent downturn, feeling safe in their cash position. They'll watch another one, and then they'll smugly watch the bull roar upward until, somewhere near its peak, there is so much frenzy and excitement, and so much regret at how much upside they have already missed, that they'll put their money in near the top and end up far worse off than they were before.
Finally, there are the clients of advisors who will lose their nerve; who gave their clients the full brunt of the downside in a buy-and-hold posture, and then will decided to give up and take an ultra-conservative position. They will lock in losses, and be caught by surprise by the sudden, unexpected bull run, either mistaking it for another sucker's rally or simply not having cash in the market in time to catch most of the updraft. The clients of those advisors will have suffered most of all.
Like it or not, even if you now believe there are ways to evaluate the future returns of this or that asset class, even if you think you learned something from this bear market and that there is something to what these sophisticated advisors are saying about sidestepping the worst of the bear, you're really trapped into offering your clients the second best of four alternatives--and, if those advisors casting stones fail to recognize the next bull, you may actually wind up with the best of the four.
I may be wrong, but I believe that the only sensible time to make dramatic changes in your investment philosophy is toward the end of a bull market, when high valuations are making you uncomfortable and your reading of the economic tea leaves leads to disturbing conclusions. I think when that day comes, many of the advisors that are being castigated and dismissed by their peers will actually have a better solution than they did this time around. Moreover, I agree with the successful sidesteppers that it will become accepted wisdom throughout the profession that correlation coefficients, mean variance calculations AND valuations need to be taken into consideration when assessing the opportunity set offered by the markets.
That day isn't here yet. I readily congratulate the advisors who managed to sidestep the worst bear market since the 1930s, and I am happy for their clients. But I'm not ready to throw the other advisors under the bus for sticking to their principles when the alternatives look like they do today. In my own portfolio, I have no idea when the next bull market will come, but I intend to ride it up from the very first moment it appears, and I know only one way to do that: grit my teeth, maybe wish I had been smarter, and hold on to the handlebars of the roller coaster to wherever it takes me next.
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