While we are professional money managers, we feel an obligation to educate the public as much as we can on investing and finance. We take calls and have meetings quite frequently from prospects who never end up doing business with us, but they have questions that need to be answered and they do not know where to turn. This week we wanted to rectify some misconceptions that some investors have regarding their portfolios and the economy.
Bonds are always a necessary part of your portfolio. Ever since Modern Portfolio Theory saw it’s rise in the 1950’s, investors have been led to believe that they need to diversify their portfolios and own a little of this, a little of that and so on to level out risk. The fact of the matter is that the investment landscape has changed drastically since the 1950’s and MPT really does not work. Imagine you were 75 years old, and I told you that, according to MPT, you should be allocating about 80% of your portfolio to bonds strictly for the fixed income. However, I then inform you that given where yields are and the prices that bonds are trading you will not be able to keep pace with inflation, or that you will likely lose a substantial portion of your principal. I would hope you would say “keep me out of bonds!” The fact of the matter is that return doesn’t matter if it is coming in the form of 8% in a bond fund or 8% in a growth fund, a gain is a gain, and diversifying away risk is a gimmick.
The US will soon experience hyperinflation. Economic fundamentals do not lead us to that conclusion. We will likely see inflation down the road, but not hyperinflation. While many investors have pointed to the Federal Reserve printing money, that is not currency that has entered the banking system, it is “state money” as Steve Hanke has described. “State money,” or monetary base, only makes up about 15% of money supply, which is up from the historical average of 6.5%, but total money supply is actually below the trend. History would show that any nation using fiat currency will see inflation over time, but hyperinflation is quite rare.
Gold prices and inflation rates always correlate. This is a dangerous misconception. The gold market relies heavily on emotion for gains. For example, the price of an ounce of gold was at $850/oz in 1980, and we did not see gold at over $850/oz again until January of 2008. It would be difficult to argue that we did not have any inflation from 1980-2008. There are certainly ways to compensate for inflation, but gold is not always one of them.
There is no need to maximize your 401(k) or 403(b). Even if your fund options are limited in your employer sponsored plan, many have matching programs…that is your return right there. Say you put in $200/month, and your employer matches every dollar, you just made a 100% return, with minimal risk. Sometimes an employer sponsored plan is not enough, but it should definitely be utilized for the free money, immediate return aspect.
IPOs are the path to economic prosperity. So many investors want to own the next Google or be in on the next tech boom or what have you. The fact of the matter is that getting rich slowly is for the best when it comes to your retirement. Which would you rather have, a chance at a 200% year/year return, knowing that the bubble could burst at any moment, or earn a modest 8-10% in a traditional tried and true investment?
It takes diligence, hard work and discipline to get your money in the right place at the right time and out with modest gains, but that task is made infinitely more difficult when we are blinded by falsehoods.