Broker Check

Money Managers Fear a Lost Decade

March 29, 2021
Share |

Money Managers Fear a Lost Decade

Looking forward into the 2020s there is a lot fear.  JP Morgan Chase CEO Jamie Dimon, Bridgewater Founder Ray Dalio, and others have expressed concerns on the prospects of a lost decade in US equity investments.  With short term interest rates at near historic lows and large parts of the bond market rated one mark above junk, we see and are revising investment allocations for our investment clients that look different then 2018, 2019 or 2020 allocations. Investors should take time to review their investment allocation and how it can serve their financial goals heading into the 2020s. 

 

This winter and spring we are informing our clients of strategies and alternatives to compliment traditional investments and support their financial planning objectives. 

 

Investing for tomorrow.  Questions to ask about your investments

 

What is the estimated future return on your current portfolio?  

What method are you using to generate that estimated return?   

How did you get your estimated?

How is that information used to inform your investment allocation and selections? 

 

Driving in the rear-view mirror limits our point of view and gives us permission to ignore what is in front of us.  Weather it is 20 feet or two miles away. 

 

Most investors drive investment decisions using the rearview mirror. They look at charts and past returns of stocks, bonds, mutual funds and ETFs to justify selecting and investing in them for the future.  This is a common way our brains are designed to make decisions.  Look for a pattern and then assume that pattern will repeat itself until we are wrong and then make a change. 

 

This thought process is known as “Resulting”.  Resulting, is building a decision-making process on your experiences and data in a manner that is not necessarily statistically sound.  There are typically too few observations to qualify definitively caused the result. This decision-making process is good for other aspects of our life and evolution; however it has many short comings when it comes to investment decisions.     

 If you want to learn more about resulting, I recommend reading “Thinking in Bets” by Annie Duke.  If you are one of our financial planning clients, I will send you a copy upon request. 

 Financial Sales Professionals… who sometimes call themselves financial advisors or planners frequently leverage this known behavioral finance / decision making flaw.  They use it to trick clients to buy their products and services in a disingenuous manner.  Showing potential clients completely made-up portfolios that look well in hindsight. Giving investors the perception, their advisor can beat the market or otherwise has specialized knowledge. 

 I get emails and mailers from companies all the time using the same methodology to promote products and investments.  “Look at how amazing we did the last 3 years”. 

 You might be thinking to yourself, yeah, that’s how I’m picking some or all of my investments. So, how can we protect ourselves from such traps?  How can we make a more informed investment decision?    

 “Don’t Believe the Hype” – Public Enemy

 Turn off CNBC, YouTube and someone on TicToc hyping flaming pieces of garbage for entertainment.  Let’s look for economic forecasts, estimates and reports that help us better understand what we can expect from the future. Put together by professionals qualified to dig into financial data.  Take time to review and study estimated returns from multiple sources and prospective.  Where can you look?

 

  • Quarterly & annual company conference calls and reports – If you are picking stocks, then I’m sure you are taking time to read over 10Ks and 10Qs. As well as listening to quarterly or annual earnings calls. On these calls you will hear and see a lot of forward-looking statements and estimates.  They usually publish financial proformas and there are questions from analysts to get a better understanding of what the company anticipates or expects to see in future quarters. (sec.gov)

 

  • Major financial custodians, banks and intuitions - Almost all of the major custodians and banks will typically put out research and estimates publicly or to their investors. In this link, Morningstar has put together an article and list of estimates from several companies to give you an idea of return estimates by asset class in the 2020s. BlackRock, JPMorgan, Morningstar, Vanguard, Research Affiliates

 

  • Academic papers, estimates and observations from federal reserve Federal Reserve Banks nationwide organize, publish and discuss economic estimates on a range of industries, asset classes and financial topics ongoing. Depending on the nature of your investments you might find some interesting data, commentary and observations in these reports to further inform your financial decisions. (warning, they tend to be more technical and difficult to read then a CNBC article.) You can follow the Fed on Twitter - @FedResearch

 

  • Hedge Funds and Professional Money Managers – It is common to see research reports from hedge funds and professional money managers. Some of them are showing you the reasoning behind their strategy or strategies, others are commercials or soft marketing strategies to capture more AUM.  Depending on your level of net worth some of these articles will be completely worthless and non-applicable.  Why? Most of these funds cater to large intuitions investing billions of dollars or individuals with a liquidate net worth over $10,000,000.  They tend to have different objectives then the millionaire next door or the emerging professional investing $15,000 - $30,000+ per year.  Example Bridgewater

 

Estimates and Projects are Frequently Wrong – Why should I listen or read any of this stuff?

We recommend reviewing and evaluating the estimated investment returns at least once every two years if not every year. This is a service we provide all of our financial planning and investment clients; an estimated return evaluation of investments given their specific investment strategy.  Using timely economic estimates, instead of random estimates for returns helps us build better financial expectations, select and implement more realistic strategies that are more realistic and improve our chances of meeting our financial goals, objectives and desired outcomes.  Are they perfect?  No.

It is important to be skeptical of estimates and efforts to predict future market returns, or the future.  However, the excise is better than guessing, wigging it or driving in the rear-view mirror and assuming returns are going to repeat themselves based on some book or article from a non-qualified financial guru written 8 years ago.

 

Recommended Reading / 8 minutes of homework  

Find a few minutes to review and read this Morningstar Article.  How has it informed your feelings and thoughts for investing and investment returns over the next 10 years?  How does it contrast, compare or further inform your current expectations?    

Don’t have the time for research? Would you prefer to outsource this to a professional? Schedule time to meet us today.