There was an excellent writeup in the FT yesterday by John Authers that questions the assumptions about equities that are held dear by all many investors, both professionals and do-it-yourselfers.
Authers refers to multiple quotes from a Rob Arnott article due to appear in the Journal of Indexes. A big take away is that “the cult of the equity” has let investors down. Also the efficient market hypothesis cannot be applied to the last 18 months.
The charts included in the article are pasted here and contribute to the argument that it may be a while before equities work again. Reader Clive left a link to essentially the same chart a few weeks ago.
Read the article, I can’t do it full justice with a recap.
My first thought is somewhat snarky but with more and more people telling us that equities may not work it seems like maybe we are getting to a point sentiment-wise where equities should be be bought with both hands for what could be a Q2 1933 type of rally (the market doubled in about three months 54 up to 106). If equities truly are broken, which is not what I believe, then shockingly violent spasms in either direction would not be a surprise. This not a prediction so much as contrarian thought.
Perhaps the more practical way to think of this is something I have been writing about for a while in terms of evolution of portfolio construction. If your financial plan calls for 7% as a mid-line number for success you can still get that number even if it means owning less straight equities. Averaging 7% may mean including commodity exposure, absolute return exposure, thematic exposure, foreign currency, foreign debt, exposure to countries that are more in their own worlds or other things.
My view for several years has been that US equities will still go up but at a lower average annual rate than what we have been accustomed to. This means having more exposure to the things listed in the previous paragraph, less reliance on broad-based products like SPY and EFA and more reliance on narrow products like sector, sub-sector and country funds, individual stocks, specialized mutual funds and maybe types of products that do not yet exist.
If this scenario pans out it will require more work but I believe it could deliver a better risk adjusted result than passive investing. The extra work required would be in terms of research, understanding how things trade and how to blend various products together to get a volatility you can live with. Just because it would be more work does not mean it isn’t doable, I’ve been writing about this stuff for four and half years. If I can begin to understand this stuff you can too.