Memorable conversations that successfully captured investor sentiment serve as a reminder of ever-changing markets and temporal convictions.
June brings a close to my twelfth year in this business, an anniversary that would usually pass without my recognition. This evening however I’ve found myself inexplicably reminiscent of the journey. The most vivid memories are a combination of events that made global headlines, pivotal moments in my personal career and a few select conversations that seemed fairly insignificant at the time.
A few of these conversations are memorable despite their brevity as they successfully captured the investor sentiment popular at the time in a sentence or less. In addition, the timing was particularly uncanny as markets shifted – and rather dramatically so – shortly thereafter.
In the midst of the tech bubble I remember hearing that an investor’s portfolio could be appropriately diversified between stock in three companies: one that provided an internet connection, one whose content attracted millions of eyeballs or clicks (a metric used at the time to value an unprofitable company’s stock) and a firm that specialized in a revolutionary concept called online banner advertising. Today the mere suggestion is absurd, but at the time it may have been difficult to outperform the concentrated portfolio being suggested to fully participate in the “New Economy.”
Years later stocks and bonds were so stodgy. I was told the only reliable way to build wealth was through real estate. And with the expectation of positive returns, employing as much leverage as the bank would allow only amplified the gains. I won’t soon forget being reminded in my driveway one evening that “they aren’t making any more real estate,” presumably the simple justification for ever-escalating prices. Yet again the rationale was terribly flawed but no one could argue with the returns at the time.
Before sharing the third and final less specific anecdote, I need to volunteer that I’ve found offering financial advice to be a humbling endeavor. No one, including myself or a host of others with fancy titles and absurdly lucrative compensation packages, are infallible. Markets are inherently unpredictable. While markets can offer substantial reward to those who correctly identify a trend in the early stages, they routinely leave the smartest people in this business befuddled – and consequently poorer as well.
With that side note as an introduction, I’ll merely suggest that conversations of late concerning investor asset allocations are equally unsettling. In today’s market there is a seemingly insatiable appetite for increasingly risky investments, especially ones offering a juicy yield in a world where central bankers have collectively adopted a zero interest rate policy. I suspect similar conversations will experience renewed fervor next month as investors open June statements to see potentially lower returns, if not negative performance on many of their fixed income investments.
I was told early in my career to be particularly wary when “this time is different” is the justification for an investment strategy that deviates from the fundamental investment principles, namely diversification. Many investors are surely frustrated, perhaps vocally agitated, if not downright angry that experimental Fed policy has created such low-yielding investment alternatives in today’s market. The environment is certainly different than many current investors have experienced. However, history suggests one must exercise particular caution when the concluding strategy is to once again abandon diversification and bid up prices of in vogue investments without hesitation.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Not strategy, including diversification assures success or protects against loss.