Tren Griffin posted A Dozen Things I’ve Learned From Julian Robertson About Investing. Number four was:
Avoid big losses. That’s the way to really make money over the years.
This has been a big point here over the years. If you can be somewhat close on the way up and avoid the full brunt of large declines you have a decent shot of outperforming over the long term and an even better chance of smoothing out your ride. This places a spotlight on the idea of true long term investing and the notion that the true purpose of planning, saving and investing is to simply have enough when you need it like when you retire.
This brings us to a post from USA Today that asks Time For A No Bond Portfolio? The article itself is not so hot but I believe the title asks a pretty good question. A better way to frame it might be is it time to rethink bond exposure not in terms of owning more equities but in terms of finding legitimate substitutes that offer closer to normal bond market returns, with similar volatility profiles but without taking interest rate risk. Without trying to predict anything, bond prices are very high and there is no way to know when, or I suppose if, prices won’t be so high and as we have seen in the occasional blips that have come along, prices on bond funds can drop very quickly.
I am not on board with eliminating bonds but rethinking the exposure is worthwhile. As we have discussed before, prices are very high and while they don’t have to go down and could even move higher, buying high is inherently risky.
We had a similar discussion in the last blog post so we don’t necessarily need to repeat the entire thing but where these are ideas that we’ve been discussing for a long time, that other people ask these questions reiterates the value of doing so ourselves for our own portfolios. Markets and investing evolve. If the market is evolving, like after 33 years of generally falling rates they might go up soon, it is might be a good idea to assess whether this evolution would impact any portion of your engagement or strategy.
If there is ever a consequence to low rates for so many years and some sort of mania comes to an end in an ugly fashion it is a good bet that like other crashes before, investors will have had no idea how much bonds (and bond funds) could fall in price, there will be plenty of advisors and fund managers with way too much exposure and learning you had too much exposure to the thing that blows, after the blow up happens is a bad place to be. As Robertson says above, avoiding big losses is very important.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.