Let Polite Investors Do A Fade-Away

The ratio of 60% equities, 40% fixed income product is time honored but dated in money management. Ask Warren Buffett.

But, our major banks who run trillions in assets for their clients stick with this ratio although it failed them badly couple of years ago. In 2022, their portfolios declined 12% as both stocks and bonds sold off. 

It could happen again, as the S&P 500 is pricy and FRB easing our money rates is likely to be modest. A 4% yield on 10-year Treasuries is not exactly earth shaking or supportive of economic growth. Stock market history suggests a contropuntal trend in financial markets. When interest rates elevate, price-earnings ratios compress. We’re at 20 times forward 12 month earnings power, discounting economic growth yet to be seen but highly anticipated. 

Sector weightings going back to 1990 show technology moving up from irrelevance to approximately 20% of market valuation. Financials, mainly banks also have ranged up to 25% of market asset value. Utilities have gone nowhere and are irrelevant in their sector weighting. Volatility of stocks like Citigroup, JP Morgan and Microsoft easily can range over 5%, overnight. Even energy and industrials are no longer as weighty as 25 years ago. 

What I’m saying is there’s no investment sector where you can hide out. Trusting your assets to major banks can be a very tense situation that’s expensive to maintain. 

Note the pie chart here on asset allocation looks complex, but it’s not so. Performance rises or falls, comparatively on how its two major investment sectors fare. U.S fixed income and equities account for 80% of assets. These percentage weightings don’t change by more than a couple of percentage points. Everything else looks studious on paper but isn’t relevant to performance numbers. 

What’s more, there can be double fees involved in their investments to which they allocated assets for management. Investment in energy markets rarely goes above 5% of assets with European plays at 10% or so. Japanese stocks hang in around 5%. 

For better or worse, passive investors rise or fall on the U.S. setting.  Structurally speaking investment management by our domestic banks runs into trillions and is unlikely to grossly underinvest or overinvest in large cap stocks and high quality bonds. Investors can do this themselves and save on management fees both directly and on farmed out capital to third party managers. 

The chances of passive, inexperienced investors finding the next George Soros to invest with are near zero. Remember George shorted the pound in the face of England’s capital management who swore that it could never devalue,  but it did so just a couple of days later. George cleaned up for himself and his clients. Imagine  JP Morgan’s managers doing likewise.

Few investors seem aware that Buffett’s Berkshire Hathaway underperformed the market and its competitors for several years, 2014 to 2019. Its top 5 holdings were Apple, Bank of America, Coca-Cola, American Express and Wells Fargo.  

Buffett wasn’t trying for a moon shot like Tesla. Actually, the Wells Fargo investment came after they saw the wolf at the door from their shabby investing in the banking crisis of 2009-’10. I bought, later,  the Wells Fargo preferred stock at 5 bucks. This $25 preferred issue was considered investment grade for years. 

There’s something to be said for investing in 10-year Treasuries, particularly when they’re yielding more than the rate of inflation in the country. You’ve got safety, liquidity and some semblance of yield. Not a bank stock that can fall into single digits and needs bailing out by the U.S. Treasury and Federal Reserve Board. 

Alas! In investing, nothing lasts forever.