Modern Portfolio Query
Investigating the quandary of storing value
Think back to the days of your grandparents and ask yourself how they saved and invested. The line that divided the mechanics of saving from investing was crisply delineated, whereas it is barely visible today. About two generations ago, a household could avoid the stock market entirely and rely on demand deposit accounts, or even cash savings to build wealth. In fact, some of the old timers may even recall stories of their parents stacking cash in the walls of their house because they didn’t even trust demand deposit accounts. One quick glance at a standard investment account agreement today illustrates just how far we’ve come from this sentiment.
Except for how we put dinner on the table, First World lives have become much more complex over the decades. Arguably, one of the largest line items on this growing list of complexities is how we store productive energy for the future when we need it. After all, we are living longer and storing cash in your walls is no longer a viable option. Financial anxiety has been around for as long as poverty itself, but today it impacts even the financially sure footed. How we got to this point in modern society is a great topic for another newsletter. Suffice it to say that most of us have been coaxed further into the risk spectrum to protect our wealth from the deteriorating effects of inflation. Savers have all been forced into a tough decision: become comfortable with investing with all its ups and downs, or swim upstream by allocating an unreasonable level of your cash flow into savings with a negative real return.
Candidly, this dilemma is why my career even exists. My grandparents did not have a financial advisor. In fact, I’m not even certain they could hire one if they wanted to. It would have been just as efficient for them to have hired a social media consultant. Saving was easy. You went to the bank and spoke with ‘Earl’ the manager. Nowadays, we have things like the Modern Portfolio Theory, IRAs, hedge funds, and crypto currency. People come to me for help even before they go to college, which surprises me on several different levels. What surprises me more is how many people try to manage their financial health on their own. While this statement may seem self-serving, financial complexity is our current reality.
So, what do we do? Let’s start with the advice most of us have been given and take as investing gospel: diversify your portfolio and put an increasingly larger portion of your money in bonds as you get older (i.e. Modern Portfolio Theory or MPT). However, 2022 proved that “MPT” stands for “Mortal Portfolio Theory” as bonds faired worse than the Dow Jones Industrial Average, a collection of only 12 stocks. Furthermore, bonds have chronically underperformed inflation as global central banks engaged in quantitative easing to keep rates artificially low for over a decade. So much for that theory.
Let’s consider another idea: swinging for the fences and make big bets on hot ideas. Good luck with that. The Vegas casino owners will have an open invitation for you with ‘all you can eat’ crab legs. If I had a satoshi (0. 00000001 of a Bitcoin) for every person that asked my opinion on an “inside track” investment with an asymmetric information edge, I’d have a lot of satoshis. Coincidently, my satoshis would be worth half of their value compared to this time last year. Don’t gamble out of desperation.
Then you may wonder if there’s any truth behind the day trader savant that spends eight hours a week tweaking a fancy trading system and the rest sipping expensive lattes at the local artisanal coffee shop. Nope, trading based on technical data is a massive waste of time and you will likely get crushed by the algorithmic systems. Need proof? Go find out how Robinhood makes money and we can talk more. Most traders that can prove a successful track record have done so purely by luck. Even Vegas has its winners from time to time.
There are solutions that work but I would not be so bold as to recommend something specific for a general audience. We would all do well to tune out the noise, pick investments that produce attractive cash flows, and buy them at a reasonable price. Think G.A.R.P. (growth at a reasonable price). Next, revisit your investment selections periodically to prune and rebalance. By “prune”, I mean liquidating positions that are ripe for harvest to fund a liquidity need. “Rebalance” means selling an investment that has outperformed for one that is more reasonably priced. Of course, there’s the matter of what to buy and how many investments you should make, but these are case specific. If you need additional guidance beyond this, then you should consult with an advisor prior to trying a DIY method. That is, unless you are immune to financial anxiety.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transactions costs and does not assure a profit or protect against a loss. All investing involves risk including loss of principal. No strategy assures success of protects against loss.