“With all the volatility in the market these days, and so much uncertainty, should we approach investing differently?”
It was a question posed by a client, unsettled by current political and economic events, and concerned that his planned path to retirement might not be as smooth as he’d hoped. Last fall’s drop in the US and overseas markets followed by choppy returns over the winter had left him worried. Should he approach investing differently?
Investing has certainly changed over his lifetime, so it was a reasonable question.
Fifty years ago, you could invest in the 10 largest companies in the US, and hold a portfolio representing nearly 80% of the world’s market capitalization. Add some Treasury bonds and cash, and you had a balanced portfolio you could ignore. Today, US companies make up about 50% of the global market, while other developed countries represent 40% of tradable stocks. Countries like China, Korea, Taiwan, India and South Africa dominate the remaining 10% of the world represented by emerging markets. Stick to the old way of diversifying and you miss out on half of the world’s investment opportunities today.
The trading floor of the New York Stock Exchange was once crowded with men barking out trades. The Exchange is still used as a television backdrop for market reporting, but it’s essentially a computerized trading room, with humans present only to monitor the computers and step in if anything goes wrong. If you ever felt you could buy and sell something for a quick turnaround profit before, you might want to reconsider.
Years ago, we waited for the evening news or the morning newspaper to tell us what was happening in the world around us. Today, we learn about a car bomb in the Turkish capital of Ankara on our smart phones within minutes of the explosion. Information about a new product or a drop in a company’s profit outlook is quickly available to everyone in the same way, so getting a jump on the news is difficult.
The investment universe is more diverse than ever before, with high speed trades placed in fractions of a second, based on information that is available to everyone in an instant.
The ability to out-smart and out-trade other investors is questionable even for organizations who have virtually unlimited resources due to their size. Last year was a bad one for hedge funds, and many are still experiencing double-digit losses this year as well. And for the privilege of experiencing these losses, their clients paid higher fees as well. So investors are waking up and making changes.
The California Public Employees’ Retirement System (Calpers) is the largest U.S. public pension fund, and one of the early investors in hedge funds and other alternative investments. Last year they dropped $4 billion of their investment in hedge funds, and cut back on their higher cost, active managers. New York, Pennsylvania and New Jersey pension fund managers indicated they were conducting their own reviews to simplify their strategies and cut costs.
Last year, individual investors moved billions of dollars from active investment managers who profess to handpick winning stocks and shifted into low cost index funds. More people are recognizing cost has a significant impact on their wealth, and that very few investment managers can out trade or outsmart high annual fees or expenses.
TAAG’s investment philosophy, and our daily implementation of it, are designed to help our clients capitalize on the current investment environment and it’s challenges. We believe in global diversification, delivered at a lower cost, with the added disciplines of rebalancing and financial planning for each individual client. It’s a way of investing that many are just now recognizing as ‘investing differently.’