Thinking Slow So Your Portfolio Can Grow

by: SA For FAs

Janus Henderson Investors: The benefit of diversification depends on a negative correlation that sometimes breaks down.

SA’s Jonathan Liss interviews contributor Eric Basmajian about the growth-suppressing effects of high debt.

Thought For The Day: Your “slow brain” can keep you from upending your investment plan by ill-timed securities sales.

High Debt, Low Growth

“During our conversation, Eric [Basmajian] continued coming back to the accelerating growth of 'unproductive' debt - that is debt that detracts from future economic growth - in the US, Europe, Japan and even China over the last decade. The rapid growth of such debt greatly reduces the likelihood of accelerating global economic growth in the coming decades. The bottom line: we are likely locked into a low growth, low rate landscape for the foreseeable future.” (SA Marketplace Roundtable Podcast)

Retirement Risk Management

“[Allison] Schrager says most view retirement as accumulating income, managing losses and maximizing the pile of money for retirement. However, the real goal is to smooth resources throughout your lifetime and have predictable income in retirement. This is achieved by managing a variety of factors, such as interest rate risk, and understanding how much income you want and need.” (WisdomTree)

Government A Producer Of Value?

“[Mariana Mazzucato] believes the government’s capacity to produce value has been seriously underestimated. Bank bailouts, tech development, and infrastructure investment, among other government activities, have helped spur productivity and boost the economy. But these contributions are ignored when it comes to calculating the subsequent growth that they enabled.” (CFA Institute Contributors)

Diversification And Correlation

“The negative correlation between government bonds and equities, which has largely persisted for the last 25 years, has broken down during times of shock. We saw this in 2013, when the so-called taper tantrum pressured housing markets, and again in early 2018, when there was an inflation shock. On both occasions, investors demanded higher yields on U.S. government bonds, which caused bond prices to fall, yet at the same time the equity market tumbled.” (Janus Henderson Investors)

Thought For The Day

Janus Henderson makes the important point that the benefit of the “free lunch” of diversification depends on a negative correlation that sometimes breaks down. Experience suggests that the breakdown occurs when investors least want it to, such as in bear markets where “there’s no place to hide.” And when the absence of a safe harbor is accompanied by a pervasive sense of gloom, investors will sometimes panic and upend their investment plan by ill-timed securities sales.

For that reason, Janus Henderson’s article occasions a reminder that now is an excellent time to plan for such an eventuality. Ask yourself how you will get by at a time when stocks, bonds and other assets are all performing dismally. Do you maintain a reserve of cash that can get you through an extended downturn? Or perhaps you hold some gold, which does not appear to be overpriced currently and is a rare asset enjoying a long record of reliable non-correlation with stocks? Other downside-protection strategies, such as put options, abound. You can choose any that suit you.

Behavioral economist Daniel Kahneman’s “thinking fast and slow” concept would seem to apply to this issue of preparation for a downturn. The fast brain refers to the limbic system, the seat of emotion, which responds to fear. Human survival has depended on this response to escape danger, which people instinctively sense during bear markets. The slow brain refers to the prefrontal cortex, which rationally considers the long-term consequences of alternative courses of action. Now is an excellent time to summon that slow brain to avoid potentially self-destructive behavior at a time when our fast brain’s impulsiveness refuses to be suppressed.


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