The initial response of clients is usually to be shocked into inaction during which phase the manager has time to reposition both portfolio and arguments to retain the business. This is not so bad in bear markets because important bear markets tend to be short and brutal. The real trouble with asset allocation, though, is in the remaining times when asset prices move far away from fair value. It would certainly help in these periods if the manager could also add value in the implementation, from the effective selection of countries, sectors, industries, and individual securities as well as major asset classes. If you wanted to be unfriendly you could say that asset allocation in this phase is unlikely to be very important. "Small" because the opportunities themselves are small. With reasonable skill at evaluating assets the valuation-based allocator can expect to survive these phases intact with some small outperformance. The correct response is to make modest bets on those assets that measure as being cheaper and hope that the measurements are correct.
Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both - and the price we pay for having this market go higher and higher is a lower 10-year return from the peak." 1
"The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. It is a privilege to ride through a market like this one more time. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. Make no mistake - for the majority of investors today, this could very well be the most important event of your investing lives.
Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.īut this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000. The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble.
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