Here’s what’s coming down the pike, high net worth investors, and don’t say you haven’t been warned. The powers that be in Wall Street’s massive asset management units have figured out a workaround for the problem of investors no longer willing to pay up for stock or bond picking. It’s called “Alternatives” and a major push is underway to communicate to you that a diversified portfolio, the kind that doesn’t cost a lot, is no longer “enough.”
Investment News has the latest form of this argument:
In the 1970s it made sense for investors to invest almost solely in stocks for risk and bonds for safety. But those days are long gone, according to Theodore Enders, senior portfolio strategist at Goldman Sachs Asset Management.
“It’s typical and even understandable to think about an investor’s risk tolerance based on stock and bond allocations, but that’s how they did things back in the 1970s, when things were a lot different than they are today,” Mr. Enders said Monday during a presentation on alternative investments at the Investment Management Consultants Association conference in San Diego.
Referencing the bygone days of fixed-income investing, when the market was largely made up of high-quality corporate bonds, Mr. Enders said that “investors still hear the word bonds and think of safety.”
“These days, you own things in your portfolio for some type of return, and that includes alternatives,” he added.
…and that’s when they wheel out the scale replica of the timeshare you’re about to buy. Just kidding. Barely. By the way, those references to the 70’s are being used because that’s the sort of grinding, long-lasting, miserable bear market that their target audience – rich boomers – remember best. It was their formative experience as young adults joining the workforce and watching inflation / high unemployment nearly tear the country apart. It’s a great touchstone to reference when you’re selling anything safe haven-y.
To be clear, I don’t have a strong opinion – positive or negative – on the use of alternatives.
On the one hand, conceptually speaking a portfolio should have aspects that offset each other. If delivered at a low cost and with reasonable expectations, an alt can accomplish a given mandate quite nicely. On the other hand, low cost isn’t exactly the raison d’etre of why this products are being pushed now. In fact, I would argue, it’s the opposite. Wall Street wants to fight Vanguard for some of their share back and they’re going to do it by selling pie-in-the-sky ideas about getting all of the upside, none of the downside. They’ll sell manager pedigree, exclusivity and sophistication, which is a house specialty.
The salesmen will answer today’s zeitgeist of low-cost, low maintenance portfolios not with something similar, but with something that is the exact opposite. And the marketing message will be that simple isn’t good enough, because conditions a, b and c are now so “different.” We heard much the same kind of thing in the wake of 2008 when they told us that it was a new era and buy-and-hold wasn’t ever going to work anymore either. Which, of course, promptly led to the greatest buy-and-hold bull market of all time.
So take these pronouncements with a grain of salt. No one knows whether or not stock/bond portfolios will be “good enough” anymore. We only know that they always have been, over a reasonable period of time, since the beginning of recorded market history.