The traditional Single-Asset Investing Strategy emphasizes purchasing one item at a time and holding it for a long time. In the 1980s, this strategy was effective, primarily because interest rates were high and assets were not correlated. But in 2016, the financial markets are displaying some markedly non-traditional features.
Low Interest Rates
In the 1980s, Federal Reserve Chairman Paul Volcker raised interest rates to reduce speculation. Thereafter, investors could purchase a certificate of deposit or simply open a savings account and earn healthy returns.
But after the 2008 sub-prime mortgage crisis, Federal Reserve Chairman Ben Bernanke did the opposite. He lowered interest rates to create “ZIRP” and “Quantitative Easing.” Did Bernanke want to increase speculation? This policy has created historically low bank savings rates.
1. Stock & Bond Correlation
Traditionally, the “Rule of 100” could be used to diversify your portfolio, simply subtract your age from 100, and that should be your equities portfolio distribution. Just add bonds and your portfolio was balanced because, historically, stocks and bonds were not correlated.
But in 2016, some experts see a correlation between stocks and bonds. Advisors will state that passive diversification is not a sufficient method of risk management in this environment. Customized hybrid financial instruments, such as collateralized loan obligations (CLOs), have blurred the lines between traditional asset classes.
2. Low Returns
The Federal Reserve is using ZIRP to 1. Protect the housing market and 2. Provide cheap capital. When the Fed bailed out the banks in 2008, it purchased the non-performing mortgage-backed securities (MBS) therefrom. If interest rates were allowed to rise dramatically, more homeowners would default and the Fed’s balance sheet would be further impaired.
In many ways, the individual is competing with the Fed as a capital source. Of course, the Fed will win the battle every time by offering ZIRP capital. Due to this new reality, investors might need to expand their attention beyond “stock-picking.”
3. Risk Tolerance
Asset allocation is explained adeptly by Mitch Tuchman Forbes article as properly investing your limited funds to gain the highest returns. Businessman Jim Rogers earned such astronomical returns at the Quantum Fund by optimizing his return on investment (ROI).
Modern technology, hybrid financial instruments, and low interest rates are the perfect storm for a multi-asset strategy, and while the strategy is more complex, it remains rooted in the fundamentals of asset allocation. When you have limited funds, you must continually adjust the allocation to respond to market changes, so this allows you to remain the “immovable force” that remains profitable in any market.