Investing Today vs. the 1980's and 1990's

1. Absolute vs. Relative Return - in the bull market decades, investors became index trackers. If they used an active money manager instead of an index fund, that manager was considered dirt if they did not consistently exceed the return of the relevant index. People who considered a return of 25% from an active manager when the index made 30% a "failure" were missing an important point: 25% return is a lot of money! Yet the investor was not focused on the "absolute return" of 25%, but rather on that figure's shortfall "relative to" the index. This has also led to many misconceptions about indexing as a strategy.

2. Secular Bear Market Mentality - the awareness of market cycles is more prevalent than in the past. However, many investors are still stuck in the past, believing that investing in stocks is some kind of automatic wealth-production system. It's hard for me to judge whether the advisory community is getting the word out to their clients that the secular trend may indeed have changed (or more importantly, that secular patterns exist at all). Based on investor behavior, however, I suspect that it is being downplayed. After all, secular bear markets are an enemy of Wall Street. Trading activity drops as investor fatigue sets in, clients get impatient and job cuts accelerate. You can understand why commercials for financial firms don't talk much about their strategies for tough speculative styles.

3. Inflation/rising Interest Rates? - Interest rates generally fell from 1980-2003. As a result, bond investments posted their best returns in history. Even if rates continue to fall over the next decade, they are now starting from a much lower rate level. That means that the bond gains many have seen as a birthright for over two decades will not be matched. It changes the whole way we look at bond investing.

4. U.S. Deficits (Government and Consumer) - the hefty tab run up by the U.S. government over the years is a cause for some concern, and the media covers this regularly. The plight of the consumer is potentially much worse. Credit card debt has become the currency of choice for many families. I marvel at how long people have stretched the proverbial rubber band of borrowed money. If the band breaks, this could have a ripple effect on the financial system. Again, I'm not trying to be gloomy or make precise predictions; I'm increasing your awareness of the potential for an environment change. It would be an environment change that would be very unfamiliar to most of today's investors. Rather than downplay it, advisors should be stirring up the conversation about it, and including their clients.

5. Global Competitiveness - very simply, it's a global marketplace. Just look at communication systems, most prominently the Internet. What took days to become world news now takes seconds. That necessarily changes the way financial markets work.

6. The Retirement Boom - Boomers have impacted our world at every phase of their lives. Now they are prepping for or entering the retirement phase. That has numerous implications for investing, but what they are is simply conjecture at this point.

7. More styles to choose from - my friends who read this book will know immediately that I am NOT talking about clothes or cars. I'm referring to Wall Street's ingenuity. Here is where I truly applaud financial firms, especially the larger ones. As time has gone by, they have found ways for investors to take a stand in their portfolio on nearly any investment style, sector or theme. Now, sometimes they charge an arm and a leg for it, and sometimes they sell it to clients as something beyond what it is. But for those of us that keep a close eye on the latest and greatest strategies and products, the freedom of choice that has developed is outstanding for investors. That is, as long as their advisors are looking out for the clients' best interests and not just their own.

8. Terrorism Risk - without going into too much detail, one can no longer ignore this in today's environment. It is something that did not exist in a similar form in the glory days of the 1980's and 1990's.

We believe that the way to invest in a changed world is to approach asset allocation and portfolio design in a different, more flexible way. Our strategies are a reflection of that.