How To Benefit From The Investing Conventional Wisdom (It’s Right This Time)


It’s fashionable to sneer at the conventional wisdom. Didn’t it tell us that the Iraq War would be a breeze? That Donald Trump would never be elected president? And in the financial realm, that damage from the unwinding of the housing craze in 2007 could be “contained”?

Financial advisors tend to be custodians of one sort of conventional wisdom—tilted toward whatever seems safest. And that’s as it should be. Woe betide you in 1989 if you loaded up on junk bonds, or in 1999 on dot-com stocks or in 2007 on mortgage-backed securities. So it pays to listen to advisors’ views on investing.

A good window into their collective thinking is the Financial Planning Association’s new 2018 Trends in Investing Survey. The FPA, a prominent organization for planners, has been polling the advisor community since 2006. Often, this thinking doesn’t take any radical shifts, just moves incrementally.

This year, they say:

Exchange-traded funds and passive investing are preferred. The vast bulk of ETFs mirror indexes. And this year, 87% of advisors favor using ETFs, compared to 72% in 2010 and 44% in 2008.

Indeed, passive management has been beating actively managed for some time. Yes, actives have shown some improvement. Last year, amid a raging bull market, active managers did better than before, with 44% besting passive funds, versus 26% the year before. That still leave passive ahead, and the trend is not on active management’s side.

That’s not to say that advisors call for the wholesale abandonment of actively managed mutual funds and other such vehicles. A large majority favors a mix, which makes sense. A hardy squad of active managers does have long-term records of beating benchmark indexes. If you can find these heroes, then good for you.

Once bearish times re-appear, though, you at least know that, with passive investments, you can’t do worse than the market

The 60-40 stock-bond portfolio remains the best choice. A solid 51% are somewhat or very confident of this traditional asset allocation. Just 5% are doubtful that such a portfolio will continue to do well.

The rationale for 60-40 has long been that the relative stability and negative correlation of bonds, in relation to more volatile stocks, will buffer investors during a bear market in equities.

This combination overweights stocks a bit, because shares historically far outpace bonds as a wealth grower. And the number of up years for stocks towers over the down years. That’s why champions of stocks, such as Jeremy Siegel of Penn’s Wharton School, tout them as the best asset class to be in for the long-term.

To be sure, there’s an argument that stocks and bonds won’t always move in opposite directions. Right now, after a correction this winter, stocks are inching fitfully upward, and bonds are in negative territory. The same forces are at work on both: Rising interest rates and a brewing trade war are chief among them.

Nevertheless, high-quality corporate bonds and US Treasury obligations held up in the 2008 financial crisis, when stocks took a pasting.

Cryptocurrencies are very suspect. For good reason. Their volatility is head-spinning.  As the year began, bitcoin, the primary digital denomination, was at $19,176, and since has tumbled to $8,173, down more than half in seven months.

Advisors report a lot of client interest in these currencies, with 53% saying they’ve gotten queries. A mere 2% of advisors say these things are a viable investment, and 57% say to stay clear. They sound an awful lot like the faddish investments of yore that brought so many people so much grief.

Anyway, this is the voice of conventional wisdom, summer 2018 version. Paying it heed would be, if nothing else, prudent.

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