I’ve been writing a lot about elevated valuations for equities and the absolutely horrid risk/reward in almost all bonds. I’ve kept the same graphics at the top of this email for the last month as I want to emphasize the importance. We’ve also covered inflation, which is rearing its ugly head, with the September PPI clocking in at a staggering 8.6%. If the S&P 500 and traditional 60/40 investment portfolios generate flat or negative returns over the next decade, historians would look at current market fundamentals and say, that seemed like a pretty good probability based on the starting point metrics in 2021.
In markets where you don’t get the huge tailwinds of lower interest rates and rising valuations, I believe stock selection and alternative strategies such as what we do with options will be more important than ever. These tools allow us to manufacture returns precisely at the time when most advisors are using the most cookie-cutter approaches of simply buying indexes or Target portfolios at these very elevated valuation levels and the likely low future returns they are likely to generate. In 2010, after a lost decade in stocks, people were desperate for alternatives and many missed out on a good portion of the great returns over the following decade. Hindsight is always 20/20 and recency bias is one of the most common mistakes investors make, thinking the future will be just like the recent past.
I found a great article this morning that covers what types of asset allocation you’d need to generate a 7.5% return over the last 40 years. You’ll see that the risk profiles had to keep getting ratcheted higher and higher, to the point now where investors are taking more risk than they ever have before. Our opportunity is that we are doing something very different than just about everybody, at a time of robo-advisors and group-think, giving us the opportunity to really excel into the future. I’m going to let the article do the talking and I’d highly suggest giving it a read, as it was very well done: https://compoundadvisors.com/2021/reaching-for-returns