Saturday, November 24, 2007

Hussman's view: white water

John Hussman is an American fund manager and takes pains to show that his judgments are carefully weighed; so his warnings are unlikely to be Chicken Little squawks:

In July, he looked at historical "awful times to invest", and found that July 2007 fits the same criteria. The 10-year outlook for the US investor is not attractive:

Presently, the probable total return on the S&P 500 over the coming decade ranges between -4% and 5% annually, with the most likely outcome in the low single digits.

More recently (November 12), he's considered many indicators and concluded:

I expect that a U.S. economic recession is immediately ahead.

(highlights mine)

This week (November 19), he remarks that much of the money apparently being pumped into the economic system is simply a rollover of earlier loans coming to maturity: the net increase is very small compared to the total oustanding, and so the rate of monetary inflation is slowing. He quotes Jan Hatzius of Goldman Sachs as saying (in effect) that if souring subprime debt hits financial institutions directly, they are likely to call in loans in order to preserve the ratio between their lending and their reserves, which in turn will slow the economy further.

What should investors do? He quotes the view of famous investment manager Jack Bogle:

"I would say do nothing – ride it out, if your asset allocation is right. The bonds in your portfolio and the long-term growth of businesses will bail you out. Unfortunately 80% of the market is speculators now, not investors. What would I say to the speculator? I would say I'm nervous and I might even say get out.”

So I guess it's the usual couple of points: are you in for the long term, or trying to make a quick killing? And where are you on the 25:75 Benjamin Graham bond-equity balance?

5 comments:

Anonymous said...

Forgive me for raising the point again, but I'm "in cash" while my occupational pension scheme is "in equities". But should I look upon the scheme as part of my portfolio? My pension won't go up if equities rise, but it might vanish if they fall too far. I do read the financial pages, but this is a point that no-one ever seems to write about.

Sackerson said...

Hello DM:

Obviously I can't advise personally, but I can make some general comments. Much depends on whether you are in a group personal pension where each person's investment is separately identified, or alternatively in a final-salary-related occupational pension scheme.

The latter will obviously be a long-term (indefinite) arrangement and can therefore take quite a different view about its investment portfolio. It's not looking to sell everything when one person retires - as some retire, others are joining and making new contributions. The longer the time horizon, the more you can weight your investment towards equities, rather than bonds. See Jack Bogle's comment in the post attached to this - it's a question of long-term investors v. short-term speculators.

For members of such occupational schemes, it's more useful to get the pension manager's view of the scheme's solvency - in other words, they have to predict the future contributions to, growth of, and demands on the fund (from retirees), and work out whether the kitty is likely to pay for it all, given reasonable assumptions. It should be possible to get a statement from the trustees, and in any case it's likely that the pension member receives such a report annually with their statement of accrued and predicted pension benefits.

Unless the scheme is simply one underwritten by public money, like the one for teachers, in which case normal considerations re investment don't apply.

But if you are in the first kind, i.e. each person has their own investment pot, then you have the chance to make your own decisions about how it's invested, and should seek personal financial advice.

Best wishes.

Anonymous said...

Thank you for that. I'm not really seeking advice, more expressing my frustration at all the writing about what Joe Bloggs should do with his portfolio, but which never extends to an intelligent discussion of what his portfolio really consists of. I've got a defined benefit occupational pension, which I'm going to draw very soon, on early retirement. Its terms are pretty good - it should look after us well, right up to the moment of insolvency! (Unlikely, but it has admitted that it is now mulling over what to do to improve its ratio of assets to liabilities). My inclination is to decide that once I've reached the scheme's "normal retirement age", we will probably have to depend on the government's rescue system, if the scheme should let us down; before that age, I'll have to defend our position myself. I have a modest personal pension fund to do that with. It's a big deal for us, not least because my wife's occupational pension is with the same scheme. Still, we can always raise some cash by selling the cheque that Gordon Brown bounced on me when we were young. Do you suppose it's worth much?

Sackerson said...

In my view, your portfolio consists of eveything you own. So for most people, one of the biggest bits (quite often the biggest by far) is their house.

Broadly speaking, you can look at your assets under four categories:

1. Bricks and mortar
2. Cash, plus other money you're very confident you'll get back (e.g. National Savings)
3. Other people's borrowings (i.e. bonds)
4. Other people's businesses (i.e. equities)

For the more adventurous, there's also commodities and other speculations (futures and options etc).

Work out how much you have in each and maybe you'll find you've been worrying about the wrong thing!

To value your pension, look at the total income per annum and multiply it by 20 or 25, which is what it would cost to buy an equivalent inflation-proofed annuity on the open market.

By the way, people who have retired have first call on the pension fund's assets, ahead of people still working and contributing. It's the young who need to be concerned.

Within an investment portfolio, there's a balance to be struck between high-quality bonds and shares in well-run companies. Benjamin Graham (Warren Buffett's mentor) suggests that for the passive investor, it could be 50:50, veering to 25:75 in favour of bonds if you're cautious or nervous, and 75:25 if you're feeling bolder.

Anonymous said...

"By the way, people who have retired have first call on the pension fund's assets": yup, that's one reason that I'm retiring. :))
Just a few weeks more.

Thanks again.