Investors Need to Know: Portfolios Are Set to Fail

The comments below are an edited and abridged synopsis of an article by Dominic McCormick

Many portfolios are fundamentally structured to fail investors, potentially quite badly given what we know about investment markets now.

Investors Need to Know: Portfolios Are Set to Fail | BullionBuzz
Money bag with the word Portfolio Investment and a down arrow near the bank. The outflow of deposits. The fall of the bank’s solvency. Bankruptcy. Loss of investment. Panic investors

There are only two responses: Totally change investment approaches and be prepared to become more contrarian, value-based and defensive (for now at least); or stick to conventional portfolios but do a better job of managing expectations as to future outcomes, and potentially changing investor behaviour in response.

McCormick’s inclination is the first response, but given the challenges it involves, and that it is the opposite of the direction many advisors/investors have been moving in recent years, it seems that few are suited to the  contrarian portfolio approach this involves.

The current environment pressures investors to avoid areas that may offer better long-term return prospects (value stocks, emerging markets, out-of-favour markets), and instead invest in the more expensive growth and defensive areas that dominate indices and ETFs, but which are vulnerable to derating and poor returns.

That leaves the second response: maintaining the current approach to portfolios, perhaps with some small contrarian/defensive tilts, but focusing on doing a better job of managing what such portfolios will likely deliver.

This is not about telling investors to expect lower returns, or that markets will be more volatile in the future. Investors either don’t believe it or don’t understand what it means; after 10 consecutive years of positive balanced superannuation returns, this attitude is not surprising. However, the future may be brutal. The low/negative returns that loom may disappoint, rupture retirement plans and cause serious financial stress.

McCormick says that, after being out of favour for years, investors are again embracing gold as a component in a portfolio. Gold ETFs have seen strong growth over the last year. He suspects that this renewed popularity may be because gold has performed well recently rather than a clear rethinking of why, and how, to include gold as a component in a robust portfolio in the current environment.

McCormick discusses what investors need to know and closes with a quote from American football star Jim McMahon: “Yes, risk-taking is inherently failure prone, otherwise it would be called sure-thing-taking.”

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