Down the Money Manager Rabbit Hole

What is the proper mix of investments? If you ask the market timers, it’s whatever is out of favor. Buy what nobody wants. Sell what others can’t buy fast enough.

Sounds logical, but in practice very hard to do. For instance, plenty of pundits were warning of a bond debacle a year or so ago. Bonds rose instead. Likewise, it would have been easy at any time in the past few years to find voices both for (and against) stocks and for (and against) commodities such as gold.

Nothing about this will change soon. The most instructive perspective on any asset type is the rear-view mirror, without a doubt. Stocks were great from the mid-1980s on. If you bought in early enough and never sold, gold was a winner. Bonds had good periods, too.

Retail investors, however, run terrible risks trying to zig when the markets zag. The research shows that we nearly always get it wrong when we try to outguess the market, with disastrous investment results.

Of course, somebody gets it right. Often, getting into an unfavored asset class at the correct moment and then capitalizing on the eventual reversal leads to great things, aside from instant wealth.

Your reputation as a soothsayer soars. If you’re in the money management business, investors flock to your fund. If you’re in the media business, viewership or readership soars, too, another kind of capital. You’re the toast of the town.

Extremely few money managers, however, are able to convert instant fame into long-term outperformance. The smarter ones run money while they can and then retire quietly, fame intact. They write a few books and make some expensive dinner speeches. Soon you don’t hear about them anymore.

Barron’s recently did a study of the top 40 wealth managers in the country. The result of their collective wisdom? It might be time to edge slightly out of bonds in favor of stocks.

You might consider this insight less than startling. Understandably, money managers for the wealthy and for institutions and pension funds have a different mission from retirement investors.

For one, they’re already rich. Defense is a big part of their money management equation. For whatever reason, Barron’s found that the managers are slightly less worried about risk from declining stock values (into the fifth year of a bull market) and more worried about rising interest rates (despite Federal Reserve assurances that low rates are here to stay).

Right? Wrong? Trying to outguess the big money runners is a bit like trying to outguess the market itself: Good luck and don’t get burned.

Money managers vs. market return

More important for those building a retirement — and for retirees trying to grow and defend what they have — is to be agnostic about market direction.

That means owning a well-designed portfolio that holds a variety of asset classes in specific weightings matched to your risk. Retirement investors should own foreign and domestic stocks and bonds of various types, as well as hard assets, commodities and real estate, then let the market price them over time.

Research shows that disciplined rebalancing — selling gainers to reinvest in temporary “losers” — provides a steady, risk-adjusted return over time, one that will compound your savings into real wealth.