The steep losses experienced by investors over the last year and a half have led to many changes in investor behavior. The personal savings rate is ticking up, some measure of frugality has returned to the consumer, and the asset allocation framework in place for many investors is being seriously questioned. Among the changes has been a dramatic reduction in appetite for risk among investors. In fact, 56% of Baby Boomers have now concluded that the stock market is too risky for people their age (San Francisco Business Times, 2/13/09).
This change in appetite for risk is manifested in the floods of money pouring into bond funds, as can be seen in the table below (Investment News, 5/4/09):
|
Morningstar Category |
1Q’09 Net Flows |
| 1. Intermediate-term bond | $24,076 |
| 2. Precious metals | 14,991 |
| 3. High-yield bond | 7,673 |
| 4. Natural resources | 6,765 |
| 5. Short-term bond | 6,210 |
| 6. Municipal national short | 5,214 |
| 7. Long-term bond | 4,647 |
| 8. Inflation-protected bond | 4,551 |
| 9. Municipal national intermediate | 3,423 |
| 10. Intermediate government | 3,395 |
As investors throw their hands up in despair, torn between putting the bulk of their assets in bonds or embarking on an experiment with day-trading financial stocks, I suggest presenting them with the following data. Right now, you may be thinking that you are about to read some fascinating new piece of data. Fascinating is probably not the adjective for life expectancy-data, but perhaps nothing is more important to consider when deciding what changes investors should make right now. The following data is taken from the Centers for Disease Control and Prevention, updated through 2005.
U.S. Life expectancy at birth
|
Men |
75.2 years |
|
Women |
80.4 |
U.S. Life expectancy at age 65
|
Men |
82.2 years |
|
Women |
85.0 |
U.S Life expectancy at age 75
|
Men |
85.8 years |
|
Women |
87.8 |
Emotions are running extremely high right now, which means that investors are very susceptible to making poor investment decisions. Any radical changes in framework for asset allocation should be done with the long-term in mind, especially now. Keep in mind that life expectancy means that one-half of the sample will live shorter than the expectancy, and one-half of the sample will live longer. After all, it is very likely that many of your clients will live well in to their eighties or nineties. With that in mind, a diversified bond portfolio doesn’t make a whole lot of sense; nor does it make much sense to embark on some unproven trading strategy.
When empirical evidence is used, relative strength and tactical asset allocation appear in a very favorable light.
