The Scary Thing a Top Banker Told Us This Week
Andy Snyder|October 14, 2021
We were invited to join an economic discussion with the big shots at a local bank this week.
It reminded us why we would never let them handle our money.
There wasn’t a lick of independent thought to be found.
Still, we bit our tongue and nodded along. The information – almost all of it came straight from the Fed – wasn’t wrong. But the interpretation sure was.
Near the end of the opening remarks, the speaker brought up a chart that looked just like this one…
The presenter’s conclusion was just what we’d expect from a fella who has been trained in the classical investing model and makes his living selling a dream of mediocrity.
Take a look at those gray boxes in the chart labeled “AA.” They represent a “properly allocated” portfolio – at least according to the textbooks.
It consists of…
- 15% large cap stocks
- 15% international stocks
- 10% small cap stocks
- 10% emerging market stocks
- 10% REITs
- 40% high-grade bonds.
The first major issue with this is rather obvious. The model is grossly overweight in an asset class that has been losing yield for nearly 40 years… bonds.
And yet leagues of finance pros lean on bonds because of their “safety and reliability”… and their performance 60 years ago.
Monkey in the Middle
This model will “safely and reliably” ensure that anybody who follows it never moves out of the financially hobbled middle class.
Proving this notion is the location of all the gray boxes in the chart. It is mathematically certain that the boxes labeled “AA” will never be at the top of the table. Though, to be fair, they’ll never be at the bottom of it, either.
Using this model, an investor is forced to stay smack dab in the middle… right in the heart of mediocrity.
With some solid spending habits, good saving discipline and a bit of good fortune from above, it’s a fine recipe for a modest retirement.
But endure a health emergency… a job loss… a divorce… or any of life’s other not-so-fortunate obstacles… and suddenly mediocrity slips to something less.
“So what are we to do?” you’re surely asking. “Are you telling us we need to start gambling and trying to pick the top asset class each year?”
Nope. Not at all.
That won’t work, either.
Look at the table again. The best asset class one year tends to be the worst the next. Just look at emerging markets (labeled EM) and REITs on the table.
Trying to pick the best from one year to the next would be trouble.
Instead, we must use a strategy that greatly shifts the odds in our favor. Instead of homogenizing everything into a soup that tastes like nothing, we tighten up our time frame and create an asset allocation model that fits the current economic environment.
Follow the Numbers
We’ve written about it before. The logic behind the traditional allocation model was first derived in the 1950s – long before things like options, ETFs and, of course, crypto came along.
Back then, even gold’s fate was in flux.
That’s why we rejiggered things a bit. We created the Modern Asset Portfolio. It’s not based on a one-size-fits-all-markets idea that will supposedly be good for ages.
That’s hogwash.
Instead, our model uses the economics of the day to ensure our portfolio lies as close to the top of that table as possible.
It does so using – oh boy – interest rates. By simply adding a key variable to the equation, we can shun the worst asset classes and overweight the best ones.
In our current case – with interest rates near record lows – we have zero allocation to bonds and an overweight stance (10%) on crypto.
Indeed… it’s been a great year.
Will we always avoid bonds and their near-zero yields? Will we always go hog-wild on crypto?
No. Absolutely not. As rates climb, our Manward Letter readers know exactly where our portfolio will head next.
It’s silly – or flat-out lazy – for anybody to stand on a stage and point to one “timeless” model… especially a model that doesn’t account for the many tools available to today’s investors.
We understand why bankers do what they do. It’s all part of the business model.
But as a consumer and an investor, you’ve got choices.
If you make the right ones, you can avoid mediocrity.
In fact… you must.
Andy Snyder
Andy Snyder is an American author, investor and serial entrepreneur. He cut his teeth at an esteemed financial firm with nearly $100 billion in assets under management. Andy and his ideas have been featured on Fox News, on countless radio stations, and in numerous print and online outlets. He’s been a keynote speaker and panelist at events all over the world, from four-star ballrooms to Capitol hearing rooms.
