“Yeah-Buts” Why Making Big Portfolio Bets on Low Probability Outcomes is a Bad IdeaSubmitted by Financial Planning Hawaii on June 1st, 2017
Below is the text version of the narrative in the 5/25/2017 Podcast of “J.R.’s Two Cents.”
Hello everyone. Today’s podcast is about “yeah-buts.” Yes, you heard me correctly. I said “yeah-buts.”
No, I am not referring to a new kebob restaurant. Nor am I referring to a communal living arrangement – that would be a “Kibbutz.”
Instead, a “Yeah-but” is a phrase that many invest planning professionals have come to dread because it is frequently followed by the words “…It’s different this time.” …and the context of this statement is that it is invariably the justification for making ill-advised investment decisions.
In the past month, I have had three long-time clients ask my opinion as to whether it might make sense to liquidate a significant portion of their portfolios in order to invest in gold and/or silver. The impetus for this proposed transaction in all three instances was, of course, concern over the instability of the U.S. Government, and, more specifically, concern over the potential consequences of the President’s actions.
My response, as always, is that I have no objection to allocating as much as 5-10% of one’s portfolio to precious metals for a “disaster hedge,” but placing a large bet on a volatile asset that pays you nothing to hold it and that has historically dramatically underperformed traditional investments in stocks, bonds, and real estate, doesn’t see like a great idea.
The response was, you guessed it…”Yeah but it’s different this time.” If I had a nickel for every time I have heard a client tell me that over the past 30 years, I would have, ummm… well let’s just say, I’d have a big nickel collection. I heard it when the stock market crashed in 1987, I heard it 1998 when the failure of the hedge fund Long Term Capital Management threatened to take down the U.S. economy, I heard it when the Internet Bubble burst followed in short order by 9/11, I heard it again during the 2008-2009 financial crisis.
Here’s the scoop, while history is indeed different every time and while there will be inevitable downturns in the markets, the U.S. economy has proven to be remarkably resilient. Betting against an eventual recovery has been a losing ticket 100% of the time. Why would you bet your life savings on a horse that has never won a race?
And that’s my two cents for the day.
The views expressed in this piece represent the opinions of the author/speaker and should not be interpreted as specific investment guidance.
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