McDolan
LONDON (Reuters) – Worried about a hawkish Federal Reserve, overvalued stocks, crumbling debt, volatile currencies, a pending election or hostile geopolitics? Relax and don’t think too much.
For those with a long-term savings horizon, the temptation to overtrade and pay too much for complex investment management, esoteric financial products and expensive hedging may not be worth it.
While the debate over the merits of active or passive investing is never-ending and people are always looking for the “alpha” to beat the index, the most reliable, cheapest and least taxed strategies over the long term may be two diversified A simple portfolio of passive funds.
One should track top global stocks and equivalent corporate bonds, both of which are hedged in their national currencies.
Then go fishing.
Jan Loeys and Alexander Wise, long-term investment strategists at J.P. Morgan, think so too, calling their favorite approach “KISS,” or “Keep It Simple, Stupid,” after the long-standing design principle of avoiding complexity when possible.
“Our main argument is not that KISS investing is absolutely optimal and that doing anything else would be irrational or a bad investment,” Loeys and Wise told clients this week.
“Our view is that we believe you can achieve most, if not all, of your financial goals by following our KISS approach,” they said. “Adding more products or complexity in our minds creates a steady Additional income from decline.”
The J.P. Morgan team acknowledges that short-term trading and market timing by hedge funds or other active participants are critical to market efficiency and liquidity and can result in significant losses. But before most investors have discovered the market pricing anomalies, arbitrage has eliminated the market pricing anomalies so quickly, so most markets no longer have much energy.
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“The life cycle of any new ‘alpha’ idea is getting shorter and shorter,” they said.
But their main rationale for keeping it simple for long-term savers largely has nothing to do with the fact that any outperformance does not appear to compensate for the risk of fund manager selection, higher fees, transaction taxes and the cost of monitoring more complex or Time on complicated money.
What’s more, they argue that the fewer assets in a portfolio, the easier it is to judge its risk.
kiss and tell
For example, Loeys and Wise looked at whether 24 years of monthly hedge fund returns exceeded what a simple global stock/bond portfolio could deliver, using weights to give the same return volatility on a rolling basis.
These have had a mixed record over the past 10 years and have rarely exceeded 10% over the past 20 years, although they have maintained positive momentum post-pandemic. These are mostly complex strategies that often lack transparency, have high fees and involve significant management risk.
According to HFR Hedge Fund Research, the HFRI Fund Weighted Composite Index has underperformed total returns in all but the past 10 years.
Other arguments include how long-term “value” investors can work hard to beat the market for years, how “undervalued” stocks can quickly become obsolete, and how many index-leading stocks can remain overvalued for long periods of time.
Just ask Warren Buffett.
Although his Berkshire Hathaway (NYSE: ) strategy is to pick unpopular and undervalued stocks, he can’t find many stocks these days.
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Speaking at Berkshire Hathaway’s annual meeting last weekend, Buffett said he expected the group’s cash reserves, which currently stand at a record $189 billion, to continue to grow. That’s more than half the size of the company’s $335 billion equity portfolio.
Boston-based value investor GMO acknowledged the pain of stock-picking funds trying to beat passive indexes currently dominated by Big Tech giants, showing earlier this year that nearly three-quarters of large-cap “hybrid fund managers” underperformed last year. The S&P 500, 90% of them, some of them are lagging for ten years.
Over the past 20 years, the MSCI Country World Index has had a total return of 400% (between 600% for the S&P 500 and 200% for the Eurozone STOXX Index), even if you add in the huge drawdowns in 2008 and 2020.
Regarding the bond portion of the “KISS” portfolio of the two funds, JP Morgan strategists emphasized that it should be diversified global corporate debt, excluding sovereign bonds, which they believe are vulnerable to government forced institutional investment and structural overvaluation And they face the risk of “financial repression”.
For example, the Bloomberg Global Aggregate Bond Index, excluding government bonds, has had a total return of 50% since the index’s launch in 2010.
JPMorgan analysts said that even as the premium of U.S. investment-grade corporate debt relative to U.S. Treasuries has fallen to a 15-year low, their models show there is still a more than 80% chance that they will continue to outperform over the next 10 years.
They concluded: “Keeping it simple in finance, with fewer assets, simple valuation rules, and simple investment rules, is an underrated strategy.”
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The views expressed in this article are those of the author, a Reuters columnist.
