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Last month, if you listened closely, you could hear an audible gasp coming from every brokerage house, financial planner and wealth manager across the continent. The collective sigh was in response to a Feb. 8 Bloomberg interview with Larry Fink, CEO of BlackRock, the world’s largest money manager. In that interview, Fink told Bloomberg that investors should be 100 percent in equities.
That bold statement, from a respected industry veteran, blew up every asset allocation plan in the country. The symbolic pie charts marketed to investors with multiple colored slices—each representing the percentage investors need in all the various categories of stocks, bonds, commodities, real estate and alternative investments—had suddenly turned into one solid color (stocks).
Now, you can be certain that Fink’s pronouncement was summarily dismissed by the investment industry cognoscenti. There is way too much money spent on marketing asset allocation for it to be abandoned. Not to mention all the academic research that touts broad diversification among asset classes. So don’t expect to see a plethora of one-color pie charts coming off advisers’ printers and showing up in client packets anytime soon. Our guess is that most of the industry views Fink’s statement as irresponsible.
Fink’s declaration calls on the carpet popular asset-allocation programs like “life cycle” funds, where investors’ asset allocation is automatically moved into more bonds as they move down the “glide path” of life. Unfortunately for retirees, these funds are shifting more assets into bonds at the wrong time, and purveyors of such programs charge a bundle for these over-marketed strategies.
To suggest that investors should be 100 percent in stocks is all the more dramatic when you consider that Fink comes from a bond background and that his behemoth of a firm oversees $3.5 trillion—much of it in bond funds.
Frankly, we believe Fink’s thinking is correct, although perhaps he could have said it sooner. My firm doesn’t have asset-allocation models. Our holdings boil down to individual stocks and cash.
In the classic text “The Intelligent Investor,” Ben Graham discusses a simple process of holding more stocks and less cash when the market is undervalued, and conversely holding less in stocks and more cash when the market is overvalued. This past fall, we became virtually fully invested in stocks for the first time in the past 10 years.
Recent comments by Warren Buffett cement our aversion to fixed-income bonds. Buffett noted that fixed-income investments are typically thought of as safe investments, “when in truth they are among the most dangerous of assets.” This is because inflation “taxes” away much of their return, and today’s low rates don’t come close to compensating investors for that implicit risk.
Fink’s “all in” call on stocks is unconventional, but hardly seems reckless when an investor rationally surveys the investment alternatives available today. To allocate, say 30 percent, to fixed income just because an asset allocation model says that pie slice needs to be filled is irresponsible considering the outlook for bonds.
Investors who believe they are “de-risking” by avoiding the stock market and seeking shelter in low-return investments will have a difficult time meeting their future liabilities, which continue to grow at a minimum by the rate of inflation.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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