"So what's happening is a situation where the equity markets continue to rise over time [while] interest rates stay lower for longer. Over $US50 trillion of cash is sitting in client's accounts, the largest percentage of cash that they have ever had,"
That quote comes from the CEO of fund manager BlackRock, Rob Kapito, and appears in the Sydney Morning Herald.
And when I say 'fund manager' I should really say 'the world's largest fund manager'.
So, when Rob speaks, people listen.
And yet…
I can't help but note an apparent contradiction in his thoughts.
To be fair, it's not Rob's contradiction.
It's a contradiction in the apparent thoughts and opinions of the investors he's talking about.
Let's break it down.
So, rates are low. Check.
Markets are rising. Check.
And investors are in cash.
Huh?
Now, to be sure, I can explain what seems to otherwise be a contradiction.
As does Mr. Kapito.
Apparently there are a lack of opportunities. And weak expected returns.
Fair enough.
Sort of.
Let's take the latter. Let's say, for the sake of the argument, that the world's markets are suddenly efficient and can accurately predict future returns.
(Yes, yes, you'll have to ignore the fact that it's never happened before, but play along with me anyway, will you?)
Let's say future returns will be lower than the historical average annual rate of 9% – 10%.
Let's be really, really pessimistic and halve it, just to invoke a little doom and gloom.
And let's say you have the choice of 5% in stocks or maybe 2% in term deposits or bonds… if you're lucky.
Tell me again why you'd have cash on the sidelines?
Of course, you'd have to try very hard for future returns to be 5% — in Australia, the average dividend yield is over 4%, just for starters.
But even if it was going to be 5% per year for the foreseeable future, I just don't get why you'd be in cash earning 2% (and, in all likelihood, much, much less).
On the flipside, would you really rather wait until the storm clouds had passed, and everyone was feeling positive again? Until the optimists ruled, and the market was riding high?
Like, say, 2007? Or 1999?
You know how that ended, right?
Yep. Precisely.
Of course, such 'point in time' analyses completely misrepresent the investment experience of normal people.
Unless you're about to invest every red cent you own in the stock market, today, then cash out — completely — at some arbitrary future point, regardless of circumstances, your situation is likely very different.
Most — almost all — of us invest slowly. Methodically. Periodically.
Indeed, that's exactly how our Super is invested.
And how you should be investing, too.
You're probably saving money regularly. Every week, fortnight or month, I trust you're putting some money away to invest.
And hopefully you're actually investing that money, almost as regularly.
Which means, today's market level doesn't matter much. You probably put some money in the market in June 2018, when the ASX (including dividends) was 13% lower than today.
You probably invested some in April of this year, when it was 6% lower.
And again in late July when it was 1% higher.
At least I hope you did.
Because the headlines and talking heads were worried then, too.
Brexit.
Trade wars.
The Chinese economy.
They were 'clear and present danger' then, too.
Hopefully you were investing in 2006. The market is up since then.
Hopefully you were investing in 2007. The market is up since then.
Hopefully you were investing in 2008. The market is up since then.
Hopefully you were investing in 2009. The market is up massively since then.
(This is important: As with all market data, never ever just look at the index numbers alone. Remember that 4% dividend yield I mentioned above. It's not included. If you add back those dividends — compounded — it's even more impressive.)
And if you're retiring?
Unless you intend to spend your entire fortune flying you and a dozen friends to the international space station tomorrow, it'll be funding your lifestyle for many, many years.
If you're fortunate, you'll be able to live off the dividends. You can ignore the price gyrations.
If you do need to use your capital to pay the bills, you'll hopefully be selling down slowly, over years or decades.
In other words, today's market levels are almost certainly useless — or worse, if they influence your decisions.
I don't know what happens next. You don't know what happens next.
Even better, we don't need to care.
If you're working, keep investing regularly, slowly, methodically.
If you're retired, and assuming you don't need a huge lump sum anytime soon, keep drawing down regularly, slowly, methodically.
You'll buy — or sell — more shares when prices are lower, and you'll buy — or sell — fewer when prices are higher.
It averages out nicely. They don't call it 'dollar cost averaging' for nothing.
In the meantime?
Well, if you're interested in finding market-beating shares, that can be a profitable and enjoyable pursuit.
If not? Either invest in an index fund or find a fee-only advisor to help you.
(That's where The Motley Fool comes in, of course, if you're so inclined.)
Whichever path you choose, though, work on your ability to be indifferent.
Indifferent to predictions of doom.
Indifferent to volatility.
Indifferent to people who want to 'help' you (for a slice of your portfolio, of course) trade the market by appealing to our egos, our fear or our greed.
I wouldn't be at all surprised if medium-term returns are lower than normal… in nominal terms.
But remember, while 10% returns sound great, if inflation is 3.5%, you're only earning 6.5%.
If you get 8% in a 1% inflation world, that's actually a better return.
Of course, I wouldn't be at all surprised if medium-term returns are higher, either.
No-one knows.
So what would you rather do? Try to second guess yourself — and the market?
Or just do what has worked for over a century?
Me too.