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Beware
the Third Talent According to the New York Federal
Reserve Bank, America’s households are in a very strong financial
position. Households own $68.2 trillion in assets and owe just $14.0
trillion in liabilities. Our net worth is $54.2 trillion. Our
financial assets at $45.1 trillion are twice our tangible assets of
$23.1 trillion. The Federal Reserve report (Z-1,
March 11, 2010) shows the asset allocation of directly held
investments, as illustrated in the schedule below:
America’s Portfolio
($ trillions)
 As you can see, the cash balance, at nearly $8
trillion, is the same amount as our stock investments. Cash
investments pay about 2%. This is the same rate as inflation, so the
real rate of return from nearly 40% of our investment portfolio
achieves no real rate of return. This is a dangerously risk-averse
allocation that is destined to underachieve. How do
you expect to grow your wealth when 40% of your portfolio earns
nothing? What are you afraid of, America?
Even a cursory examination of capital market history shows that
stocks and bond prices can be volatile. So what? If they go down
they always recover. Since the 1920’s we have had 19 bear markets in
the stock market and 19 recoveries. I used to do
asset allocation studies for the large corporate pension funds I
managed. The studies were extensive and expensive. We always ended
up in the same place: 60% in stocks and 40% in bonds. Our allocation
to cash was always zero because we understood the long term return
from cash was nil. Individual investors need to understand this too.
The record of the stock and bond markets tells us clearly, it is
much more dangerous to be out of the markets than in. It tells us
the returns from stocks and bonds are volatile but will grow our
wealth over time. Cash has no permanent part in a
portfolio. In the portfolios I manage, I have a stated objective of
100% invested position at all times unless extreme conditions exist.
If history is not enough, let’s consider what the wisest man who
ever lived, Solomon, had to say about this. In Ecclesiastes 1.9,
Solomon tells us “What has been will be again, what has been done
will be done again. There is nothing new under the sun.” It
seems pretty clear to me we can expect, in fact, we should expect
more bear markets and more recoveries. It’s nothing new.
Solomon also told us about cycles. In Ecclesiastes Chapter 3 he
tells us “There is a time for everything and a season for every
activity under heaven: a time to plant and a time to uproot, a time
to build and a time to tear down, etc.” That sure does sound
like a market cycle to me. Capital markets go up and down. Count on
it! Your portfolio needs to go to work and grow your
wealth. It cannot do that in cash. What are you
afraid of, America? Invest your cash in assets
that will give you consistent and high returns. Increase your
investment horizons to cover at least one market cycle.
Jesus used parables or stories to get His points across. While His
parables have many levels of meaning and wisdom, I want to address
the literal interpretation of His parable of the talents.
A talent is a measure of silver and was currency in the time Jesus
lived. A talent was the equivalent of several years of a workers
wage. Applying it to today it would represent more than $100,000.
This parable is about risk taking and stewardship.
It is about diligence and personal responsibility. It is about
growth. The parable is about three servants whose
master gives each a different number of talents to manage in his
long absence. When the master returned he asked his servants for an
accounting. The first two doubled the amount they were entrusted
with and received praise. The last was afraid and he buried the
money he was given. He returned to the master the amount he was
given. The master said he was unfaithful and lazy, and expelled him
from his house. Forty percent of your portfolio is
“buried in the ground” (in cash) earning you nothing.
What are you afraid of, America? Are you being
like the unfaithful and lazy servant in the parable? Have you
organized your investments for appropriate risk levels and returns?
According to the Investment Company Institute, there are at least 92
million individual investors. Based on this household data from the
Federal Reserve, millions of you are not allocating your investments
for the best result. Maybe it is because you think there are not
enough eligible investments. Maybe that is true. Maybe we don’t have
enough “good” investments because of risk-averse environment we have
created. We can change that starting with the ballot
box. Ninety two million investors can insist on an environment that
rewards risk-taking and encourages economic growth. Elect
representatives that will begin to dismantle the massive and mostly
failed government programs that are now 25% of our economy. And more
important, elect representatives that will cut taxes and burdensome
regulations rather than stifle risk taking and economic growth.
If 92 million individual investors voted for growth,
then it would be impossible to elect radical socialists like Obama
and half of Congress. Lower taxes and less government regulations
are the key ingredients to encouraging risk-taking. Vote for growth and put your cash to work. What
are you afraid of, America? But we would be
irresponsible to blame a lack of investment opportunities solely on
the government. Even with heavy handed and oppressive government
involvement, we still must search out and invest in assets that will
grow our wealth. After forty years of investing I
have come to the firm conviction that earning something every day on
your portfolio is the best overall protection there is... protection
against idiot politicians, inflation, deflation, economic
dislocations or natural catastrophes. May you live
long and prosper, Mike Williams, CFA
Chief Investment Officer
Panhandle Portfolios, Inc.
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