It’s time to give your clients a portfolio stress test, says Axel Merk of Merk Investments.
“You may want to hope for the best, but that’s not a strategy. You have to plan for the worst,” he says, adding that advisors should be stress testing portfolios today. All is way too quiet on the Western front.
“We think the odds of a more serious decline in asset prices have increased sharply given a combination of what we believe are high valuations; a period of low volatility that may be nearing its end; rising interest rates; all of this in the context of what we believe is an over-exposure to equities in both individual and institutional portfolios,” he says.
We are now eight years into a bull market. Investors have basically given up betting against conventional wisdom. Betting against the Fed, assuming a dollar crash, or a bull run in cheaper emerging markets has not worked out. The U.S. has been the only game in town since the second quarter of 2009 and shorting the S&P 500 or looking for alpha in global equities has only paid off for those who got the timing perfect. The iShares MSCI Emerging Markets (EEM 40,84 +0,07 +0,17%) fund is down around 7% in the last five years while the SPDR S&P 500 is up a whopping 68%. In fact, over that period the SPY has absolutely clobbered nearly everything you can think of: gold (GLD 211,52 -1,22 -0,57%), Russia (Unfortunately, we could not get stock quote NYSEARCA: RSX this time.), Brazil (EWZ 31,83 -0,59 -1,82%), China (FXI 24,02 -0,11 -0,46%), Turkey (TUR 36,66 -0,47 -1,27%), Mexico (EWW 66,95 0,00 0,00%), Europe (VGK 66,41 +0,11 +0,17%), Japan (EWJ 70,92 +0,27 +0,38%), Treasury (IEI 114,79 -0,47 -0,41%), local currency emerging market bonds (LEMB 36,25 +0,19 +0,53%), dollar emerging market bonds (EMB 89,28 +0,03 +0,03%). Shall we go on?
Merk says in his insight note today that not being invested in U.S. stocks has been so costly that advisors who have been too cautious and diversified out of the index are no longer in business.
“I’m not just talking about short sellers, but also many who have – in our view prudently – diversified beyond a traditional “60/40” stock/bond portfolio,” he says. “We know of advisors who positioned their portfolios more aggressively not because they thought the markets were going higher, but because they were losing clients for underperforming the S&P 500.”
For investors who want to protect from the correction (whenever that is), another option is the VanEck Merk Gold Trust (OUNZ 19,96 -0,03 -0,15%) ETF is one alternative to State Street’s behemoth gold fund (GLD 211,52 -1,22 -0,57%). It tracks it pretty closely, but barely edges it out YTD and over the last 12 months as well. Time For A Portfolio Stress Test?
It’s time to give your clients a portfolio stress test, says Axel Merk of Merk Investments.
“You may want to hope for the best, but that’s not a strategy. You have to plan for the worst,” he says, adding that advisors should be stress testing portfolios today. All is way too quiet on the Western front.
“We think the odds of a more serious decline in asset prices have increased sharply given a combination of what we believe are high valuations; a period of low volatility that may be nearing its end; rising interest rates; all of this in the context of what we believe is an over-exposure to equities in both individual and institutional portfolios,” he says.
We are now eight years into a bull market. Investors have basically given up betting against conventional wisdom. Betting against the Fed, assuming a dollar crash, or a bull run in cheaper emerging markets has not worked out. The U.S. has been the only game in town since the second quarter of 2009 and shorting the S&P 500 or looking for alpha in global equities has only paid off for those who got the timing perfect. The iShares MSCI Emerging Markets (EEM 40,84 +0,07 +0,17%) fund is down around 7% in the last five years while the SPDR S&P 500 is up a whopping 68%. In fact, over that period the SPY has absolutely clobbered nearly everything you can think of: gold (GLD 211,52 -1,22 -0,57%), Russia (Unfortunately, we could not get stock quote NYSEARCA: RSX this time.), Brazil (EWZ 31,83 -0,59 -1,82%), China (FXI 24,02 -0,11 -0,46%), Turkey (TUR 36,66 -0,47 -1,27%), Mexico (EWW 66,95 0,00 0,00%), Europe (VGK 66,41 +0,11 +0,17%), Japan (EWJ 70,92 +0,27 +0,38%), Treasury (IEI 114,79 -0,47 -0,41%), local currency emerging market bonds (LEMB 36,25 +0,19 +0,53%), dollar emerging market bonds (EMB 89,28 +0,03 +0,03%). Shall we go on?
Merk says in his insight note today that not being invested in U.S. stocks has been so costly that advisors who have been too cautious and diversified out of the index are no longer in business.
“I’m not just talking about short sellers, but also many who have – in our view prudently – diversified beyond a traditional “60/40” stock/bond portfolio,” he says. “We know of advisors who positioned their portfolios more aggressively not because they thought the markets were going higher, but because they were losing clients for underperforming the S&P 500.”
For investors who want to protect from the correction (whenever that is), another option is the VanEck Merk Gold Trust (OUNZ 19,96 -0,03 -0,15%) ETF is one alternative to State Street’s behemoth gold fund (GLD 211,52 -1,22 -0,57%). It tracks it pretty closely, but barely edges it out YTD and over the last 12 months as well.