Royal Bank of Scotland to investors: 'Sell everything'

Take my advice for what it is worth.

1) Most people suck at timing markets and knowing what is going to appreciate in price and when. Like 99.99 percent of people suck at it.
2) Therefore, diversification across different asset classes makes sense for most people saving for retirement. It really isn't that difficult.
3) Those asset classes should take into account how aggressively you are going to need to grow the money (i.e. -- how much you can afford to put away), but also whether you are going to be able to sleep at night. Don't invest in high beta things (for example, put all your money into a small cap technology fund) if you are going to lose sleep.
4) That said, equities have been the best place historically if you have a long enough time horizon. I don't believe the S&P 500 has ever LOST money over a 20 year period, for example.
5) Since most people suck at timing markets and picking stocks, low-cost index funds make the most sense for people. The expenses actively managed funds charge rarely pay you back -- over time, you can't count on any superstar fund manager's stock-picking ability to make up for the higher fees they charge. Those fees eat away at your returns. Therefore, I think most people should park their retirement money in the lowest-cost index funds they can find (Vanguard, Fidelity, etc.) and just hope to keep pace with whatever market the fund is tracking.
6) For a typical person, the asset allocation mix would be something like 70 percent equities / 30 percent bonds. Or 80 percent equities / 20 percent bonds. If you are comfortable being more aggressive, you would put more into equities. Within those classes, for diversification reasons, a percentage should be in U.S. stocks and a smaller percentage in international stocks -- look for an index that includes emerging markets, because they typically don't correlate with stocks from the developed countries.
7) For example (and I am not saying this is appropriate for you, necessarily), a reasonable mix of funds would be: 45 percent in an S&P 500 Index fund, 15 percent in an extended market index fund (the rest of the the U.S. stock market), 20 percent in an index fund that tracks the FTSE all-world index (international stocks) and 20 percent in a bond index fund -- one that is investment grade and is somewhere around 7 to 10 years in terms of maturity. With Vanguard's funds that would be their "Total Bond Fund."
8) In any case, once you figure out 3 or 4 index funds that meet whatever allocation you want, don't look at it. Except 4 times a year. Rebalance. Let's say the allocation you want is 70 percent / 30 percent, but stocks have done exceedingly well, while your bond index fund hasn't. And at the end of the quarter, your portfolio has shifted to 75 percent equities / 25 percent bonds. Move some of the money from the equity fund into the bond fund to bring your mix back to 70 / 30.
9) Keep adding to your funds. Every month. It's called dollar-cost averaging. You buy sometimes when things are expensive. You buy sometimes when they are cheaper. Over time, hopefully it all evens out.
10) When you get a huge blow off, like the one in 2008 / 2009, DO NOT sell into weakness. Ride it out -- a bear market can last for years and the next one likely will. And it can be painful to watch. But with a 20 year time horizon, hopefully you can afford to ride it out, and if you keep dollar cost averaging in, you will hopefully be buying low along the way.

In any case, don't overthink it. And look for low-expense funds. Those expenses make a HUGE difference in the compounded return over time. It's not worth paying someone, when index funds almost without exception outperform active fund managers over any time period that is long enough.

 

Totally agree with you. So not disagreeing. If you invest in something (as opposed to trading it), you need to have a fundamental reason in mind for why it is going to appreciate. And if you think about it rationally, as opposed to emotionally, you will be looking at various ways to value a security you are interested in. If it is a stock, for example, a value investor might look at the price of the stock relative to the company's book value. Or they might look at the price of the stock relative to its earnings. And do comparisons with similar companies or measure up the investment historically to other investments, etc.

I'll say two things, though.

1) When it comes to investing for retirement, I think most people should NOT be doing that kind of fundamental research and investing. Aside from not having the background (and information) to properly analyze companies. ... Most people don't have enough money to buy enough individual securities to be able to mitigate their risk through diversification. Which is why rather than trying to be stock pickers -- and most people really do suck at it -- they should just be trying to participate in the stock market as a whole. Buying the whole market, or large parts of a market, gives you diversification. It reduces the inherent beta (or systematic risk) of your portfolio. Over long periods of time, that has been a winning strategy (you don't hit home runs, but you are way less prone to striking out), and it comes with much less inherent risk than trying to pick individual stocks. People shouldn't be gambling with their retirement savings. They should be trying to maximize returns in a way that reduces risk as much as possible. Risk should be the primary part of that equation.

2) Even if you are inclined to try to be a fundamental investor, all the stuff I have posted about on these threads over the past several years has made that impossible. The past few years, stocks have not been trading on anything fundamental -- earnings have largely sucked across the broad market, and earnings SHOULD drive stock prices. Stocks globally have traded (and went way up) on monetary policy. Many stocks have run up, as companies have borrowed heavily thanks to the central banks, and used the money to boost their dividends and do stock buybacks. Meanwhile, many of their businesses have been falling apart -- even as their stock prices have run up. I remember trying to point this out about IBM to DQ at one point on here. IBM is the poster child for trying to prop up a stock price via stock buybacks. Meanwhile, it has a dying business. Fundamantally, its business sucks. Not coincidentally, as the air has started to come out of the bubble, and rationality is coming back to the markets, its stock price has been sinking. Even with the buybacks.

As long as the various central banks have kept the punch bowl spiked, stocks -- and it was nearly all stocks -- went up. People making money were just riding the momentum -- to me that is a trading strategy, not an investment strategy. The minute the Fed tried to end that manipulation because they sense they have gotten in over their heads -- pulling back on the quantitative easing and jawboning about potential rate hikes -- the party started to come to a screeching halt. And our markets are buckling.

If you really were doing any fundamental research during the run up in stock prices -- and doing it in a vacuum-- you would have been looking to short more individual names than own them -- given the ridiculous valuations. For example, on that GM thread, I kept saying that the price of Tesla (which is now crashing) was ridiculous, based on the fundamentals as I saw them. Just a few months ago, I was looking at a company heavily in debt -- raising more and more money in the debt markets (once again, thank the Fed) -- with no earnings, trading at a valuation that was 2/3 the valuation of GM!!! Tesla sold 50,000 cars last year. GM sold close to 10 million cars. Fundamentally, Tesla screamed mania. ... and "short."

I didn't short Tesla, though, and I never would have. When markets get distorted that way, they can get irrational way beyond my ability to stay solvent trying to fight a rising stock price that can conceivably go to infinity (or in this case really, trying to fight the Federal Reserve's ability to juice the stock market).

I am a trader by nature, not an investor. But I do invest for my retirement. Using low-cost index funds as I laid out. All things being equal, I think it is a fool's game to try to time the market with your investment money. But about a year and a half ago, I sold all of our retirement investments and parked the money in cash -- in various currencies; it was more akin to a trading strategy, unfortunately. I don't own any equities outside of my retirement accounts either. I knew the equity market could go up more when I sold -- in fact, I was prepared for it to way overshoot any semblance of rationality. I also knew that there was way more downside risk left than any possible incremental bubble left. I was willing to let the market go way up -- even wait it out longer than I have had to, if it is going to blow off now. Because I knew there is going to be an inevitable buying opportunity, well below where I sold. As I type that, I am even cognizant that the Bank of Japan or the Federal Reserve could do something tomorrow that lights the fire again and gets the mania going again. And if that happens, I will still sit on the sidelines, because eventually fundamentals ALWAYS win out. ... and fundamentally, our equity markets are way overvalued. It sucks. I want to be fully invested for my retirement. I don't want to be worried about preserving capital. I want to try trying to grow it. They made it impossible for me (personally) to do that. If I was a fundamental investor, I'd be totally screwed. There are no fundamentals left. Just what Janet Yellen might say and do next.

 

Can I blame Peyton Manning instead? I like blaming him for stuff.

 

She has actually confused the hell out of everyone. Because she is trying to walk a middle ground.

Markets were rallying well before her testimony. There was that glimmer of hope that she would walk back the hawkish talk. When I woke up at 4:30 am, the futures were way up beyond where we are now.

The market got oversold on a relative strength index basis. It is simply taking a break. I have been swing trading it and it is essentially following a script.

But she isn't doing anything to help markets. Not that I blame her. She is in a no win situation given the corner they have backed themselves into. The only thing that will sustain a permanent rally is if they back off -- take rate hikes off the table, start talking about QE4. And even then, it is going to take a flamethrower now. Look at the yen and the Nikkei index over the last week. The markets laughed off the BOJ's negative rates -- they don't have control anymore. I actually think it is dangerous for people pressing that trade. The BOJ is not like the ECB, where it is mostly talk, but a fear of doing extreme things. They are not to be trifled with.

In any case, any small rally we get today in U.S. equities -- and I am not sure it is going to even hold the day -- is going to be sold hard.

 

This summed up what I was watching pretty well. The market may have a small rally on a short-term basis, but it has nothing to do with her. It just needed to take a break from selling off. Europe was rallying well before her testimony was released and the futures were up overnight.

Her testimony was almost as uncomfortable as the day Martin Shrkeli was there. She has no credibility.

She blathers on about "data dependency." But it's complete bullshit. When they were telling us that they needed to launch QE3 in order to prop up the economy in 2012, our GDP was growing faster than it was this past December, when they were telling us that they needed to reign things in with a 25 basis point rate hike into a near recessionary economy!

"Data" had nothing to do with it, obviously.

They are flying by the seat of their pants. It dawned on them last year that they had created a huge mess (they were the last to know), and that we were coming to the end of the liquidity-driven economic cycle we were riding. ... and they were desperate to try to get out of the mess they have created. Unfortunately, there is no way out. They created a monetary roach motel. They either keep easing -- and to a greater degree each time, kind of the way a heroin addict needs bigger and bigger fixes -- or the phony asset bubble economy (including the stock market) they have saddled us with collapses. It's really that simple.

 

You insult me. I don't need to make my posts about you to address the small semblance of a point in what you wrote.

Of course, her job is to boost the equity market (and all risk assets). At least as a side effect of monetizing endless amounts of debt so our government can remain solvent and keep running up more debt. That isn't an "idea." the way you think about all of this as an ideology. It's what they do. Debt levels have exploded -- publicly and privately -- because they monetize debt with what you call monetary policy. At the same time, their balance sheet has exploded due to the bullshit schemes they have had to come up with to keep monetizing debt as long as possible. Interest rates are permanently suppressed by them -- they price fix the most important market we have. That is tangible reality, not an "idea."

Their whole playbook turned into trying to create a wealth effect by creating asset price inflation. And they got in over their head. You don't even see it when your readers digest version of the news is finally saying exactly what I was saying that you found hysterical 2 or 3 or 4 years ago? They hoped that creating asset price inflation would be "stimulative" of real economic growth. It has just created phoniness -- while our real economy remains in a malaise. But there is a reason why it has always been the "Greenspan put, " the "Bernanke put," the "Fed put." It's ALL about the stock market. It's all they have.

Unfortunately for her, she took over the job of chief when the house of cards was ready to topple, and she is hastening the collapse because she is desperate for a way to get out of it all and try to create a soft landing -- she doesn't want her legacy to be one of blame for the whole shit storm. That soft landing doesn't exist. When you create distortions this big, there is a price to pay at some point. There is no easy way out of it. Markets know it. Nuts -- you know, like Ray Dalio, Carl Icahn, Kyle Bass, etc. -- everywhere know it. Her only hope is to blow more helium into the balloon and try to buy more time. It will be the worst thing to do, of course -- more of the same, creating even bigger distortions on the prayer that it buys more time. Which is why it is what I expect. I suspect they won't step away until they lose all control, unfortunately.