Thursday, March 1, 2012

"What Do I Do With My Money?"

Laurence Fink of the investment firm BlackRock has undertaken a major campaign to try to change investor behavior.

In an interview with Bloomberg in early February, Mr. Fink made headlines when he suggested that investors should be "100% invested in equities" (I have added the highlight): 

Investors who seek the safety of treasury bonds will have minimal returns and will not be able to meet their needs with the U.S. Federal Reserve expected to keep interest rates low, said Fink, who in 1988 co-founded the New York-based manager with $3.5 trillion of assets. By contrast, equities are trading at the lowest valuations in 20 or 30 years. 

"I don’t have a view that the world is going to fall apart, so you need to take on more risk,” he said in an interview with Bloomberg Television in Hong Kong today. “You need to overcome all this noise. When you look at dividend returns on equities versus bond yields, to me it’s a pretty easy decision to be heavily in equities.”

Fink followed his comments with an editorial in yesterday's Financial Times.  I have highlighted the last part of this excerpt:

Wherever I go in the world now I hear the same question from individuals, corporations and pension funds:  what do I do with my money? At every level, the answer is the same:  we need that money working again, to fund retirements and drive economic growth.  Very simple, we need to turn today's short-term savers into long-term investors.

We must convince individuals to start investing for their retirements now and help them go beyond the old 60/40 mix of stocks and bonds, which will not deliver the returns they need at today's low yields.

Fink's comments have been generally seen as either wild-eyed bullish, or self-serving (BlackRock, after all, is one the largest asset managers in the world), but I happen to agree with his general thoughts.

Bonds can play a role in a balanced portfolio to mitigate risk and provide some income.  However, there is no denying that yields are low, and shorter maturity rates are less than the current level of inflation.  For an investor with a longer term time horizon, it is hard to advocate bonds over stocks.

In my opinion, this is not a question of being "bullish" or "bearish" on stocks.  I don't have any idea what the market will do in the short term, nor does anyone else.

However, it really boils down to math.  When one asset class (stocks) is offering an all-in (earnings yield + dividend) of over 11% compared to bond yields mostly less than 2%, it seems logical that an investor with a longer term time horizon should be moving more towards equities, regardless of whatever short-term market might occur.

One final thought:  retail mutual fund investors continue to flee domestic equity funds in favor of bond funds.  However, last February we saw a spike in interest rates, to nearly 3.6% on 10-year Treasury bonds.

With the Treasury 10-year yields roughly half of the level of a year ago, what would be the impact on investor psychology if they suddenly saw the value of their "safe" bond mutual fund holdings plummet?