Retail investors’ behavior is not reflective of the current global landscape. According to Hewitt Associates’ 401k data for 2007, retail investors were only allocating 14% of their equity portfolios to international investments. This contrasts starkly with the current US portion of global market cap and global GDP. Unlike retail investors, institutional investment activity clearly reflects awareness of the rapid expansion occurring outside the US.



I heard Paul Wolfowitz, former head of the World Bank, lecture on this topic several years ago. At the time, Mr. Wolfowitz pointed out that in 25 years the US portion of global market cap would shrink from roughly 50% to 25%. He also outlined that this trend began to accelerate in the 1970s (at that time US markets made up 66% of global market cap). What troubles me is that institutional investors like Harvard and CalPERS have increasingly moved their equity allocations in line with this global market cap shift. Unfortunately, individual investors who are increasingly more responsible for their own investment decisions (as DC plans overtake DB plans) are showing no signs of adjusting to this trend. This could prove to be a costly mistake.

According to the MSCI Blue Book, in 1970 the US public equity markets made up of 66% of global market cap. We recently ran a simulation using S&P 500 (SPY), MSCI EAFE (EFA) and MSCI EM (EM) Indexes to test how investors would fair if they had kept pace with globalization. We began the simulation in 1970 with 60% invested in the S&P 500 and 40% in the MSCI EAFA index. In 1988 we shifted the portfolio to be 40% the S&P 500, 40% MSCI EAFA and 20% the MSCI EM index to reflect the shrinking global landscape. Rebalancing annually, this global portfolio averaged a return of 11.71% vs. 10.50% for the S&P 500 over the same period.





The case for retail investors to move to a global portfolio is a case for improving their returns. Since 1970 the rate of real GDP growth has slowed in the US. This is also reflected by a US public equity market that has seen its growth rate slow post-1970. This is exactly why institutions are increasingly moving toward global equity mandates. The risk to US retail investors is that they may see investment returns significantly below previous generations. This does not bode well for those investing for retirement today.

Disclosure: The author’s firm has positions in SPY, EFA, and EEM.

Tags: Asset Class, Pension Funds, Greg

A common fear among investors is not running out of money as they age. For the very wealthy this means protecting capital, but for most people this means growing a portfolio at a reasonable rate and withdrawing just enough to live.

This begs a common question: What is a reasonable withdrawal rate?

The first question many retirees ask is how much money they can safely extract from their portfolio each year. The easiest way to express this is using a withdrawal rate, expressed as a percentage of your investment assets.

Our research and the research of others shows that withdrawal rates that could support an investor over a 30-year retirement have varied from 4% to 6%, depending on the asset allocation of the portfolio. You should revisit your retirement plan if you are withdrawing more than 6% annually. Most importantly, remember to measure how much you are withdrawing so you can analyze this withdrawal risk.

A broadly diversified investment strategy, similar to our University-style portfolios, can help investors meet their retirement income need and reduce the risk of running out of money.

Tags: Greg, Retirement, Income

What asset classes are winning in 2008 as of Wednesday, August 13th?
1) +15.45% - Biotechnology (XBI)
2) +14.77% - Commodities (GSG)
3) -0.66% - Domestic Real Estate Investment Trusts (RWR)

What asset classes are losing in 2008 as of Wednesday, August 13th?
1) -21.16% International Real Estate (RWX)
2) -20.73% Domestic Listed Private Equity (PSP)
3) -19.39% Emerging Markets (EEM)

How are the broad markets as of Wednesday, August 13th?
Domestic: Stocks (SPY): -12.06% and Bonds (AGG): -1.22%
International: Stocks (EFA): -18.69% and Bonds (BWX): +0.20%
Emerging Market: Stocks (EEM): -19.39% and Bonds (PCY): -7.75%

Our Comments: An interesting trend has emerged within the markets in the last few weeks. We're finally seeing some strength from the dollar and weakness in commodities. This trend change is matched by a strengthening of domestic stocks and a dramatic decline of the foreign stock markets.

Most importantly in our minds we have seen great strength from Micro Cap. This may be signaling that the US markets are out of the woods. We are well aware that things are looking better for the domestic markets.

While the US economy is facing significant challenges in some industries not all is doom and gloom. We must always remember that the markets are a leading indicator and they seem to be indicating things will begin to improve.

Tags: Greg, Assets

More evidence of the shift towards indexing vs. active management (stock pickers) appeared today as the Massachussets State Pension Fund moved 2 billion out of Legg Mason active mangers to indexing strategies. Eventually they will be moving all domestic equity exposure to indexing strategies. This was reported on Bloomberg today (click to read article).

Even more incredible, there was a study released that shows only 0.6% of active managers exhibited truly positive alphas over the 1975 to 2006 period (click to read study). We believe strongly in the benefits of Indexing, especially for individual investors. The odds of successfully picking stocks and the odds of picking an active manager that will outperform their relative benchmark is incredibly low.

Tags: ETF, Pension Funds

Volatility is not much fun if you are looking for stability and consistent long term returns. Universities typically use volatility to rebalance their portfolios. In fact this rebalancing can reduce volatility and improve performance.

David Swensen wrote in one of his books, Unconventional Success, that Yale has been able to improve performance by over 1% due to their rebalancing Sotechniques.

Tags: Rebalance, Universities

Well, everything (except real estate) has been getting a lot more expensive and it looks like it’s not going to get any better. Consumer prices increased by 1.1% month over month in June. This was a lot higher than the consensus forecast and it’s the biggest monthly rise since Hurricane Katrina. The annual inflation rate jumped to a 17 year high of 5%.



So what does this mean for you and your portfolio? For discussion purposes let me highlight some of the techniques used by universities to hedge against inflation.

Often in managing their endowments, universities construct portfolios that include several hedges against inflation. To begin with, Treasury Inflation Protected Securities (TIPS) is an allocation that universities often use. These are bonds that typically go up when the consumer prices go up. David Swensen, the former head of the Yale Endowment, believes TIPS are an important component to a portfolio. Universities often allocate to commodities, precious metals and natural resources as well. On a sad note, usually real estate is a good inflation hedge, but unfortunately the deleveraging of the credit markets will likely prevent an appreciation in real estate in the near term. Important Disclosure

Tags: Greg, Assets, Universities

It’s scary to think about, but I've had a few people ask me about the strength of their banks and if their cash was safe. Am I personally worried about mass bank failures? No, not at all. We are in the business of managing risk and therefore without trying to scare anyone, I thought it would be helpful to address ways to limit your risk in the event of a bank failure. What I am telling most clients is that if you have over $100,000 in cash equivalents at one bank, consider putting the rest into Treasury Bills. Read the following quote taken from the FDIC website:

"Customers who purchase T-bills at banks that later fail become concerned because they think their actual Treasury securities were kept at the failed bank. In fact, in most cases banks purchase T-bills via book entry, meaning that there is an accounting entry maintained electronically on the records of the Treasury Department; no engraved certificates are issued. Treasury securities belong to the customer; the bank is merely acting as custodian.

Customers who hold Treasury securities purchased through a bank that later fails can request a document from the acquiring bank (or from the FDIC if there is no acquirer) showing proof of ownership and redeem the security at the nearest Federal Reserve Bank. Or, customers can wait for the security to reach its maturity date and receive a check from the acquiring institution, which may automatically become the new custodian of the failed bank's T-bill customer list (or from the FDIC acting as receiver for the failed bank when there is no acquirer)".

It’s not time to panic, but it is time to take a step back and evaluate your positioning. What I would suggest is that you take note of how your money is positioned so you can evaluate the potential risks. Take a look at how you hold your cash, the stability of your bank and your needs for the cash you have in savings. If you have any questions please let me know.

Also be sure to visit this link to the FDIC website. It explains how their insurance works in greater detail: Click Here

Important Disclosure

Tags: Greg, Cash

So it’s been 5 1/2 years since the last bear market. From the high in October the Dow is just over 20% down and that meets the most common definition of a bear market. The Nasdaq joined the Dow with a loss of 21.3% for the year.

How often do we have bear markets?
They tend to appear every four to five years. (There have been 19 in the last 100 years.)

How long do they last?
An average of 18 months.

How far do they fall?
The market decline is an average of 36%.

What’s the good news?



They can provide great buying opportunities for equities. According to this Financial Times blog, in the last 100 years the best times to buy were 1921, 1932, 1948 and 1982. So while things might get uglier, the upside is this could be a great time to buy equities.

How is Belray handling the bear market?
Our strategy of investing like universities means we’re very diversified and our average portfolio is only slightly down for the year. Our rebalancing rules allow us to take advantage of these market declines.

Important Disclosure

Tags: Greg, History

One more day like yesterday and we’ll be in an official bear market. Doom and gloom seems to be perpetuating throughout Wall Street. The one good sign is that no one can figure out how anything good will happen. That leaves room for an upside surprise. So until we get surprised or people just give up it’s not going to be much fun.

If June felt particularly painful, that’s because it was the worst June on record for the Dow Jones since the great depression. Don’t forget to smile, the economy grew at a 1 percent annualized rate in the first quarter of 2008.

Important Disclosure

Capital Economic provides us with some research and they sent us an interesting piece on how the resurgence of global inflation is raising fears of a return to the 1970s. They point out that the good news is that, there is little sign of commodity-led inflation becoming embedded in the economy via wage and price-setting behavior. With economic activity weak and labor markets softening, households will find it very hard to secure higher wage increases to compensate for higher prices.

This is good and it should allow the supply and demand responses to eventually bring commodity prices back down to earth.

Important Disclosure

Tags: Greg