Most of the daily price moves are irrational. Just notice how often prices swing 1% or more in the last trading hour without any news to provoke it. Our clients spent a lifetime building their nest eggs and they ought not be subjected to unnecessary speculation. It is natural for clients to be concerned when their portfolios are "lagging the market," but let's work hard to remind them about the seriousness of risk, about how they felt at the end of 2008. And try to manage according to their lifestyle goals instead of an arbitrary benchmark.
A huge range of possible outcomes. It is important for those of us charged with preserving clients' savings to be aware that in this government-private sector competition for capital, the range of possible outcomes is much wider than anything we imagined during the great period of economic stability in the 20th century known as the Great Moderation.
For example, what if unbridled quantitative easing to increase the money supply (what Federal Reserve Chairman Bernanke likens to a helicopter drop of money) begat runaway inflation as one potentially extreme policy outcome. That's ugly enough, yet we could probably figure out how to invest for it if we saw it coming. But how about a double-dip recession accompanied by widening spreads, a renewed credit crisis that starves small business, an investor flight to the "safety" of government bonds, a debt-deflation spiral and protectionism that takes the depression global? It sounds like a perfect time for Keynes' deficit spending idea. Oh, yeah, we already did that.
Isn't there a middle ground where we gradually pay for our years of overspending and get back on the growth track? We all hope so. If there is, it's probably some combination of letting markets set the price of bonds and mortgages, and limiting government's annual deficit to something less than the economy's growth rate so we can "grow into our debt burden." Maybe we could eliminate institutions "too big to fail" and socialize risk. That would be nice.
I also believe personal money managers need access to and familiarity with tools that can help protect their clients' capital against things that go bump in the night. Among these are an enormous variety of inverse funds, bear funds, paired trades, long-short or market-neutral positions, precious metals and commodity strategies. The list of noncorrelated and negatively correlated options grows daily.
Let's all study hard, delegate carefully, practice patience, insist on transparency, set realistic expectations and diversify like our lives depend on it. Our clients deserve no less.