Thursday, May 28, 2009

Bonds are the new black.

Time for a rant on what I've learned about the DIY Canadian investment blog community (if that is indeed a thing that can have a name like that), people posting online about what everyone else in their situation should do with their money (this is regardless if they are a financial advisor, some dude, or a big outfit), following this or that bit of information. Lots of times there is a nice little graph or a box of numbers next to another box of numbers.

Many people enjoy posting their own financial information. Not just their particular investments but their whole list of debts and assets, their jobs, incomes, how big is their family, etc.

I have no problem with people who want to share personal information, especially if their intention is to selflessly help others. However, most of what people consider to be their business is in fact just that- it's their business and no one else's. Privacy is about minding your own business. This isn't a rejection or defensive posturing, just a mutual understanding that my economic and social context is unique to me. It's what makes me 'me' and not 'you', the 'other'.


What am I talking about?


I'm talking about how I've learned to ignore information (like the analysis and trends and fancy equations and statistics) as the key to distilling, understanding and utilizing the underlying reality of the various investment strategies and attitudes.

This is what philosophy is all about. Those guys that people talk about- Plato, Aristotle, they were guys who had a holistic (if still primitive) view of what a person should do with their life (their view of the soul is like how we view our retirement nest eggs) and how to go about doing it in the best way possible.


What does philosophy really have to do with investing?

1) Philosophy is about the pursuit of truth.

2) Investing is about weighing risk with return.

3) Return is cash money in your hands; risk is the absence of certainty about that return.

4) If Philosophy is about truth (which is about validity and certainty) and investing is about risk (which is about the certainty of making money),


5) understanding certainty and using that understanding to our advantage will allow us to maximize return (cash money) while minimizing risk (uncertainty).


So what happens when, in a variety of quips, comments and suggestions, you present the consequences of this line of reasoning to the Canadian DIY financial community?

The answer is not much.

You see, when people have 'bought in' to a line of reasoning, and worse still, put their own financial nest egg behind a line of reasoning, it becomes a very touchy subject.

Though it's easy to divulge how much we have with who and where and how much we owe on this or that, it's actually much more psychologically (and philosophically) difficult to admit compete and total failure.

Indeed, it was Nietzsche who best espoused the idea that without the understanding and acceptance of complete and total failure, one can never enjoy true success. Though he lived a lonely and miserable life, he viewed humanity in organic terms and, wishing in an alternate life he could have been a gardener, Nietzsche argued that the failures of ordinary people are like the dirt and roots and worms and detritus. If they are understood and cultivated properly, they will combine and yield a beautiful flower. If they are mismanaged, they will rot.

This is an apt analogy for a flawed investment strategy. When the reality is that stocks do not always beat bonds, and over the last 40 years bonds have beaten stocks, an individual who attempts to understand and accept reality will adapt.

A logical adaptation, if we attempt to remain consistent, would involve less effort attempting to make significant gains or investments in the stock market.

You see, this is essentially my line of reasoning before the market crash and I took it from my parents (who got it from their parents) before me and it meets a lot of static.

The static takes the form of people who believe that bonds are not available with high enough interest to beat inflation (consistently proven incorrect when dealing with a properly laddered portfolio), people who believe that investment-grade corporate bonds are at a significantly higher risk of default than a government bond (consistently proven incorrect over time), and (perhaps worst of all) people who view the return of capital as a burden- best avoided by purchasing a stock or mutual fund and holding it forever (this is a philosophical disagreement, I buy some equities but I love when I see I have cash waiting to find a new home in my accounts and argue it is never a burden if you always have the ability to wait for a good value investment).

I believe the accepted notion of a 30-70, 50-50 or 40-60 asset allocation, the belief of diversification, and professional management has been completely compromised and undermined by the real world experiences of ordinary people. People who could have been convinced of any asset allocation so long as it beat inflation and preserved a nest-egg, were lead into investment vehicles that charged a lot of money and in the end provided little or no protection from stock market volatility.

As a logical consequence, I have determined that the entire investment community is as flawed as the products they sell, analyze, discuss and throw their money behind. People who argue about the benefit of estate, tax and insurance planning do a disservice to the role an accountant provides (at a fraction of the cost and with no conflicts of interest) and exaggerate how difficult it is for the average person to determine their need for those things on their own for free.

Financial advisors are your best friend, but only when they understand how to treat you and your money with the respect you deserve. If you remain uneducated to the actual returns of the various asset classes that you can invest in, you will drastically increase the likelihood that you will unknowingly lose money when you think you are helping to 'grow' it.

There are some people, like 'NurseB911' who writes his blog about his financial journey, that are starting to catch on to reality.

The rest would rather refuse to look at their financial profile and continue to hope and pray the DOW magically goes back to 13000. The smart money has been slow and steady FOR ALL ETERNITY.


  1. Dude, you are either completely insane or completely right. I'm just not sure which one you are. I like that you're a little bit out there. I've added you to my RSS feed.

  2. Nelson,
    I agree.
    thanks for the comment. I hope you enjoy some of my thoughts and find something here useful.
    for the sake of full disclosure, I've been to a doctor who did assure me that I am, in fact, not crazy.