Markets: The investor’s dilemma

By July 17, 2013 October 7th, 2014 Blog

Stocks are expensive. Bonds are expensive. What is an investor to do? Unfortunately, the only answer appears to be to invest in new and… 

The full article can be found at:

Mr. Gerard Colaco: Over the last three decades, we have come across any number of articles of the kind forwarded by you from the Financial Times.  The overwhelming majority of such articles are very well written, very erudite and very wrong.  No country of the world in the last two centuries has been written off more and more often than the United States.  So far all these doomsday predictions have been wrong.

You have tried to apply some of the contents and predictions in the article to personal investment.  Let me try to provide you with some knowledge which should enable you to take all such articles you may come across in the future with not a pinch, but a wagon-load of salt.

You might have heard of a Jewish holy book called the Talmud. In 1,200 BC, Rabbi Isaac wrote: “Let every man divide his money into 3 parts, and invest a third in land, a third in business and a third let him keep by him in reserve.”  This is quoted by Roger C Gibson right at the beginning of his masterwork “Asset Allocation: Balancing Financing Risk”.  This is a classic on asset allocation.

Where personal investment is concerned, there is not much we have learnt in 3,000 years that’s new and effective.  We have of course seen much that is new and ineffective.  The point at which the Talmud started was asset allocation.  The highest point we have ever reached in personal investment after a 3,000-year journey is asset allocation.  In between you mostly have hype with a capital H.

If you implement Rabbi Isaac’s asset allocation strategy to today’s world, it would recommend that an investor deploy a third of his funds in real estate, a third in equity and a third in short-term bonds.  By any stretch of imagination, this is an excellent strategy for even a novice investor.  That’s why I say that we have not made much progress in personal investment over three millennia.

Anything that facilitates or increases diversification is excellent.  Anything that doesn’t is financial journalism.  Asset allocation is the highest form of diversification.  Asset allocation would also include international diversification.  And international diversification would include exposure to the US, the world’s major economy, regardless of doomsday predictions about it.

Asset allocation and diversification have survived across 3000 years.  Predictions haven’t. And if by luck rather than skill, this particular prediction comes true, so what?  It will only provide people like us with an opportunity to buy into a cheap US equity market.  We already have an SIP into the US feeder fund of Franklin Templeton India.  We will not hesitate to make lump sum investments when the Dow says “Oww…!”.

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