Jeremy Grantham writes an article WAITING FOR THE LAST DANCE The Hazards of Asset Allocation in a Late-stage Major Bubble.
“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.
These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.
But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.”
How are clients to tell the difference between extreme market behavior and a manager who has lost his way? The usual evidence of talent is past success, but the long cycles of the market are few and far between. Investors need to have a clear strategy. Otherwise, investors end up justifying their lack of action in the comfort that everyone else suffers the same fate. Being wise after the event still loses money.
It doesn’t matter if your decision is to alter your asset allocation today or keep it exactly the same; what matters is you have thought about your action. Are you going to hold, sell or buy? Whatever you choose, you need a reason.
If the bubble bursts, and there is nothing you can do about that, with a sense of purpose now will mean your future decision-making will have a purpose. If the bubble bursts and you have not given your investment any thought other than, hey, my investments are going up, then how will you make good decisions? Mike Tyson says everyone has a plan until you are punched in the face. Make sure you have a good strategy as the bubble keeps growing.
Download the article here.