Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... I've been ranting about Epochal Change since late 2021.
Is it starting to become obvious that this isn't just "another run-of-the-mill bear market?"
My goal is to help you with useful and actionable educational resources so you're prepared for what's happening. Hopefully, I've done my job.
With that said, I've never really explained what epochal change is...
I thought the term was fairly obvious - that we entered a new epoch, different from the last 50 years - that causes different financial market characteristics resulting in a different optimum investment strategy.
But feedback from readers tells me it's not as obvious as I thought...
Passive investment strategies (like buy and hold) worked well during the last epoch spanning roughly 40+ years. In fact, those passive strategies worked so well that it was extremely difficult to add value through active risk management. That's because every market decline was met with a flood of new liquidity by the Fed resulting in perpetually rising valuations and lower interest rates (higher bond values). The S&P 500 was a top performing index, and bonds provided both diversification during declines and excellent risk-adjusted returns.
All of that is changed now.
This new epoch requires a more active investment strategy to both manage downside risk and deliver positive returns net of inflation and the expected crazy market volatility.
As I've said before, this isn't a normal bear market. It's a change of epoch. What worked for the last 40+ years won't work for the next 10-20 years.
This will all be obvious a decade from now, but by then it will be too late for your investments. You have to be out in front of the change with proper strategy, and there's still time (despite the current losses this year.)
The decision you faced 6-9 months ago when I first tried to prepare you is the same decision you face now, and it will be the same decision 6-9 months in the future. The new epoch will last longer than a decade with many dramatic market declines and rises. The interim losses so far this year for the buy & hold strategy from the old epoch change nothing about the investment strategy decision needed for the new epoch. It's better late than never.
To help you make a smart business decision, today's resources take you inside the epochal change puzzle. As I stated with our recent "sand pile analogy" newsletter a month ago, it's not one thing that is driving this change of epoch. It's the fact that nearly every fundamental driver reached extreme, unbalanced levels all at the same time that allowed the catalyst (inflation) to begin the cascade effect that history will show is a fundamental change of epoch. We've entered a window where years of change can accelerate into months.
But rather than my continuing to pontificate, maybe it will help to hear the exact same message in someone else's (highly qualified) words. Quoting from our top resource this week... - " We believe we're in a new world order that will shape the rest of our lives." (I think it will last 10-20 years.)
- "The old world order was a 50 year virtuous loop that led to the most dramatic global welfare creation we will ever experience. The boomers had a fortunate run."
- "The new world order is characterized by constraints - in liquidity, resources, global security - as the world transitions from global integration to multi-polarity."
- "Profligacy creates inflation, which ends profligacy." (Love that quote!! So clear, accurate, and succinct.)
- "We have no good historical analogs for financial and geopolitical regime change of this scale happening simultaneously." (Yep, that's why this is so big!)
- "The period of building paper claims on real things is over, and the period of calling in those claims has begun." (The epoch changed.)
- "Asset allocation will matter again. Skill will once again differentiate." (Optimum investment strategy changed.)
- "The last fifty years were a fluke - the unprecedented financial and geopolitical regime supported each other in a self-reinforcing way."
- "When all assets are rising regardless of fundamentals, alpha is hard work for not much relative gain, and beta is both easy and rewarding." (Which is why you firmly believe passive index buy and hold is the investment answer. That's what worked in the prior epoch. The strategy matched the epoch, but that doesn't equate to it working when the epoch changes.)
- "Now that liquidity is going away, the (disconnects between asset prices and fundamentals) are closing. Liquid strategies can navigate volatility correctly anticipating shifting fundamentals and rewarding in this new world, because prices will follow macro signals more reliably." (Translation: trend following is an excellent investment strategy choice for this new epoch, exactly as I've been encouraging.)
The last half of this article is far less valuable because it's big-brain thinking around predicting best asset allocation choice. Of course, none of that is necessary (or advisable) because it requires too much skill. Even the brightest minds in the business will fail. Instead, use my suggested trend-following solution so that the math automatically and systematically solves for the same problem for you, but with no particular skill required on your part.
Remember, this epochal change will last many years - probably between 10-20 years. I refer to these periods as "lost decades," which have occurred reliably throughout financial history.
You're just at the start of this change, so it's not too late to align your portfolio with it. Yes, it would have been better to start 6-9 months ago when I first told you, but you'll likely be saying the exact same thing six months in the future if you don't take action now.
It's better late than never. I hope today's resources help you make smarter decisions... This is our featured article where I pulled the quotes above. The first half of this analysis aligns beautifully with my analysis for epochal change. Loved, loved, loved it! The second half is big-brain forecasting which can be ignored if you adopt my investment solution that does all of that for you on auto-pilot using statistics and math with no thinking required on your part. The Fourth Turning - Tony Robbins Podcast with Neil Howe This interview describes one small aspect of epochal change - generational demographic and psychology shifts. Consider this an entertaining and digestible epochal change primer. It's only one small piece of the epochal change puzzle, but it's worth understanding anyway. Plus, it's an entertaining listen. I've been explaining how bonds no longer provide the diversification value for risk management in a conventional passive portfolio. You must do more to manage risk than just diversify. This brief research piece by AQR explains the issue, shows the history, and (once again) tells you the same investment strategy solution I've been advocating for the past 9 months - trend following. Are you noticing a consistency from so many well-educated, deeply researched analysts? That's because it's what works in this new epoch. It's not a secret. The solution is well understood. Are you going to take action and put it to work for you?
Onward and upward!
Todd Tresidder
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