Long-term investing requires patience, diligence, and an understanding of financial markets. For many, a helping hand in the form of an experienced financial advisor is valuable. Any competent advisor understands the importance of diversification to long-term success. Those who do not are speculators, not worth the fees and commissions they collect from clients and customers. Avoid those “so-called” advisors.
Types of financial assets (Primary Asset Classes) include Cash and Equivalents, Domestic Stocks, Domestic Bonds, Foreign Stocks, Foreign Bonds, Real Estate, and Alternatives (commodities, etc.). Diversifying a portfolio is a process of adding assets from more than one Primary Asset Class. How many are included is a function of portfolio value, investor preferences, and the advisor's skills, if there is one.
Given those parameters, I was surprised recently to read that Bill Gross had declared his concept of “Total Return Investing,” or “TRI,” to be obsolete. Explaining my surprise requires some background information. First, Bill Gross is widely considered to be the GOAT (Greatest of All Time) in his niche, which was in bond trading. He co-founded PIMCO, which remains one of the premier investment companies in the world.
Total Return Investing, the concept Gross developed around 1981, used bond coupon yields, along with bond value changes from natural fluctuations in market interest rates over time. When interest rates rise, bond prices fall, and vice-versa. Through tactical buying and selling, Gross added trading profits to interest payments, dubbing his outstanding results “Total Return Investing.”
Why is Gross now abandoning TRI? According to his recent statement, it is due to today’s low bond yields, generally in the 4% to 5% range, compared to the 16% yields available in the early 1980s.
Van Wie Financial continues to believe in and practice Total Return Investing. Where we differ from Mr. Gross is in portfolio design. Gross applied his TRI to a portfolio of only bonds, a single Primary Asset Class. In doing so, he excluded from consideration other forms of income and asset appreciation. Dividends from stocks and Real Estate Investment Trusts (REITs), swings in commodity prices, and worldwide variations in economic conditions also provide elements of Total Return Investing.
When we praise TRI, we encompass the full range of available financial assets to diversify portfolios. In this environment, Total Return remains a viable concept. Over time, the main component of portfolio performance is derived from asset diversification among (and within) Primary Asset Classes.
Van Wie Financial is fee-only. For a reason.
