U.S. Investors Act as If Markets Owe Them Something
(Bloomberg Opinion) -- God bless America, the land of the most spoiled investors on the planet.
I was in Buenos Aires earlier this month at the same time the Argentine peso was starting its freefall. But that’s not unusual for Argentina, where the peso has depreciated some 95 percent against the U.S. dollar in just 17 years. It’s even worse the further back you go. Citizens of Argentina spend a lot of time trying to obtain dollars, whether through official means or otherwise. I’m not talking about dollars in a bank account. People there haven’t trusted the banks since the government defaulted in 2001. What they don’t exchange into dollars they spend within an hour of getting paid because inflation is out of control, rising 25 percent in April alone.
That would seem to be a horrible way to live, but the Argentines have done it for decades. They are used to it. Meanwhile, Americans are not content with a stable currency and low inflation. They think stocks are supposed to magically produce gains of 8 percent to 10 percent a year, and all it takes to get rich is to blissfully go along for the ride and hang on like bloated ticks. We are having this ridiculous debate about the alleged underperformance of actively managed funds in the U.S. versus their passively managed counterparts. But let me tell you something: Argentine investors would be over the moon to own a dollar-denominated U.S. mutual fund that underperformed the benchmark by 50 basis points and charged a little more in fees.
As you travel around the world, more places look like Argentina than America. Even in the developed world, things are not so good. European stock markets are basically in the same place they were three years ago. Canada’s stock market has turned into a perennial laggard. Equities in Japan — which is a disaster from an economic as well as fiscal and monetary policy perspective — remain far below their 1989 peak. A handful of developed-market countries have housing bubbles. Do people believe in “stocks for the long run” in these countries? Most places in the world, if you tried to pitch buying and holding and dollar-cost averaging you would get laughed out of the room. What would have happened if you dollar-cost averaged Iceland?
In emerging markets, Chinese equities have basically been a random number generator given the government’s frequent interventions when things go south. Russia’s fortunes are tied to the price of oil and sanctions, and Brazil has been buffeted by countless political corruption scandals. Turkey is a mess, and South Africa is on shaky ground. In frontier markets, the big issues are no liquidity, no U.S.-style accounting standards, no disclosure, and a heightened potential for fraud.
I would classify the debates we get into in the U.S. financial media about the societal benefits of private equity, the merits of high-frequency trading, and the proper amount of corporate governance as champagne problems. There is nothing wrong with improving the current system, but I find that most finance people have zero perspective on the types of struggles that foreign investors face on a daily basis, such as with inflation. For all the analysis and fuss we make about inflation in the U.S., it is simply not much of a factor in corporate or individual economic decisions. In some countries (such as Argentina) inflation influences every economic decision.
Which brings up another point: No matter how much Americans complain about their banks, the U.S. has an incredibly sound financial system — with generous deposit insurance to boot. In most places, you want to be in the business of selling safes.
Americans need to stop acting as if the financial markets owe them something. There is nothing that says stocks will definitely return 8 percent a year in perpetuity, or that the economy will continue to grow in straight-line fashion, or that a 60/40 portfolio of passively managed stock and bond funds will set you up for a comfortable retirement. In most places in the world, investing requires a little more thought than picking the same index fund as 20 million other people and then getting upset if it doesn’t go up.
Perhaps instead of getting twisted up in endless debates about things such as investing fees, spend a little more time on building an asset allocation that will help your portfolio survive an environment routinely faced by many overseas, which probably means holding a little more hard assets and real estate and fewer stocks. Also, a little more cash, which gives you the ultimate in optionality.
The U.S. is so rich that its people think investing is easy. Everywhere else, people know better.
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