Monday, November 20, 2023

According to investing legend Bill Gross, who’s best known for founding asset management firm Pacific Investment Management Co. or PIMCO in 1971, many successful investors have been more lucky than good. He even said he wouldn’t have been so successful without luck.

Gross thinks folks don’t understand what an easy time they’ve had since about 1980. Many investors have done well over that span. They’ve saved, invested in 401(k) accounts, and whenever the market fell, they bought. Stocks always recovered and eventually achieved new highs.

But many of these investors have no experience outside the 1980-and-on boom years. By any measure of financial history, the last four decades were one of the most significant periods of asset price growth ever.

A remarkable 91% of the price appreciation for the “60/40” equity and bond portfolio over the past 90 years comes from just 22 years (1984-2007). Similarly, 94% of domestic equities returns, 76% of bond returns, and 72% of home value appreciation over the past 90 years came from the 1984-2007 timeframe.

Another investing icon, Oaktree Capital Management co-chair Howard Marks, said the most important financial event in recent decades was the 2,000-basis-point decline in interest rates from 1980-2020. It was probably responsible for the lion’s share of investment profits during that span.

Easy capital gains distort behavior, according to Marks. Things are built that otherwise wouldn’t be built, investments are made that otherwise wouldn’t be made, and risk is absorbed that otherwise wouldn’t be accepted.

If “easy money” is done, Marks thinks economic growth could be slower, profit margins could erode, default rates could rise, assets may not appreciate as reliably, and financing may be more expensive. In other words, the future won’t look like the past.

This should be a wake-up call for investors.

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