Tom Noonan recently spoke at our staff employee benefits seminar. Below is a summary of some of the information he presented.
There is a common denominator in unsuccessful investing. During the last decade, investment returns have been near zero for many individuals, pension plans, and other retirement plans. There is a basic explanation for that fact. The markets usually accommodate the least amount of people. In other words, the majority of people buy when they should be selling, and they sell when they should be buying. Investment decisions are made where it seems comfortable and others are doing the same thing.
Remember the 90s? Growth was the only game in town. Dot coms ruled! Investment managers proclaimed it was a whole new market. It was different this time. Most investors found out that it wasn't different this time and it wasn't a whole new market. The markets just accommodated the least amount of people.
Remember the mid-2000s? Your neighbors and friends boasted of all the houses they were purchasing or already owned. Retirement plans increased their exposure to real estate. It was the safest and fastest road to positive returns. What happened? The market just accommodated the least amount of people.
Now I want you to fast forward to July 2010. What markets are accommodating the least amount of people? Number one would be residential real estate. They are giving away real estate throughout most of the United States. Banks are throwing houses away. Owners are walking away from homes. Experts say it will be many years, if ever, for prices to rebound (these were the same experts that owned multiple homes themselves a few years ago).
Two things to remember; there will not be any more land created and the markets usually accommodate the least amount of people. Where then, is everyone putting their money? Money from all over the world is gushing into U.S. Government bonds. Investors are gobbling up 30-year investments with annual yields of 3.9%. Is this a safe place to put money? The principle is guaranteed by the U.S. Government. What isn't guaranteed is what the market value of the bond investments will be worth over the next 30 years until maturity. The United States has a $13+ trillion deficit and climbing. History has shown that one of the few ways to get out from under big deficits is to inflate our way out. Pay back our debts with future dollars that are worth less. Should that happen, as it did in 1980-81, those investors flocking into 30 year government bonds could discover that more than half of their market value has disappeared.
All the experts say there is no inflation in sight and bond yields will remain low for many years to come. Remember, when all the experts say the same thing and all the investors do the same thing, something happens. The markets usually accommodate the least amount of people.
Thomas R. Noonan is the owner of Thomas R. Noonan Inc., a Registered Investment Advisory company and where he offers investment advisory services. He specializes in educational and training sessions for trustees and other pension plan participants. Tom can be reached at tnoonan1@bellsouth.net.
The views expressed in this article do not represent the views of Legacy Professionals LLP. Readers are cautioned that investments involve risks and uncertainties, and that actual results may differ materially from those contemplated by forward-looking statements.