I have always been intrigued with the idea of a portfolio of assets you can sleep on for twenty years. In fact, it is probably a pretty good way to think about how you should invest.
To refresh memories, recall that Rip Van Winkle was the creation of Washington Irving. He was a pre- American Revolution Dutch farmer who was both lazy and hen pecked. As the story goes, he meets a bearded man wearing antiquated Dutch clothing who is struggling with a keg of beer. Rip helps him carry the keg up a hill and finds himself among a cohort of bearded men playing nine-pins. Rip joins in the fun and then wakes up 20 years later and finds the colonies have become a nation.
If Rip were around today, and knowing that he was prone to long comas after a pint too many, he would be besieged by his brokers from TD Ameritrade or Goldman Sachs to put all of his money in front end load products of indefinite duration. Knowing Rip is a student of all markets and observing this chart that overlays the rise of the S&P 500 to M-2 (a recognized proxy for liquidity that includes cash, checking accounts and near cash like money markets) what would he do with $5 million if he had to pick no more than 5 investments:
A Condo In Aspen
His first million might go for exclusive real estate- a pied a terre in Paris, an apartment in NYC, a ski chalet in Aspen or a summer house on Nantucket. Unfortunately, these real estate ideas all cost more than a million bucks and would all require lots of debt and Rip knows he is going to default on that loan and lose his equity. He ends up looking at a condo in Myrtle Beach for $700,000 with $300,000 in a maintenance, repair, taxes and insurance fund to carry the property for 20 years.
A Bullet Proof Bond
A sure bet should be US Treasury Bonds. He can buy a 30-year bond that will yield 3.0% backed by the full faith and credit of The United States Government, but he is a little bit unnerved about the high amount of National debt ($21 Trillion) and the high and growing Debt to GDP. Japan’s balance sheet looks even worse so his only real choices are long term bonds issued by Germany and Switzerland. Germany with a low yield of 1.23% is preferable because the Swiss 30-year bond offers only 0.635%. In fact, the yield on the Swiss 10-year bond has been negative which offends a Dutchman like Rip who does not think you should ever pay someone an annual fee just to return principal.
An ETF For the Ages
Rip is hip and he understands that active managers are blood suckers. He is just about to choose SPY, a low fee ETF that mimics the S&P 500 but then he remembers the chart above that shows an alarming correlation between the slope of creation of liquidity and the amazing ascent of the S&P 500. He also worries the market as a whole might fall if central bank liquidity really goes towards repaying debts rather than supporting the stock market and all other asset classes. He also remembers the crash and the long slumber the Japanese Nikeii has endured since 1991 under similar conditions. Instead he gets really interested in algorithmic robo advisers like Betterment with the hope that artificial intelligence will replace human stock picking over his long slumber.
Rip is friends with a few people in the private equity business and he understands from his pals at Cambridge Associates that PE performance has been exceptional over the last 20 years. He likes the idea of owning a portfolio of operating businesses. He is a little leery of the high reliance on borrowed money and the nosebleed valuations. He is also a little concerned about a 20-year commitment at this point in the economic cycle and he is not sure about splitting 20% of the profits with the managers.
Rip does not understand Bitcoin or the Blockchain Technology but being a Dutchman, he remembers 1630 and speculation in tulip bulbs called tulip mania. He is intrigued about owning an alternative to fiat currencies, but Bitcoin is just a little too speculative.
Commodities, gold, silver, diamonds, art, raw land, forests, wine, coal mines in West Virginia- these are all possibilities, especially getting a coal mine on the cheap. In fact, the idea of buying farmland in upstate New York instead of a condo in Myrtle Beach and burying gold and silver rather than buying German bonds is pretty appealing. He probably will not grow his $5.0 million, but he probably won’t lose it all either.
Rip is embarrassed to tell his investment advisors he is buying land and burying gold. There are pages and pages of completely liquid and highly rated investment products festooning the pages of The Wall Street Journal and Barron’s. Many of these have small investment fees and expenses. There are also highly respected asset managers with eye popping investment performance over the last 10 years who charge high fees but are probably worth it.
Rip is just concerned the conditions under which long term investments are made must be relatively stable and predictable. For a Rip Van Winkle portfolio to work you need constancy. That word would not describe Black Monday or the Tech Bubble or the credit induced real estate mania of the BIG Recession in 2008. Nor would it characterize its liquidity induced recovery. Shovel ready led to QE1 and, even though things were improving, to QE 2 and then QE3 and now a Trump tax cut. The bad actors in all of this are the Congress and the devil children from The Federal Reserve Bank.
They have good company. According to the International Monetary Fund Central Banks all over the world have manufactured more than $200 Trillion of debt and many central banks are taking unconventional approaches to managing their economies. For example, the Bank of Japan is openly buying ETFs to boost the Japanese stock market as part of Abenomics and the Swiss central bank is running a sovereign wealth fund. What happens when they run out of money?