Is “Professional Money Management” dead?

Summary: We believe professional money management is going to die a slow ugly death. This will cause extreme stress on the banking system and Wall Street. But this doesn’t have to mean your death. In the immortal words of my mother, “When I was a little girl, we weren’t aware that there was a depression. My father had his own business.” 

The disaster we call the 60/40 portfolio. 

In an op-ed we wrote years ago, (Now deleted) we stated the obvious. Retirees cannot retire on stock market investments. 

Why? It’s simple. You need a return ON your money and that return cannot be from capital gains. When you sell shares, somebody has to buy them. That means you are not retiring on the shares. You’re retiring on somebody else’s savings. 

Although people in the past could sell and find buyers, this only worked when there were excess buyers. Excess sellers, even small numbers, destroy stock values. 

When rates went to 1%, bonds became stocks. That was the end game for portfolio management. 

Thing that are free have no value.

This is the fundamental bedrock of economics. So, when money rates went to zero, everything money could buy had no value. This includes buildings, inventory and machines. 

To understand this concept, one must have a WORKING understanding of cost accounting. This understanding is not something this article will give you. 

Small investors are clueless. (And that’s the danger)

The reasons are myriad. 

First and most importantly, they aren’t sold investments, they’re sold overly simplified portfolio concepts. This discussion is about how much risk “they are willing to take.” But they’re also told that risk is mitigated by a weird concept called “allocation.” 

Second is the simple fact that their “advisors” don’t know any more than they do. This is because advisor training revolves around that weird concept called portfolio allocations. These allocations are designed to sell portfolio allocations. 

By selling allocations and forcing clients to accept risk waivers, the banks and Wall Street have taken literally all of the nation’s investment risk and put it in your 401k. 

A quick aside…

Market returns are measured from market peak to market peaks over duration space. It’s a very complex concept because a duration may be an interest rate cycle, an economic cycle or your life span.

The last cycle was the 2000 market peak and the 2022 peak, a period of 20 years. During that time stocks went up 250%. Great news? Hardly.

House prices went up 350% and gold went up 600%. 

What should your advisors’ job be?

Well, according to FINRA the advisor regulatory board, it’s to protect the client. How can you protect the client when you make money putting them at risk?

There are two basic problems with this. First and foremost, your advisor probably doesn’t have the skill. But hidden in the fine print is the fact that all they can do is adjust you into another portfolio allocation. 

The snarly science of duration space.

We live in a space time continuum. Your time on earth is limited to life expectancy, 78 years or so. But within this time, you have learning years, perhaps to age 22. After that there are experience years. There are child rearing years and finally, perhaps from age 45 to 65, peak savings years. 

That means if you were born in 2000, you missed the entire up market bubble cycle. We are now in a rising rate cycle. 

Do you see the problem with duration?

It doesn’t matter what the stock market has done. All that matters is what it’s likely to do over your personal duration space on earth. This is where YOUR decision is critical because this is where your ass resides. 

The 60/40 portfolio is a sleepwalking disaster.

It’s a disaster for three reasons.

First, rising interest rates from the artificial 0% rate are repricing everything. (There is no safe space.)

Second, because your advisor will try to delay you doing the safe thing. 

And finally, because the cost of closing out your 60/40 401K portfolio can be as high as half of the value. (Spoiler alert: Your 401K has a guaranteed principal option. Your advisor will tell you not to use it.) 

Should you close out your 401K?

We’re not advisors and have no intention of making that call. We’re a systems engineering company. We build SE models (1) for small businesses to predict possible profitable niches in existing businesses and startups.

What we do recommend… 

Is that you start to think in systems and adopt a SE mindset that encompasses your finances and your personal duration. 

For example, let’s say you are 30. Imagine that there is (another) real estate collapse and Florida homes are selling for 20 cents on the dollar. When that happens, will you have the market knowledge and financial resources to capitalize on that? 

Let’s say you’re 50 and want to retire at 60. Can you develop a second income that gives you mad money to empty your bucket list and not have to cut coupons. 

You cannot hire this skill out.

There are certain resources you can use. (Namely the Landon Fillmore Systems website) But we suggest that you do it yourself. 

A good book to get you started is “Thinking in Systems,” By Donella Meadows. Donella was a professor of systems engineering at MIT and a marvelous woman who died tragically at a young age. Her book is required reading at Landon Fillmore. 

A disciple of hers, also an engineer once said, “when I started thinking in systems, I learned that most of what I knew had no value.” 

(1)  Systems models are models that anticipate possible future scenarios in a process. We then look for forward and backward operating loops. (This is not as complicated as it sounds.) 

For example, imagine you own a coffee shop. You have a process that gives you a profit margin. Forward loops will increase profit, like selling more to an existing customer, having higher priced menu items, faster service, etc. Backward loops are things that hinder process, like an employee calling in sick, more expensive coffee, etc. 

These changes are incorporated strategically into your process. And no, this is not easy! If it’s not doesn’t intentionally and systemically, it cannot be achieved. (Spoiler alert: Major corporations do this continually.)