Larry Swedroe: 10 Big Risks Threatening Markets Now

I can’t predict, but economic growth can be impacted.

Active investing is “the loser’s game,” you write. Why is that? Charles Ellis argued that in his seminal “Winning the Loser’s Game,” first published in 1985.  

The odds of winning are so poor. Unless you get entertainment value from it, you shouldn’t play.

Wall Street will never tell you that active management is a loser’s game because it’s not in their interest. They need you to trade a lot so they can make the bid-offer spread and get their commissions. 

So then, you favor passive investing?

I don’t like the word “passive.” I prefer Nobel Prize winner Eugene Fama’s description: no individual security selection — stock-picking — and no market timing.

All index funds are passive investments, but there are a lot of passive funds that are not index funds. I invest in passive funds, but none are index funds.

What’s in your portfolio?

Probably more than 40% is in alternatives: funds from Dimensional, Avantis and Bridgeway, which are highly diversified, systematic, transparent, replicable.

I own lots of things that aren’t exposed much to the equity markets, and I’m not exposed to inflation. I own reinsurance funds, long-short funds, a life settlement fund, a drug royalty fund. 

On the bond side, I own municipal bonds.

What else should advisors know about alternatives?

The average retail investor in the U.S. probably has between zero and 10% in alternatives.  

But thanks to the introduction of interval funds, investors can have access to what was [available to] only to big institutional investors and super-high-net-worth individuals. 

Should people be investing in international stocks?

You have to avoid home-country bias because we don’t know that the U.S. isn’t the next Japan.

The only way to deal with uncertainty is with diversification.

You write that gold isn’t a safe haven. Please elaborate.

It certainly isn’t an inflation hedge except if your horizon is, maybe, 100 years!

It’s an inflation hedge with no real asset return over very, very long periods. It tends to do well over very short periods when inflation is running way up. 

But when the Fed comes in and drives interest rates way up and inflation down, it tends to get hammered and be terrible for 20 or 30 years till inflation rears its head again. 

What’s the issue with investors’ preference for stock dividends?

It’s completely illogical. People think when you get a dividend, it’s income and that the IRS taxes it as such. It’s not income. The income is the profits that the company earned, and they’re already taxed on it.

They’re returning that capital to you when they pay a dividend, and you now have to pay taxes on it. 

It reduces the value of the shares one for one even before that tax impact.

You can’t create money by paying a dividend. It’s just a transfer from the company’s coffers to your coffers.

Credit: Tom McKenzie