Horizon Kinetics: indexation and asset allocation models are broken

Investors now face questions they haven’t had to consider for decades.  Until this past year, the entrenched basketof-securities approach to investing meant one didn’t have to think, one just bought the recommended asset classes.  That approach is now in disarray.  It depended on a simplistic presumption that the prior 20 or 40 years of daily price data represented normality.  It couldn’t contemplate a change in those presumptions.  History is a lot messier.  That data, it turns out, described an anomalous period, not a normative one. 

It should now be clear that indexation and asset allocation models – at least as practiced – can no longer be relied upon as having predictive value.  Bonds, for instance.  Over the past 20 years, after taxes, they returned only about 2%, annualized.  Even accepting the government’s CPI calculation that inflation averaged only 2.5%, that means bonds had a negative real return, a two-decade loss of purchasing power.  That was not supposed to happen (on the reasoning that it hadn’t happened before).  And that was during a period of relatively benign inflation.  ‘Benign’ is not the likely caption for the next 20 years.  Rationally, one must rethink one’s approach to bond investing.  One must rethink other presumptions about the standardized approach to investing.

~ Horizon Kinetics 2023 investor letter, January 4, 2023

Murray Stahl