Personal Wealth Management / Expert Commentary
Fisher Investments’ Ken Fisher, Answers Your Questions on Retirees’ Asset Allocation, the Fed & More
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher answers viewer mailbag questions about retiree’s asset allocation, Federal Reserve policy and why the yield curve is different this time. Ken believes a retiree’s asset allocation should be determined by their individual financial circumstances and investment time horizon. According to Ken, investors with long time horizons should invest mostly in stocks. However, as one’s time horizon shortens—due to age or other circumstances—he believes reducing stock exposure to mitigate short-term volatility may be appropriate.
Next, Ken discusses the Federal Reserve’s impact on markets. Ken believes central bankers are mostly reactive to current economic conditions. Ken believes this reactivity leads to inconsistent messaging, which increases investor uncertainty and market volatility. However, Ken doesn’t expect Fed rate hikes to “kneecap” the economy since bank lending and credit creation remains healthy. Historically, a deeply inverted yield curve—notably, the difference between short and long rates—was a reliable sign of impending recession because it generally reduced bank profit margins and loan activity. However, Ken thinks the yield curve isn’t a useful proxy for bank’s willingness to lend currently—noting that bank lending has remained robust despite a rapid rise in short-term interest rates.
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Ken Fisher: We will not bail out Silicon Valley Bank. The next day, Sunday, Treasury, FDIC and the Federal Reserve collectively bail out all the depositors 100%. They don't bail out the shareholders. They don't bail out the creditors. They say it's not a bailout, but it's bailout. And in that, those kinds of inconsistencies scare the dickens out of the market.
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A banner identifies him as Ken Fisher, Executive Chairman and Co-Chief Investment Officer, Fisher Investments.
Ken Fisher doing hand gestures with paper messages in his hands time to time explaining and reading questions.
And each time he reads a question a green screen shows up with the question written.
Ken Fisher: It's every month people send in questions, and I try to respond to them in this format that allows you to know what I think very quickly about a whole variety of topics.
Ken Fisher: So, here's one that comes in. How would you respond to folks who bring up sequence of returns as a reason to weight your portfolio more heavily toward fixed income once in retirement? Well, I'd respond to them saying they don't know what they're doing. The fact is, the concept of sequence of returns is one that makes perfect sense if you don't really have a long-term view. And let me explain why. If you buy at 100 and the market falls by 30%, at that moment you got 70 and it takes a 50% increase from 70 to get to 105 which means you need a bigger than 30%, almost 50% return to make up for a 30% drop. So, the theory is that if you have a portfolio that falls markedly first, you got to make up for it with even more later.
Ken Fisher: Now, that's true if those are your points, if that 70 is important to you relative to your cash flow in retirement, it kind of makes sense a bit. But most people in retirement, the average 65-year-old man married to a 60-year-old woman, which is about as common a couple as you get, one of the two of them is going to live more than 20 years more, maybe 30 years more, maybe longer. And they have a fairly long-term horizon.
Ken Fisher: And over the course of that period, the first and seconds just keep repeating each other. And if you do what sequence investors think you should do, which is make your portfolio more defensive, less volatile, because of the risk that you could have a down move first before an up move, which you always could have, you end up with a lower long-term return. Because in very long periods, stocks do better than bonds, stocks do better than cash. Not in the short-term necessarily, but in those long-time horizons that most retired folks have, the fact is the sequence of return argument leads you to worse returns.
Ken Fisher: Another question that's sort of parallel to this is is an 80/20 allocation of stocks and bonds or stocks and cash or a 90/10 sufficient enough to reduce overall portfolio volatility in your portfolio? Well, some people as their time horizon they need their investments to work over, gets shorter, do need to reduce the volatility in their portfolio.
Ken Fisher: But it's a little bit like saying if you put your toe in the water. Are you very wet? Well, not as wet as if you put your foot in the water and not as wet as if you go down to your knee, but it's actually hard to stand on the side of the pool and go down to your knee without falling over sideways and then you get all wet. What's the right amount?
Ken Fisher: And the answer is, and this is really simple as I explain it to you, if you have a really long-time horizon, you don't really need to reduce volatility at all. As you get older, you get to a point where your time horizon will get shorter. Not so much when you're 55 or 60 or 65, but after that. And as it gets shorter and shorter, you could start with 90/10 and that's the right amount of volatility. Then it gets a little shorter and you go to 80/20 and then 70/30 if you want.
Ken Fisher: But the reality is there's not a magic number that's right for all. And when I say that to you, it should make sense to you that there's not a magic number that's right for all. That kind of has to be figured based on your time horizon and your circumstances. But a 90/10 doesn't give you much portfolio volatility reduction, but it gives you a little bit, 80/20, a little bit more. You go from your toe to your foot to your knee. But the reality is, for most people with a really long-time horizon, you want to be in the water the whole time anyway on the next one.
Ken Fisher: Why does a market go up and down so much every time the Fed speaks, when the market should have priced in these moves weeks ago? Should the Fed be stopped from speaking? I don't know. I've always been a Fed critic. And if you've heard me before, I'm not just a Fed critic, I'm generally a central bank critic. I don't believe central bankers actually are more than mostly not 100% as it comes to monetary policy, other than reactive. They're not leading us to something mostly. They're mostly following what happens and they react month to month. So, you get a period like January where the inflation numbers come in higher than people expected in February and people freak out and so does the Fed. And the Fed people start talking about how they got to raise rates more to fight inflation. Well, they weren't saying that the month before. So, the inconsistency freaks people out.
Ken Fisher: And then you get a period where things come in better in terms of the things they worry about and then they talk otherwise. And you take something like Silicon Valley Bank, Janet Yellen, not the Fed Secretary Treasurer who used to be head of the Fed, says on the Saturday that Silicon after Silicon Valley Bank failed the Friday, Saturday, we will not bail out Silicon Valley Bank. The next day. Sunday, Treasury, FDIC and the Federal Reserve, collectively bails out all the depositors 100%, They don't bail out the shareholders, they don't bail out the creditors. They say it's not a bailout, but it's a bailout. And in that, those kinds of inconsistencies scare the dickens out of the market. In fact, when governments ever say inconsistencies, first we say this, then we say that, then we say this. You say this, I say that. This member of the Board of Governors says the one thing. The other member of the Board of Governors says the other thing. And they conflict two weeks apart. It drives people crazy. And the reality is they don't know what they're going to do. So, what they do is often a surprise at the last minute. Sometimes it's not. Sometimes it is. What they say a lot of the time is because they're talking all the time. I wish they wouldn't talk. The question says, should they be banned from speaking? I wish they wouldn't speak. But there isn't really the authority to stop that. That would take an act of Congress. And actually an act of Congress is really hard to do.
Ken Fisher: And I'm not Catholic. Maybe you are, maybe you're not. But traditionally Catholic people love the Pope and make sense why they would. But once you look at somebody that's head of the Fed, for the most part, most people treat them as nearly as sacred as the Pope, as if they had some all-knowing power. And members of the Board of Governors are kind of seen as one step away from the Pope of Finance. And as that happens, their utterances as they wiggle around cause inconsistency and cause uncertainty. And that's what makes markets volatile relative to them.
Ken Fisher: With that comes the question, what consequences of Fed rate hikes are you concerned about? Really? Not so much. Because what the Fed does is it raises Fed fund rates, which impact US treasury bill rates, but don't really have a lot more impact than that. People often think they do, but they don't. The fact in this environment, in other environments they sometimes can and have often in history. And there's been long periods of time where long periods of time where when the Fed has raised rates or lowered rates, it's had huge impact. But right now, it's not having much impact really, which you could tell by the fact that over the course of the last year, they raised rates more than they pretty much ever have in a year.
Ken Fisher: And meanwhile the economy keeps going on and the drops in things like grain prices, in oil prices and what have you and the supply chain unsnarfling mostly all happened before they ever started making any of their 75 basis point hikes. But to that point, that goes to the next question asked.
Ken Fisher: Does the historically inverted yield curve not matter this time? Why is this time different? Well, anybody that's read me for a long time has probably known that in decades past I would regularly cite the yield curve. That when it becomes so called inverted. Inverted meaning when short-term rates get above long-term rates. So short-term rates, intermediate-term rates, longer-term rates, very long-term rates slope downward with short rates above longer-term rates. I would have always said that leads to recession and until it ends is probably parallel to a bear market continuing. Why? Because what I would have said then, and did say that, is that this is a reflection of future banking system eagerness to lend, Why? Because the core business of banking, whether it was Silicon Valley Bank or any other bank, they do other things. But the core business is taking in short-term deposits as the basis of making long term loans. And if they have to pay a lot more for the short-term deposits then they're going to get off the long-term loans. Then there's no profit incentive to lending at those lower long-term rates and they're not going to do it. But when short-term rates are above long-term rates, they would. Now, most of my life the Treasury Bill rate for 90-day T bills has been a pretty good proxy. Not perfect, but pretty good proxy for what it has cost banks to get deposits that they would use short-term deposits that they would use as the basis for making these longer-term loans.
Ken Fisher: I am not going to get into a detailed treatise of how banking works, but those longer-term loans falling to varied pockets in a normal bank, handled varied ways. And that's all very well understood, but the aftermath of what happened with COVID and the period actually leading up to COVID a little bit, flooded the banking system with deposits as short-term interest rates were very low that had the deposits costing the banks almost nothing. And you'll remember short-term rates being low. But what you don't think about is if you go to JPMorgan today or bank of America or Citigroup and you want to put in a deposit, on average you get paid about one third of 1%, But mortgage rates, you know where they are. That's a common thing. Banks lend to banks lend longer term to businesses and those rates are higher, mostly higher still, with the exception of just a very few kinds of businesses.
Ken Fisher: And banks also buy long term government bonds and a ten-year bond right now is just a hair whisker over three and a half percent. So if you got a cost of 35 basis points of 31%, 33 basis points and you're lending out a ten-year Treasury Bill rate a little over three and a half percent, you got a whopping profit margin on doing that, you got a lot of incentive to lend. Normally, yield curve inverts long term rates are higher than short-term rates. Banks stop lending. The lending kills the economy because businesses and people who were dependent on borrowing before are dependent on borrowing to continue. And when the bank says, Give me back my bullets, they have to pull in their horns and they can't do the activities that they previously engaged in. And that shrinks the economy. In 2022, as the Fed raised rates steadily, loan growth actually increased. In the beginning of 2022, it was operating at a four and a half percent annual rate. By the time we got to the end of the year, it was operating at a 12% annual rate. Loan growth accelerated because those deposits stayed the same at low costs to the banks, regardless of what happened to Treasury Bill rates and long rates went up out of increased fear of inflation.
Ken Fisher: And as that happened, when one long rate goes up, all the rest of them tend to go up in parallel mortgage rates, corporate bond rates, and rates for intermediate-term business loans. And so, banks make more profit from lending. As they make more profit from lending, they keep going. It's why it's different this time. And until you see lending in aggregate for the banking system. You can see this online from the Federal Reserve of St. Louis every two weeks, two weeks after the lending numbers are actually completed, until lending falls below the inflation rate, it's pretty hard to have the economy go bad, which is what the Fed's banking on doing to try to stem inflation, kneecap the economy.
Ken Fisher: So, I think we've covered all of the points. I always enjoy talking to you about these. Keep sending questions in, hopefully I can answer them. There's a lot of things I can't answer. but I always love talking to you. Thank you so much. Subscribe to the Fisher Investments YouTube channel if you like what you've seen. Click the bell to be notified as soon as we publish new videos.
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