Two pieces worth reading today from Eleanor Laise at the Wall Street Journal, which go along with what I have been writing in my Unstable Value Funds series:
I just want to make the short, simple point that an investor can only get two of the following three items (at best):
- Principal Protection
- Liquidity
- Above-Market Returns
Perhaps I am a bit of a pessimist, but as a wide number of products came into existence attempting to offer all three back in the 90s, I would ask questions like, “But what happens if you have losses on assets and redemption requests at book at the same time?” An answer would come back on the order of, “You worry too much. We’re making money.”
True, as parties are willing to take more and more risk, you can get all three for a time. But over a full market cycle, it can’t be done. And, by a full market cycle, I mean a period of time long enough to include a major debt deflation, like the 30s and now.
So, be aware of withdrawal provisions on your investments, both the formal ones listed in the prospectus or its equivalent, and the informal ones where ability to withdraw is suspended as a matter of fairness to all clients, and/or protecting a business at a financial firm (though risking lawsuits in the process).
Also, try to understand what underlies the shares in any pooled investment vehicle that you own. If the underlying does not have a liquid secondary market, the shares of the pool won’t be liquid under all conditions. If the value of the assets vary considerably over time, stability of principal won’t be possible under all conditions.
So, be aware. Though there are laws and courts, you are your own first and best defender when it comes to any investments.
Interesting excerpt from one of the articles:
“To sell property at inappropriately low prices in order to generate cash for a few would hurt the majority of investors and violate our fiduciary obligations,” said Terri Hale, spokeswoman for Principal Financial Group Inc., the parent of the fund’s manager.
INAPPROPRIATELY LOW?
How do you interpret that statement David?
It seems to me that maybe there is still a sort of collective delusion that ASSET prices, houses, commercial real estate, stocks, etc. are at some temporary VERY WRONG price, and it is just a matter of time before they rebound much higher to the “RIGHT” price.
Is it just me or does it seem like many including those with financial/investment backgrounds don’t fully grasp the implication of the substantial deleveraging/debt unwinding, and that the asset prices they thought were APPROPRIATE and NORMAL were based on an unsustainable debt level?
I’d be happy to settle for above-market returns and principle protection, ignoring liquidity for the most part. What you got?
We can sell you some privately placed notes, if you are a QIB. If you aren’t a QIB, you can buy a long-dated CD from a bank — if you are under the FDIC limits you can just go for the highest yield. That is better than T-bills, which are the “risk free” asset for those of us who spend dollars.