#TheZero


Zero is both a number and a concept and as such, zero is critically important. But as zero, the number, becomes more associated with benchmark interest rates and returns on bonds, its importance cannot be understated.

At the beginning of what could be a prolonged period of policy-fuelled financial repression, we will all have to focus on zero, its impact on investment decision making, and its impact on asset allocations. We have only begun to see zeros everywhere.

At its most basic level, zero is the absence of anything; that absence can be a hard concept to explain. Most simply, the absence of things can be taught to children, much in the same way I taught it to my brother when I took all his toys away. Perhaps he would see it as poetic justice that the concept of taking away, until nothing remains, is my focus here.

Today, #TheZero means simply this: that nothing is left.

The CIRCLE of life

The absence of income manifests with Zero Interest Rate Policy (ZIRP), when benchmark yields approach zero. In this instance, the basic 60/40 investment portfolio strategy seems to inspire more questions than answers. Can we achieve a balance between growth and safety? Will bonds any longer offset equity volatility? How do we earn income? If the base return is zero, or negative, are we still looking for alpha? Or, do we need to now re-examine the risks that we take on in order to earn that alpha.

Indeed, should we revisit the merits of exposures to certain asset classes and their current efficacy as return generators?

Clearly, there is some basic maths to reconsider, not just at the fundamental level, but at the investment allocation level, and at the life planning level.

#TheZero has material implications for how we live our lives, not just for our investments.

Add the zeros to the end through hard work

I’ve always liked simple concepts. The simple life plan: work hard, get a scholarship, educate yourself, get a job, care for your loved ones, save money, invest, retire and live off of the income your invested savings generate. Invested savings, as a simple rule, meant bonds. Using bonds was the plan because you could earn income and maintain your principal. Simple plan, ironclad... or so I thought.

What happens when simple becomes complicated? What happens when the coupon income generated by bonds is close to zero?

With zero income, the maths no longer works for retirees, not to mention for those that manage pension plans for the benefit of retirees.

Furthermore, in a demographically top-heavy society, this problematic paradigm is compounded.

If savings do not generate adequate income, you have three options: you must be willing to spend down your savings, you must be willing to reduce your expenses, or you must continue working for a longer period prior to retiring. This reality is becoming more common and I’ve seen a new acronym to represent it, “D.A.D.”, which stands for “Die At Desk”.

This is the impact of “The Zero”, and it will get a lot of attention, it certainly has ours (or mine).

Macabre? Yes. Escapable? Definitely.

Please find the full article as a PDF below.

Read the full report

#TheZero 8 pages 

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