What sort of investment advice book would you expect to see after an eight-year bull market run in the US stock market?
Well try Unshakeable: Your Financial Freedom Playbook by the giant of US motivation speakers Tony Robbins, with the assistance of wealth manager Peter Mallouk.
It reminded me very much of the tomes extolling the virtues of home ownership and flipping property just before the sub-prime mortgage crisis that resulted in the global financial crisis (GFC), the worst such episode since the Great Crash of 1929.
Then US homes were supposed to be the easy way to a fortune. I remember reading a book that explained how to put down a deposit with your credit card. No prizes for recalling how that epic boom ended for the average investor.
Now I must admit to being a Tony Robbins fan. His positive energy and enthusiasm is the very essence of the American dream, as is his own rags-to-riches tale.
But I wonder about the switch from personal motivation orator and author to investment adviser. True he has made a fortune and seemingly invested it wisely, and his fame brought him access to 50 of America’s top investors for advice.
However, distil the message down to basics, as Mr Robbins loves to do himself, and you are told that in the long run the US stock market always goes up, and the best way to invest is through a series of highly diversified stock index funds, admittedly with some international diversification too for protection against the vagaries of Wall Street.
Just in case you don’t know, stock index funds are investment vehicles that simply track an index of shares, like the S&P 500, and are not actively managed. This allows them to charge much lower fees than mutual or hedge funds and operate in a more tax-efficient manner.
What is not to like? These index funds are easy and cheap to buy; you just hold them for a very long time and you apparently cannot lose.
A bit like US residential property before the GFC?
To be fair to Mr Robbins his text does several times briefly bring up the unfortunate counter-thesis of Japan post-1990, when its stock market crashed from levels that have never since been repeated. Tough if you bought a Nikkei index tracker just before that happened.
Of course, we are assured this sort of pattern has never been repeated in the US. Except of course for the “lost decade” of 2000-09, when share indexes fluctuated substantially and showed very little gain.
So what are we supposed to expect to happen next? US share prices have rallied by more than 250 per cent since the devil’s bottom of March 2009, when the S&P 500 hit 666. That’s actually one of the largest and longest rallies in Wall Street history.
No matter, say the optimists. Buying on any dips is just a way to make more money. Indeed, Mr Robbins has a chapter extolling the virtues of doing just that, and explains how Warren Buffett famously bought Goldman Sachs and Wells Fargo at the bottom of the market in 2009.
He also quotes Mr Buffett’s dictum that cash can be expensive over the long term and shares always perform better, although he also notes that having cash in a crash is essential if you want to buy the best share prices.
Could that be why the same Sage of Omaha is currently sitting on more than US$85 billion in cash, more than ever before in his entire supremely successful investment career?
Now admittedly Mr Robbins’ writing partner Peter Mallouk has a lot of sensible advice on asset allocation and diversification as a way to maximise total portfolio returns. But I still have my doubts about using index tracker funds at precisely this moment in time.
If you look at the big picture then we appear to have just begun a new journey in the cost of money after about 35 years of falling interest rates. US 10-year treasury yields bottomed out at 1.6 per cent last year before the election of president Donald Trump, and have shifted up by as much as 1 per cent since then.
If bond yields continue this rise then they will derail the US stock market because the only way share dividends will be able to compete is through lower share prices. Will it take another 35 years for this process to play out?
If it does then index trackers will behave like housing in the sub-prime mortgage crash, and buying on the dip will be suicidal as all those passive index investors exit as interest rates rise and rise.
Peter Cooper has been writing about financial affairs in the Gulf for two decades.
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