The tortoise, the hare, and the snail
Most people are familiar with Aesop’s fable of the tortoise and the hare. It is the story of a tortoise challenging an overconfident hare to a race. While the hare initially leaves the tortoise behind, the hare decides to take a nap at the side of the road. When he finally awakes, he sees the slow and steady tortoise finish the race ahead of him.
In the investment world, this fable is often used to explain that investors can reach their financial goals faster by creating portfolios that are slow and steady and well diversified instead of investing in high-risk investments that may do well for a while but then have significant drawdowns (when the hare falls asleep) that may take a long time to recover.
There is a lot of truth in this analogy and I agree with this interpretation of the fable. But what sometimes gets forgotten is Klement’s fable of the tortoise and the snail. It goes something like this:
A nobleman meets a tortoise and snail on his way back to his castle. Because he is on foot (unlikely because he is a nobleman but bear with me) he asks them if they can offer him a ride. They both agree to offer him a ride, but the snail tells the nobleman the fable of the tortoise and a hare and recommends taking the slow and steady transport of the snail. The nobleman, convinced of the wisdom of the snail, jumps on its back. But unfortunately, the snail breaks down under the weight of the nobleman and gets smashed into a puddle of slime while the tortoise slowly goes along its way towards the city.
Ok, this fable is probably less elegant than Aesop’s original, but the moral is clear. Don’t ride a snail. You get overtaken by a tortoise and you end up in a puddle of s…
What I am getting at in terms of investing is something that I observe with many of my friends and clients. Some of them are constantly worried about stock markets and bond markets both being overvalued and in a bubble that they cannot bring themselves to invest even in a defensive portfolio. Paralysed, they keep their savings in cash, waiting for the markets to drop. But if that drop never comes, they end up like the nobleman on the snail. Stuck in the same place with no returns.
In a world of zero interest rates, (and in a world with higher interest rates as well) the risk for investors is not only to be too aggressive but also to be too defensive. Not taking any risks leads to a high likelihood of missing your financial goals as well.
So even if you don’t like tortoises and feel uncomfortable sitting on the hard shell back of it, please make sure you overcome your fear of stock and bond bubbles and get on the tortoise. Just make sure you bring a cushion to soften the ride.