[PB Notebook] "Market Changes and the Unchanging Essentials"

Kang Boyoung, Deputy Branch Manager of the KB Kookmin Bank Busan PB Center

Morgan Housel left the following words in his book “The Laws of Wealth.”

He wrote, “Even a good idea becomes a bad one when executed at an unreasonable speed.” He offered the following example to illustrate the benefit of slower pace in nature.

Fish in cold water grow more slowly than ordinary fish, while fish in warm water grow faster than ordinary fish. The surprising outcome comes later. Fish that grow more slowly than average during their youth end up living 30% longer than the average lifespan. In contrast, fish in warm water that grow faster than average die 15% earlier than the average lifespan. This was discovered by biologists at the University of Glasgow.

The explanation is that, in cases of slower growth, “the resources allocated to maintenance and recovery increase.”

According to the September Federal Open Market Committee (FOMC) results, the U.S. Federal Reserve raised its benchmark interest rate by 0.25 percentage points (bringing the upper range to 3.75–4.00%), marking the first rate hike since 2023. The main reasons for this were a sharp rise in oil prices due to escalating geopolitical risks in the Middle East, as well as persistent concerns over inflation. As a result, the year-end interest rate forecast on the dot plot was also raised to about 4.1%, strengthening expectations for a prolonged period of high interest rates and further entrenchment of a hawkish monetary policy stance.

In this environment of “renewed high interest rates and inflationary pressures,” why is a defensive asset allocation strategy—one that prioritizes a slower and more deliberate approach, builds a long-term portfolio, and aims to reduce volatility and protect capital—useful?

Defensive asset allocation brings flexibility to fund management. In a constantly evolving economic environment, it enables future reallocation toward assets with higher expected returns or probabilities. For those with a conservative outlook—such as retirees or those preparing for retirement—it is beneficial in the short term to hold more than 50% of assets in short-term bonds with maturities of less than one year or time deposits, while steadily accumulating, over the long term, low-volatility stocks and asset allocation funds such as target date funds (TDFs) and consumer staples like utilities, using installment investment plans. Moreover, it is now possible to find bonds issued by domestic government agencies or public enterprises with maturities around 2 to 3 years that yield close to 5.0% per year. For aggressive investors, in sectors like artificial intelligence (AI) infrastructure, it is necessary to ask whether the current purchase price is justified given the future cash flows that might be generated, and to gradually add such assets after evaluating their return on capital and whether this high return can be sustained over time.

Charlie Munger, Warren Buffett’s longtime partner, once said the following:

“In the long run, it is difficult to earn investment returns that significantly exceed the underlying business performance. If you hold shares of a company with a 6% return on capital for 40 years, your investment return will not be greatly different from 6%, no matter how cheap your initial purchase price was. Conversely, if you own stock in a business that generates an 18% return on capital for 20 to 30 years, you will achieve tremendous results even if you bought at a seemingly expensive price.”

We often hear that life is not a sprint but a marathon. The same is true for asset allocation. Those who start investing in their 30s, considering current average life expectancy, will be investing for over 50 years. Therefore, instead of worrying about what might happen each quarter or year, wouldn’t it be more useful to think about ways to lower your asset volatility while maintaining a consistent investment approach?

Voltaire once said the following:

“It is not history that repeats itself, but human behavior.”

How, then, does human behavior repeat? Guided by our animal instincts, we might move our money into sectors or companies that are currently in the market spotlight, believing this will lead to high short-term returns. It is easy to think, “my instincts are sharper than others' when it comes to finding and switching investment targets.” However, frequently rotating holdings in pursuit of short-term performance is akin to attempting constant baton passes in a marathon.

This leads to a continuous accumulation of risks: missing trade timing or choosing the wrong next runner (investment target).

The greatest enemy of investors is not short-term underperformance or market volatility, but their own impatience—which prevents them from holding to a long-term perspective.

Kang Boyoung, Deputy Branch Manager of the KB Kookmin Bank Busan PB Center

This content was produced with the assistance of AI translation services.