“We are proud to state we have never written off a single penny of principal in any taxi-related loan.” This quote from the CEO of a New York lender came only 18 months before bank regulators seized Montauk Credit Union. The vast majority of the small lender’s loans were tied to taxi medallions which for years had served as strong collateral. How could insolvency occur so rapidly? Did fraud or criminal activity play a role? The answer is not very interesting.
In reality, Montauk CU and several others making similar loans simply were blindsided by an unforeseen collapse in the value of their primary collateral, taxi medallions. In a development that at one time very few expected Uber, the transportation company, has experienced, well pardon the pun, uber success; leaving in its wake cab companies and their lenders. Some experts now peg the value of NY city medallions at just $360,000, a far cry from the reported peak price of $1.3 million in 2014.
So what does all this have to do with investing and specifically your portfolio? Simply put, it’s human nature to extrapolate recent events and just like medallion lenders assumed the value of their collateral would remain high, investors – after years of strong U.S. stock market returns – may incorrectly assume that U.S. stocks will always lead the pack. And that would be a poor assumption.
Despite U.S. stocks producing incredible returns over the recent past (SP 500 up 13% annually for 5 years ending September 30), history tells us that market leaders “take turns” and it’s very probable other asset classes will shine going forward. I’m occasionally asked by investors if it still makes sense to own a diversified portfolio that includes emerging market stocks, MLPs and even commodities. And while it’s certainly frustrating to be broadly diversified when one asset class is performing so well, it’s not only prudent but generally produces higher returns with lower volatility over the long-term. And when I really want to make my point, I mention that for the 5 years ending June 2009, the SP 500 actually averaged negative 2% per year! Hopefully that’s a good reminder of the need to diversify.
