Conventional Wisdom Is Neither Conventional Nor Wisdom

I can't believe that it's almost been a year since I posted here. I'm having a hard time staying on a writing schedule. Possibly impacting me is the fact that I'm not really promoting this blog yet, so I feel like I'm writing to myself. I do have a few thoughts however, mostly having to do with assumptions that investors and advisors share about the markets and money management.

The system that we have all been accustomed to seems to share the following beliefs, some of which are detrimental to your wealth:

1. Modern Portfolio Theory (diversification of assets designed to limit risk and smooth returns) is reliable, makes returns predictable, and will enable you to sleep at night.
2. The most visible and highly-advertised mutual funds and financial products are the ones that will make you successful.
3. _______(insert your investment choice here) is/are safer than _______________.
4. _______(insert your investment choice here) will appreciate better than________.
5. All types of investment advisors and brokers will look out for your interests equally.
6. The big investment firms are safer and more reliable than the independent custodians / Broker-Dealers.

My thoughts are as follows:

1. Modern Portfolio Theory has been misunderstood and misused by many in the investment management profession. Slick computer programs designed to evaluate your "risk tolerance" spit out beautiful graphs and charts which are primarily designed to give the investor confidence so that he or she moves his accounts to the advisor armed with these tools. I don't dispute the value of diversification, as our clients would not have weathered the economic downturn nearly as well without their bond positions. However, statistics have a way of lying, and these tools have to be taken with a grain of salt. Adding infinite asset classes does not help manage risk, either. You don't need more than a handful of low or non-correlated asset classes in your portfolio.

2. Rarely are the most visible and advertised investment products the highest-performers, or the most consistent. We prefer managers who are good at what they do, have a track record, and preferably do not spend a lot on advertising and entertainment. Some of the best managers are ones you've probably never heard of. Don't forget you are buying talent, not a slick brochure.

3 and 4. No one asset class is the highest performer or lowest risk at all times. Sometimes bonds are overvalued relative to stocks and other assets, and sometimes the reverse is true. Everything is relative. Beware of absolutes.

5. Only a NAPFA-Registered financial planner (Purely Fee-Only) or a firm that is strictly a Registered Investment Advisor act as fiduciaries (put your interests first) for their clients. Period. End of story. Always find this out before hiring one.

6. Really? Wasn't Merrill Lynch rescued from bankruptcy by a government-backed buyout by Bank of America? Wasn't Citigroup (Smith Barney) against the ropes? Interesting that Fidelity, TD Ameritrade, Schwab, and a host of smaller firms had no threat of going out of business during the credit crisis.

That's all for now...I hope to be a little more frequent with my posts. Have a safe and enjoyable Summer.

-Doug