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

The Excitement Continues

The Dow Jones Industrial Average closed down 514 points today, apparently on worries that corporate earnings for the third quarter will be disappointing.  It is now becoming clear to the masses that the expected slowdown in the economy will materialize.

For long-term investors in stocks (the only time frame that applies to stock investments), this volatility and weakness will continue to present opportunities to make investments at reasonable valuations.  We believe that our attention to overall diversification, cash management,  and prudent investing will reward our clients over time, and we encourage you to stick to your plan.

If you are a participant in a corporate retirement plan, where you have the opportunity to "dollar cost average" into a diversified portfolio, consider the fact that everything's on sale, and you are going to load up your shopping cart with a lot more items than you could buy for many years.

If you are approaching retirement, this is a good time to be overweight in cash and bonds.  We tend to take a very cautious approach with portfolios as they reach the retirement years (now  you should really enjoy your bond ladder).  We certainly don't ignore growth investments for retirement, but only after stress-testing your personal situation would we then recommend gradually adjusting to a balanced position between cash, bonds and stocks.