The definition of insanity
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[quote=Piker34]
Thank you once again, BondGuy. Most will make this thread about the merits of MPT or asset allocation or investment strategy.
However, it's a classic BondGuy prospecting thread for me. You sir, with the definition of insanity just gave me my "opening line" to prospects on how I am different. I told a prospect that has his money at MSSB in an asset allocation fee based account that I didn't believe in the old-school method of asset allocation, and he looked at me like I was insane. His broker tells him to "stay the course." Then, I told him what I had been doing for my clients over the last couple of years, step by step. I will still be transferring his assets in, but I felt like I sounded a bit too much like "my rate is better than his rate." You just helped me how I can tie it all in...[/quote] But the guy probably bought it because you showed him how you would beat his current portfolio, AFTER THE FACT.[quote=BondGuy]
The alternative is to be the alternative. To have an answer.
To have an answer we need to turn back the clock. For those of you who don't know it here's a news flash: I'm a dinosaur. I'm a dying breed. I come from an era of individualistic brokers who not only raised the money but managed it to. Day by day, we are being replaced by a kool aid army of raise the money fee it up advisors. Most of these advisors are clueless on the investment side. They've never bought a stock or a bond. They've never written an option ticket. Most can't read an options screen. And to most Bloomberg is a guy running a big city and nothing else. All this group knows is fee it up and you get to drive a BMW. Ethically, we need to go back to raising the money and managing it. Or, we need to at least exercise the oversight we claim, to justify the fees we collect. My personal answer is to have my own seminar. It will be entitled: The Bear Ate My Pie Chart Content will be centered on ways to protect assets. From bonds with maturity dates, to annuities with living benefits to options/hedging strategies to momentum analysis of the major market sectors. The messege: The process is broken. I am the alternative.[/quote] Can I buy your seminar content?BG- What happens to me when you post your ideas is something i can't even post in THIS forum, let alone a forum for normal people. YOU ARE THE MAN
I have to admit that when i first came into the business 10 years ago, i drank the firm produced kool aid, asset allocation, buy and hold, blah blah blah, and i used SMA;s We were doing exactly what we were telling clients and prospects we were doing - no lies - we were bringing institutional style money management to the retail investor. The problem is, that is not appropriate. You have to know who your audience is. I dont know an individual investor who has a 35 year time horizon. Most of them understand a bad year or two. But what they dont understand, and shouldnt, is paying me a fee to tell them that the managers we have are great managers and it doesnt matter that they are standing in front of a freight train coming at them at 120 mph and refuse to move out of the way. So in 2005 i started firing the managers and took discretion. Thats why i rarely lose clients. I am still searching for the "better way" to manage money. Not sure it exists. But i dont believe its asset allocation buy and hold. I think thats fine for a portion of the portfolio, but you need to have a big piece that is tactical. And even in the strategic piece, you need to have flexibility. Otherwise you will 1. not bring any value to the table, and 2. sound like every tom d*** and harry with an FA title. Which leads me to think I'll start another thread to drill down on something i have been doing.Give me a few minutes will ya WetB? I just posted this.
Actually maybe i'll start it tomorrow.[quote=BioFreeze]
You didn't ejaculate, did you?[/quote] Nah, that was just a test to see if you were still around. I guess you are, since you posted exactly the response i expected
I think BG’s suggestion is that we need to look at other options than what we’ve been told by “the industry”.
For example, following the tenets of MPT and subsequently the guidance of your firms may not be the ONLY thing. Maybe it’s a beginning. Maybe you start to think outside of the box. Maybe the research you listen to is faulty for one reason or another.
BG may be reluctant to reveal what he is doing for clients. Some of us have methods that we choose to keep to ourselves.
The key is not to always listen to conventional wisdom. What is interesting about both MPT and EMH is that they have been accepted pretty much without question by the broader economic community (yes there are those who question it, but they are in the minority), much like Climate Change.
This is anathema to the scientific method. You should constantly try to prove where those theories don’t work. In the case of EMH, it is something that is impossible to prove, because there are plenty of cases where it won’t work.
Be thoughtful is what BG is saying. Evaluate what you are doing, even if you are getting good results. Constantly look at your methods. Things may change, and you may need to adjust.
Add some value for the fee you are collecting. I think that’s all he’s trying to suggest.
[quote=Ron 14][quote=Piker34]
Thank you once again, BondGuy. Most will make this thread about the merits of MPT or asset allocation or investment strategy.
However, it's a classic BondGuy prospecting thread for me. You sir, with the definition of insanity just gave me my "opening line" to prospects on how I am different. I told a prospect that has his money at MSSB in an asset allocation fee based account that I didn't believe in the old-school method of asset allocation, and he looked at me like I was insane. His broker tells him to "stay the course." Then, I told him what I had been doing for my clients over the last couple of years, step by step. I will still be transferring his assets in, but I felt like I sounded a bit too much like "my rate is better than his rate." You just helped me how I can tie it all in...[/quote] But the guy probably bought it because you showed him how you would beat his current portfolio, AFTER THE FACT. [/quote] Pretty naive and cynical comment... But to answer your question, I had no idea what his current portfolio was or what his rate of return was. I shared with him what I did for the majority of my clients last year, and how I manage and create portfolios. I figured he's smart enough to figure out what direction he wanted to go.agreed.I think BG’s suggestion is that we need to look at other options than what we’ve been told by “the industry”.
For example, following the tenets of MPT and subsequently the guidance of your firms may not be the ONLY thing. Maybe it’s a beginning. Maybe you start to think outside of the box. Maybe the research you listen to is faulty for one reason or another.
BG may be reluctant to reveal what he is doing for clients. Some of us have methods that we choose to keep to ourselves.
The key is not to always listen to conventional wisdom. What is interesting about both MPT and EMH is that they have been accepted pretty much without question by the broader economic community (yes there are those who question it, but they are in the minority), much like Climate Change.
This is anathema to the scientific method. You should constantly try to prove where those theories don’t work. In the case of EMH, it is something that is impossible to prove, because there are plenty of cases where it won’t work.
Be thoughtful is what BG is saying. Evaluate what you are doing, even if you are getting good results. Constantly look at your methods. Things may change, and you may need to adjust.
Add some value for the fee you are collecting. I think that’s all he’s trying to suggest.
[quote=iceco1d]BG, et al - The problem is not with the concepts themselves (MPT, EMH, etc.), it is with the implementation and interpretation of them.
Problem #1 - Clients don't know their own risk tolerance, and neither do most advisors. Problem #2 - To achieve the expected long term returns that most advisors want to use in their assumptions, requires extra exposure to equities because of the excess costs in the portfolios. Simple math: 1.25% wrap fee (this could be higher). 100 bps average fund expense ratios (again, could be much higher). 50 bps in "hidden" fund expenses due to turnover (not just brokerage costs, but bid/ask spreads, etc.). Note: Some studies have shown costs due to turnover can exceed 200 bps per year, depending on the level of turnover. Now in this very fair example... 1.25 + 1.00 + .50 = 2.75%. Stocks, over time, aren't going to average much more than 11 or 12%. Lets say 12. Lets pretend bonds average 6%. Lets not get into an active vs. passive debate here, but even if you are a bad ass active manager, you aren't going to deliver 18% returns on equity, or 12% in bonds, we are talking a few bps worth of difference, if any. On to the example... 50/50 allocation, expected return = (.5 x 6%) + (.5 x 12%) = 9%. Minus 2.75% in costs, and your expected return here is 6.25%. Wow, that's exciting. You're giving away over 30% of your gains in costs! And remember, there are plenty of 1.5%+ wrap fees. Plenty of funds with expenses over 1%. And turnover costs could be much, much higher. How about an 80/20 allocation? (.8 x 12%) + (.2 x 6%) = 10.8% expected return. Take away your 2.75%, and your expected return is now a shade over 8%. Pretty reasonable rate of return, but you had to assume an 80/20 allocation to get it!Give me a break. Use ETFs and/or index funds, and your fund expenses ratio drops to 35 bps or less. Your "turnover" costs get cut in half, if not more. Charge 1% instead of 1.25%. Now what type of allocation do you need to achieve a 6, 7, or 8% return? Less costs = take on less risks. MPT didn't fail. People need to take on more risk to overcome the ridiculous costs. All because "that's why we select these managers Mr. Client," when the truth is "these managers give kickbacks to the b/d, which is why we select these manager," or "this wholesaler pays for my seminars, which is why we selected those managers." MPT didn't fail. I run almost all of my qualified money in index funds. I started in the business at the peak of the market. The clients that started with me at the peak, are currently even or up slightly (at least, the ones with serious money, and older, so in a 60/40 or 50/50 or less allocation). I wasn't in the business during the tech bubble, but I'm guessing my portfolios would have faired OK during that fiasco too. People suffered then, because you HAD to have the latest and greatest tech fund or stock. And "the rules have changed!" No they didn't. And the people that thought they did, got burned. In addition to this stuff...I don't see doing things like put options, or covered calls, as "fancy" or not "buy and hold." Covered calls, to me, are basically buy & hold. I'm just starting to cross into the darkside, and exploring running index subaccounts in a VA with a GMAB rider - ONLY for the equity piece of the portfolio. Pretty vanilla. As for Fannie & Freddie, and buyers of bad mortgage debt? It's MPTs fault that you ASSUMED that Fannie and Freddie were true government agencies, when they clearly were not? It's MPTs fault that credit default swaps were unregulated? It's MPTs fault that people were overconcentrated in real estate? Financials? 30 year bonds? CDOs? I think you'd find that a SOUND follower of MPT, wouldn't be overconcentrated in those areas, just like they wouldn't be overconcentrated in tech. BG - you frequently rail against bond funds for doing things to fit into an asset allocation fund, vs. being for income. So in asset allocation, you are going to view fixed income as a "necessary evil" to stabilize the portfolio? WTF are these people doing buying bond funds with average durations in the teens? Or significant pieces in high yield? Same concept with insurance...VULs, in addition to being pricey, but you buy insurance to reduce risk...why add risk into the mix with a VUL? Same concept with bonds. You are 60/40 to reduce the risk vs 80/20 or 100% equity. So why are you buying 30 year bonds to reduce risk? Why buying junk bonds to reduce risk? Should be more fixed annuities, CDs, MMKT, short duration, high grade corps, govies, GNMA, etc., with maybe a "sprinkling" of high yield and international. Anyway, sorry for the rant...but I don't view last year as MPT failing, I view it as most advisors failing to implement it properly.[/quote] Ice, you make many very good points with this post. I agree with parts of what you are saying. Still, I say MPT has failed. So, has buy and hold. Of course now the joke is buy and hope. Regarding MPT, it holds that risk can be controlled. That for every return there is a correlating risk that can be largely or completely offset. As well, MPT assumes efficient markets. Possibly its greatest failing. Accounts utilizing MPT got the full ride down. It's that simple. Everyone thought Captain Smith was a good Captain until his ship hit the iceberg. He went down with the ship and didn't get a second chance to endanger innocent people. MPT has failed twice in a decade to proctect investors. How many more investors have to have their life savings sunk before we write this turkey off?
Someone asked if my clients lost money in 2008? Not to be evasive, but define loss?
Yes, my clients were down. However, the bulk of my AUM are securities with a maturity date. Those who sold, lost. Those who didn't will get 100% of their investment back at maturity. Until then their investments are giving them exactly what they signed up for. For the clients in equities, not as good an outcome. Some were hedged and some were in annuitys with living benefits. And the market over the past 10 or 11 months has largely bailed us out. But that's not good enough. Not by a long shot! It is my search for answers after buying the bill of goods that leads me to my conclusion that our system is broken.MPT makes too many assumptions that don’t work in the real world. Like I said, as a theory, it is a good starting point.
But as a financial model it is wholly inadequate.
Correlations aren’t fixed and are affected by external forces.
Also, observed returns do not follow the normal distribution. MPT at it’s core uses the Gaussian function.
Actually, there are any number of things wrong MPT as a theory.
The problems ice illustrated will not go away, and thus are another hole in EMH and MPT.
Gamblers take on a ton of risk. What is interesting, is that we assume that investors are risk-averse. That makes little sense.
The one I think takes the cake is that all investors are looking to maximize profit. Which, is pretty funny, because if everybody follows MPT, they are not trying to maximize profit, just attain the best return for their given risk.
Like I said, good concept, but flawed. Needs to be questioned, and has. Hopefully we can build upon MPT and EMH and create models that will allow us to add more value.
[quote=BondGuy]Someone asked if my clients lost money in 2008? Not to be evasive, but define loss?
Yes, my clients were down. However, the bulk of my AUM are securities with a maturity date. Those who sold, lost. Those who didn't will get 100% of their investment back at maturity. Until then their investments are giving them exactly what they signed up for. For the clients in equities, not as good an outcome. Some were hedged and some were in annuitys with living benefits. And the market over the past 10 or 11 months has largely bailed us out. But that's not good enough. Not by a long shot! It is my search for answers after buying the bill of goods that leads me to my conclusion that our system is broken.[/quote] So let me get this straight....... You have been in the business over 10 years. When you started you bought the bill of goods the industry promoted. Your ideas and opinions have evolved over time. You are still searching for answers. Your wife manages retirement plans that I assume are not actively traded. Throughout this period of professional doubt you and your wife have continued to pay yourselves handsomely for these services. Are these statements accurate ?Hi,
Mentally deranged was the term used for many years, as well lunatic.
Insanity today implies the behaviour, not the person and it is used
very wisely in any court of law. It is very, very difficult to prove
anyone insane or mentally incompetent today as one must go before an
entire board, which all must agree upon.
Here’s part of the problem with MPT/Monte Carlo, etc. It assumes that being “close” is OK. So maybe you have a 92% chance of meeting your financial goals in retirement. What does that mean? Does that mean you will have 92% of the income you thought? No. It means that if you experience the 8%, you could run out of money well-short of “death” and be compeltely broke. It’s like going to the casino. You could go with $1000 bucks and walk away with $1000 bucks, $500,000 bucks or zero (OR, you could end up going back to the ATM machine for more). But you don’t walk away with a littel more or less than $1000 bucks every time.
This false sense of security tricks people into thinking soemthing like this..."well, maybe if I only get 6% instead of 8% over the next 30 years, I might be OK. I'll just spend a little less." No, what happens in REALITY is that you are doing great and then WHAP! you lose 40% in one year and the entire plan gets completely destroyed. And that same year you have a major medical issue, right after you got back from that 6 week trip to Tahiti that cost you $22,000. So instead of waking up tomorrow with your $500K nest egg, you wake up and have $265K and don't WTF to do now. And since it is a no-win situation, your FA doesn't know WTF to do now, either ("uh, spend less, go back to work, sell your house, etc."). Point is, all of the "models" that we use don't account for the "Black Swan" effect. And in reality, they happen more often than you think. That's why I am so conservative with my clients. Very few of my clients have more than 50% in equities. Yes, I will be unpopular if we go on a 10 year win-streak. But I would rather be unpopular for getting "modest" returns than losing 30-50% of someone's money. Unfortunately, most firms don't do this. For some reason there is such a biased towards equities. They are SO focused on outpacing inflation that they INSIST that you need large allocations of equities. IMHO, risk management is not a major focus at msot firms. And ironically, I only hear it talked about with the ultra wealthy. For some reason, firms find it OK to exploit high-risk portfolios with the very population that can't afford to lose it (HNW folks and below), but focus on principle preservation with folks that CAN afford to lose it. Persoanlly, I think it is all just scale. We should treat our clients the same way as someone with $50mm. DON'T LOSE THEIR MONEY.[quote=Ron 14][quote=BondGuy]Someone asked if my clients lost money in 2008? Not to be evasive, but define loss?
Yes, my clients were down. However, the bulk of my AUM are securities with a maturity date. Those who sold, lost. Those who didn't will get 100% of their investment back at maturity. Until then their investments are giving them exactly what they signed up for. For the clients in equities, not as good an outcome. Some were hedged and some were in annuitys with living benefits. And the market over the past 10 or 11 months has largely bailed us out. But that's not good enough. Not by a long shot! It is my search for answers after buying the bill of goods that leads me to my conclusion that our system is broken.[/quote] So let me get this straight....... You have been in the business over 10 years. When you started you bought the bill of goods the industry promoted. Your ideas and opinions have evolved over time. You are still searching for answers. Your wife manages retirement plans that I assume are not actively traded. Throughout this period of professional doubt you and your wife have continued to pay yourselves handsomely for these services. Are these statements accurate ?[/quote] Ron, that sounds awfully close to criticism. I started in 1983, well before MPT came on the scene. I tried a lot of different things. Some worked, some didn't. My ideas and opinions have evolved over time. Haven't yours? I'm constantly seaching for answers. I doubt nothing. If something doesn't work, we change it and move on. We stopped using MPT in 2001. That the process is flawed is a long held belief within our practice. Our business experience resulting from the great crash of 2008 is , zero acats, production up 30%. Success speaks for itself. We are paid handsomely!Modern Portfolio Theory - A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.
Markowitz wrote his book in 1959 so I don't see how you started before MPT came on the scene. Maybe it wasn't as popular or an industry wide philosophy, but it was around. The theory is based on risk. It doesn't say an investor will not see their investments decline in value over a period of time. If an investor is completely risk averse that investor still needs to spread their assets among different classes because, as we all know, long term funds in cash are at risk. A balanced strategy, invested using index funds and/or ETF's, rebalanced annually did 5.9%/yr. What is wrong with that ? With a 1 year low of -21.6%. If people can't handle a bad stretch then they just don't understand investments. Those same people saw their home value go down more in that same year, are they selling it out to the first buyer ? It is about constructing portfolios that will get them to their financial goals and coaching them along the way to stick with the plan. Jumping in and out, changing philosophies, not trusting what has worked for decades, getting spooked every so often because the herd drives the market well below its value ? These practices define insanity. I am not trying to be critical. We all develop different thoughts and ideas over time. I do think that changing core beliefs on the run can have negative consequences.This is one of the best threads I have read in a long time. And although I may not have as much experience or training as some on this board regarding investement theory, my belief is that no matter what theory you follow the industry is always going to be biased to the buy side. Which in turn makes reducing risk and protecting our clients from loss a difficult thing to do. And I know A LOT of retail advisors that are converted car salesmen, or appliance salesmen, or pharma salesman, and the one thing they know is “if i sell I get paid”. And their logic is I hire money managers to make sure my clients are taken care of, all the time not really knowing what that manager is doing, or how it really effects the client. And my personal favorite is the advisor that uses the fact that the mutual funds he sold to you (A shares probably) are now down 45% to SELL you a fixed annuity and at the bottom of the interest rate cycle and collecting another 6% commission becuase you told him you were tired of losing money. Oh wow thanks for helping reduce my risk. So in my eyes the sell side bias has more to do with what is wrong than any investment theory.
MPT has been around for a while, but it wasn’t widely used as the basis for financial recommendations until much, much later.
Also, people are selling out of their homes, or not paying the mortgages. They are starting to realize that homes are really not investments.
I agree that jumping in and out is bad, but a lot of firms have been using MPT as if it were gospel, when in fact, it is far from it.
Also, in your first sentence you state that MPT is a theory on how risk-averse investors can maximize expected return based on a given level of risk. In fact, one of the key assumptions of MPT is that investors want to maximize profit regardless of any other considerations. But if everybody is following MPT, that tenet is untrue.