The definition of insanity
One of the perks of this business is the ability to live in a nice neighborhood. One of the downsides of living in a nice house surrounded by other nice houses is that the solicitations from financial advisors and consultants never ends. Many on this board who live in these types of places can relate.
This week i received not one but two solicitations from MSSB. One from their local in town office and another from an office located in Capital City about 10 miles away. First, the good news- Hats off to these advisors for their prospecting effort. At least that I respect. Next, the messege to us advisors - If you aren't contacting your clients rest assured someone else is. Finally, the bad news - Mailing number one comes from a three advisor group. The group consists of the typical two senior veeps and a junior FA. They have invited me and my guest to a dinner at one of the area's top restaurants. We will be entertained by Blackrock Investments. Opening for Blackrock that evening, Roosevelt Investments will do its act. The entertainment should be interesting. The invitation is entitled: A Consultative Approach to Investing It says and I quote: In today's complex world, investors need to develope a sound investment process that addresses asset allocation, developing an investment strategy, evaluating investment managers, and measuring performance. OK folks, what's wrong with that statement? If you answered, nothing listed in the invitation stopped investors from losing money throughout the past decade give yourself a gold star. Nothing in the invitation talks about protecting assets from decline. There's a reason for that. It doesn't work, it's failed strategy within a broken process. Yet "they" continue to push it. If it doesn't benefit the investor, who does it benefit? On to mailing number two: This one comes from an advisor without the Veep title, so I'm guessing rookie. The letter is four paragraphs long and totally fails by any standard to grab my attention. The letter focuses on retirement asks: How much should you save for retirement? What level of risk can you live with? How much do you need to live on? These are all good questions that we as profesionals ask as a standard course of business. The letter goes on: I believe that MSSB's comprehensive approach to retirement planning sets a new standard in the industry. We begin with your vision for retirement and try to estimate what that may cost to fund. (and here's the part i really love) We'll also look at risk factors-longevity,health care costs and others-that could threaten the lifestyle you envision. Then we'll develope a long-range investment plan that details where your income will come from in retirement. OK, I'll give trying to estimate retirement funding a pass. You either can estimate it or you can't. My question is this: When looking at the risk factors that could threaten my retirement lifestyle who proctects me from this Advisor and MSSB? Ya gotta love rookies. This kid obviously drank the Kool Aid because he believes that MSSB sets a new standard in retirement planning. Did i miss something here? Did MSSB protect it's clients in 2008? Did thier clients have a positive return in 2008? Are they back to even this year? How have MSSB clients done over the past decade? Were they immune to the tech bubble popping and decade opening 45% sell off? We all know the answers to those questions. The point: On main street people have gotten screwed by this process. Retirees and pre-retirees have little to show for the past decade of investing. Many have had their retirement plans scuttled. This firm, my firm , all our firms, did nothing to protect these people. Yet the beat goes on. The fees are racked up and the cash register rings. Whether you call it a Consultative Approach to Investing or Comprehensive Retirement Planning any program that puts investors money at risk without the safeguards in place to protect those assets is a failed process. A well stuffed mattress has outperformed most if not all of the cookie cutter fee based programs on Wall Street over the past decade. What do you call that when you continue to do the same thing and expect a different result? In this case, it should be called criminal.You have been on this for a week now… What is with the anger?
Squash, rant of the week huh? Actually, I’ve been at this for a decade. Not anger, frustration.
Rather than focusing on me, the messenger, think about the messege. You need to be able to answer this question at your next client/prospect meeting: The market's been down over 40% twice in the last ten years, what will you do to protect me the next time? In your practice you need to develope a way, a process, that pulls your clients who have entrusted their life's saving to you off the tracks. You, me, us, need to think long and hard about what we are doing. Looking at a screen, collecting a fee, and hoping for the best doesn't cut it!Spot on Bond Guy
BG,
I agree with you on this. My firm peddles the same lame asset allocation / buy and hold through anything philosophy like every other firm. They have absolutely NO response to what to do if the market tanks. Actually, their response is, "you can't time the market". They constantly come up with new and exciting twists on the "missing the 10 best days in the market" B.S., the "you can't predict" B.S., etc. All of it rests on the fact that all the firms want to hang their hats on the same CYA strategy backed up the FPA, et al. That way, nobody stand out from the crowd and they can't be "wrong". Personally, I don't think large brokerage firms do anything from a strategic standpoint to help FA's. I think it is up to us to use our heads and focus more on risk management and less on the "optimal" portfolio. It drives me crazy to see firms like Goldman, Merrill, etc. (the "stars" of Wall Street) making changes like "moving from 12% in Consumer Durables to 14%, and lowering our "guidance" on Health Care stocks to 10% from 12%".....as if that will make ANY difference AT ALL. Sometimes I feel like my firm is completely ignorant to what goes on around them. And yes, many portfolios have made back much of their losses. But what about the ones that haven't? And what if the market DIDN'T recover??? Then what? Just keep sitting tight??B24, BondGuy in mock horror!
Sacrilege! The people at the heads of these firms are soooooo much smarter than you.
And do you mean to tell me you don’t KNOW that asset allocation is 93 (or 4 or 5 or 6 or 7) percent of returns?
Look, just because the market has treated people horribly for ten years, does NOT mean it’s ok for YOU guys, retail advisors to question the big dogs (in all fairness, BG is a big dog).
Seriously folks, if you haven’t been listening to BondGuy, now is the time to do it. That is some good advice.
[quote=BondGuy]Squash, rant of the week huh? Actually, I’ve been at this for a decade. Not anger, frustration.
Rather than focusing on me, the messenger, think about the messege. You need to be able to answer this question at your next client/prospect meeting: The market's been down over 40% twice in the last ten years, what will you do to protect me the next time? In your practice you need to develope a way, a process, that pulls your clients who have entrusted their life's saving to you off the tracks. You, me, us, need to think long and hard about what we are doing. Looking at a screen, collecting a fee, and hoping for the best doesn't cut it! [/quote] I didn't mean of the "week".... Normally you post on a topic and move on... I completely agree with what you are saying(i learned the hard way at EDJ buy and hold) so I decided by reading a lot of books by a lot of people and experimenting in the past... That "smart" clients don't mind only gaining 50% of what the market does, if they don't lose money in the bad years.. I do pull money out of the market and for first time clients they have a hard time grasping the idea, but after the last 2-3 years, they understand now...I understand what you guys are saying and I agree most investors just roll their eyes at all of this crap. My question is, what is the alternative ? If you pushed bonds the last 10 years you look like a hero and your clients love you, referrals are probably flooding in, but what happens if the next 10 years the market does 10% annually or better ? Those same people will be pissed and rush to someone else. What exactly should someone fairly new to the business and still just trying to gather assets be selling as their value ?
Where’s BioFreeze??
Yes, finally a relevant topic.
Insurance products should be part of everyone's plan.I understand what you guys are saying and I agree most investors just roll their eyes at all of this crap. My question is, what is the alternative ? If you pushed bonds the last 10 years you look like a hero and your clients love you, referrals are probably flooding in, but what happens if the next 10 years the market does 10% annually or better ? Those same people will be pissed and rush to someone else. What exactly should someone fairly new to the business and still just trying to gather assets be selling as their value ?
It starts with segmentation of money. Short term/mid term/long term. Risk. Don't risk short term money (0-10 years). Don't risk a lot of mid-term money (10-15 years) - balance is key here. LONG term money (15-20 years+) can eb invested aggressively in assets with a high likelihood of long-term appreciation (i.e. emerging markets, etc.). BUt since it is for a spending goal 15-20 years+ away, you don't need to allocate a lot to it, so you are minimizing your downside risk. Most average FA"s just take the whole thing and say "10% cash, 30% income, 30% growth and income, 20% growth, 10% aggressive" without any plan for the future. And if things go bad, just "hold on". This is a start, and there are other ways to do it. I also believe that a portion of your money could and/or should be gauranteed, especially the short-term bucket. Whether through annuities, CD's, short-term fixed income, whatever. I also feel like we have to look at the bigger picture. Should it have made sense to get highly allocated to equities in 1998/1999/2000? Did all the brokerage firms REALLY think the sky was the limit? How often does the market trade at 30-35 P/E and then grow from there? Oh, I forgot, it was the "new paradigm". Thank God that term was lost. Who knows what's next. But there is this strange deisre to shoot for the moon in investing, when most clients would be perfectly content with 5-8% per year without big losses. At least my clients would.I understand what you guys are saying and I agree most investors just roll their eyes at all of this crap. My question is, what is the alternative ? If you pushed bonds the last 10 years you look like a hero and your clients love you, referrals are probably flooding in, but what happens if the next 10 years the market does 10% annually or better ? Those same people will be pissed and rush to someone else. What exactly should someone fairly new to the business and still just trying to gather assets be selling as their value ?
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.MPT is a joke… In never takes into account the down years… ever… and assumes 35 year times horizons…
MPT applies risk in the wrong way. The founder Markowtiz even said the problems are the lack of ability to figure out semivariance... Investors don't care about upside risk, they care about downside risk.. A prime example of this is the idea of a sharpe ratio... It penalizes return above and below a set amount(such as your 12% equity returns) when in actuallity all investors should care about are those below such stated number.[quote=iceco1d]MPT isn’t a joke. It requires some adjustment to account for the “real world” but the concept isn’t a joke.
As B24 said, most clients would be more than happy to earn 5,6, 7 or 8% a year, consistently. Without costs, you could have an expected return of 7% with a 20/80 portfolio. If you could keep your TRUE costs at 1.5%, you could have an expected return of 7% with a 40/60 portfolio. Now, tell me that your average 50-something wouldn't be OK with a 7% return? And tell me they wouldn't be OK with 40/60 volatility? Throw in some puts, or some living benefits on the risky assets, and you could increase to a (gasp) 60/40 allocation. PS - "Growth & Income" isn't an asset class. [/quote] I know that. That was a sideways shot at Jones. I never understood their asset allocation theories. Small cap growth is aggressive. Small cap value is growth. WTF? Basically, it's a misnomer for value and growth...sort of. I still don't get it.[quote=Ron 14]
PS - "Growth & Income" isn't an asset class. --, Jones told me it was !!!![/quote] According to my buddy at LPL it is too...The problem with MPT isn’t MPT. It is that it was never meant to be an all-encompassing theory.
You can use MPT and even EMH as a starting point. But advisors don’t add value by blindly following theory. It’s application of theory and the exceptions to theory is where advisors become worth their salt.
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=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.Where’s your God Damn new thread buddy???
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 know!
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.
[quote=Ron 14]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. [/quote] Ron this sounds like what i'd expect to hear at the fee based seminar. Markowitz won the Noble in 1990. So, while it may have been bouncing around out there it didn't gain acceptance until after that point. Wall Street embraced it as justification to fee up clients begining around 1992. Full steam ahead by 1995. 5.9%? Really? How about the investors who bought in Oct 2007? Did they get 5.9%? How about those who bought in aug 2008? How did they do? Did they get 5.9%? How many years of chugging along at 5.9% do you need to get back a 25% loss? How about a 40% loss?Not from me. A definition search online. Either way I understand what you are saying.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.
[/quote]
Ron this sounds like what i'd expect to hear at the fee based seminar. Markowitz won the Noble in 1990. So, while it may have been bouncing around out there it didn't gain acceptance until after that point. Wall Street embraced it as justification to fee up clients begining around 1992. Full steam ahead by 1995. 5.9%? Really? How about the investors who bought in Oct 2007? Did they get 5.9%? How about those who bought in aug 2008? How did they do? Did they get 5.9%? How many years of chugging along at 5.9% do you need to get back a 25% loss? How about a 40% loss? [/quote] Well what if you bought in Mar of 09 or Nov 08 ? You can cherry pick time frames all day long. People are saying this was "the lost decade." Yeah, the decade sucked, two big crashes. That doesn't mean the global equity market will cease to produce returns that will get clients to their financial goals moving forward. And even though the decade was a bad one it wasn't a world ender. Investments contain risk. Home ownership contains risk. Bank Cd's contain risk. It all contains risk. Having a systematic plan to manage that risk and to prevent panic and euphoria is our value.I’m with BG, not just because I honestly believes that he has to get his pants tailored to hold the basketball sized gourds he walks around with, but also because I think that the “asset allocation model” that firms have been pimping for years is overrated, and certainly is not for every investor.
The theory has a much more plausible application if you are running a pension or endowment, who have no defined target date for use of funds (or a perpetual one, however you want to look at it). If you are a person who plans on creating a net change to the flows of a portfolio (i.e. go from contributing to withdrawing at some point), owning the amount of risk assets that most firms recommend is dangerous. 2008 should be the lesson for that. The deviation from the mean swings far too wildly in many "allocated" portfolios (at least the ones your typical advisor would use) for it to be a practical fit for someone with such a target date, especially when you consider the return is only marginally better than a well diversified bond portfolio. I know, I know..."but SN, the xyz index has gone up an average of 12% a year for the last 100 years". Right. That's awesome if you are Yoda the Jedi Master or Methuselah, but for most investors who actually have a relatively short horizon when you compare it to a secular market cycle that can be too much to bear. And if you believe that the volatility that was experienced in this decade will be more of the norm, you have to take a long look at more stable returns... ...or go buy an EIA from Biofreeze (just kidding ) Just .02 from the new guy.[quote=Ron 14]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. [/quote] You're right Ron. It worked for decades. Some decades. If you were the unlucky sap that retired in 1900-1915ish, 1927-1940's, 1968-1975ish, 1998-2008, then it didn't work so well. You were real lucky if you retired in the 50's, or 80's or early 90's. Go back and look at the charts. No, not the deceiving mountain charts put out by the fund companies that show the S&P if you invested $10,000 100 years ago. The one that shows the level of the S&P for the past 100 years. And then look at one adjusted for inflation. Shocking to say the least. It might changed your mind on "buy and hold and wait it out. Why the huge variability in returns? It's not earnings and GDP growth. That has been pretty consistent over the years. Inflation? Nope. Interest rates? Nope. Black Swans. Big events that upset the entire apple cart and changed the P/E ratio in the market. We went from a 44 P/E on the S&P in 2000 to a 13 in 2008. Did people stop spending? Did people stop working? Did companies shut down? Did people stop brushing their teeth? (an American Funds favorite). No. Something disrupted the economic universe. And your stock that was worth $50 was now worth $25. Nothing any buy-and-hold strategy could defeat. Thank goodness the market has come back. We are only short about 35% from the peak. If the market had dipped to a P/E that was reflective of prior bear markets (mid to upper single-digits), we would have been at Dow 4500 or so. I would much rather have gotton out at Dow 12,000 (from 14,000) than ridden it all the way down. And so would your clients. Better yet, out at Dow 12,000 and over half your money protected from the stock market to begin with, and actually MAKING money in 2008. Not saying it's easy. But there are other ways.This always comes back around to the same thing. Ok. Asset Allocation is crap, its just a model to help firms keep people in the market, pile up fees, blah blah blah. Then what is the answer ? What do you do for your clients ? What are the core principles you are building your practice on ?
I am not trying to piss anyone off I just want a healthy debate. Give me a break !I am not referring to 100 year mountain charts from American Funds. I am talking specifically about the last 10 years of garbage.[quote=Ron 14]
Well what if you bought in Mar of 09 or Nov 08 ? You can cherry pick time frames all day long. People are saying this was "the lost decade." Yeah, the decade sucked, two big crashes. That doesn't mean the global equity market will cease to produce returns that will get clients to their financial goals moving forward. And even though the decade was a bad one it wasn't a world ender. Investments contain risk. Home ownership contains risk. Bank Cd's contain risk. It all contains risk. Having a systematic plan to manage that risk and to prevent panic and euphoria is our value. [/quote] Cherry picking? What would you call 5.9%? It's all cherry picking. And much of it is lying with statistics. Of course the global economy will perk along and equities belong in all long term investor accts. That's not in question. The problem is we, as in the street in general not you personally, doesn't have a systematic plan to manage risk. MPT is sold as that plan but clearly, it hasn't protected investors. Another word on cherry picking. Ok, fair enough, i can pick periods that show poor performance and the counter arguement can hand pick good periods. Neither is the point. The point is the 50 something pre-retiree who doesn't have time to rebuild if we fall off the tracks. That person doesn't get to cherry pick. They are operating in real time. They need the growth equities can provide, but can't stand a catastrophic wipeout. How do we protect that investor? It's time for the street to go back to telling investors not only what to buy, but when to buy. Tech analysis anyone?BG - there isn’t going to be a systematic plan, because the economy is too dynamic. The biggest issue is that most advisors are salespeople and are very good at selling. Financial management is a different craft and one that most of us aren’t experts in. Oh, there is bluster on the boards about such things, but in reality MPT has been a godsend for financial companies, because it allows advisors to work within a certain framework.
How many people will take the time to actually become experts in finance? Maybe people who have been doing it for so long you naturally learn things. But advisors are going to become pretty scare if there isn’t a framework to follow. And then you won’t have enough advisors for everybody.
We apply much of financial and economic theory using social science statistical models, when we should more likely use chaos models (non-linear, asymmetric). Our business is incredibly complex and further complicated because of human nature.
I’m not sure we should be tech analysts, but it is an option, and one that can be explored. But like anything else, it would need to be tested on a relatively consistent basis to insure that it is working.
All strategies need to be tested on a consistent basis.
It is prospecting. Toss out the line, see what "develope"s. They might do better if they learned how to spell develop! Hahahaha!
Much of it comes back to timing. There are times that are just not real good to be invested in equities.
Ron, do yourself a favor (I don't mean to sound condescending), read Unexpected Returns by Ed Easterling (Crestmont Research). It will open your eyes. I read the first version a few years back. They have an updated version out. Basically, it talks about the fact that there are times when you can look at the value of a market and know, with almost certainty, that your future potential returns are doomed. There is simply no way to make money. 1998-2000 was a perfect example. It was clear beyond clear (unless you prescribed to the "New Paradgim") that there was simply no way you could make money going forward putting money into a 40+ P/E market. Conversely, investing heavily in equities when the market P/E was 8 or 9 made sense. You ALWAYS made money. The long cycles (secular cycles) ebb and flow. You need to know where you are in the cycle. When you DON'T know (like now - are we at the beginning, middle or end??), you need to be in "protection" mode, and seek the least risky assets (which is not always what we consider the "least risky " assets like cash or Treasuries - right now, both of those would be poor choices). But simply dumping 60% into equities and 30% into bonds, and 10% into cash is making an assumption that a market P/E of 44 is the same as a market P/E of 7. I think MPT is a perfect starting point, or reference point. A well-balanced portfolio of stocks, bonds, alternatives, and cash. But you need to look at the balance among them during given market cycles. Portfolios cannot just be static representations of a market that is anything BUT static.[quote=BondGuy][quote=Ron 14]
Well what if you bought in Mar of 09 or Nov 08 ? You can cherry pick time frames all day long. People are saying this was "the lost decade." Yeah, the decade sucked, two big crashes. That doesn't mean the global equity market will cease to produce returns that will get clients to their financial goals moving forward. And even though the decade was a bad one it wasn't a world ender. Investments contain risk. Home ownership contains risk. Bank Cd's contain risk. It all contains risk. Having a systematic plan to manage that risk and to prevent panic and euphoria is our value. [/quote] Cherry picking? What would you call 5.9%? It's all cherry picking. And much of it is lying with statistics. Of course the global economy will perk along and equities belong in all long term investor accts. That's not in question. The problem is we, as in the street in general not you personally, doesn't have a systematic plan to manage risk. MPT is sold as that plan but clearly, it hasn't protected investors. Another word on cherry picking. Ok, fair enough, i can pick periods that show poor performance and the counter arguement can hand pick good periods. Neither is the point. The point is the 50 something pre-retiree who doesn't have time to rebuild if we fall off the tracks. That person doesn't get to cherry pick. They are operating in real time. They need the growth equities can provide, but can't stand a catastrophic wipeout. How do we protect that investor? It's time for the street to go back to telling investors not only what to buy, but when to buy. Tech analysis anyone? [/quote] Maybe I missed something, but I thought we were talking about recent history and how you believe MPT failed investors. I chose the last 10 years because it was terrible period in the equity markets to show a balanced portfolio didn't kill anyone. My parents are 55. They have what many would call a balanced portfolio. They lost 23% in 2008. They have more money to invest now than at any period because home is nearly paid off and kids are gone. One of them is likely to live beyond 85. That is a 30 year time frame and they will need 4% withdrawals. Why is a bland, low expense, diversified portfolio, rebalanced annually, with 12 months living expenses in cash a bad thing ? If you can systematically buy and sell stocks for profit by using analysis you should not have any clients. You should trade your own account and keep all the profits.[quote=B24]Much of it comes back to timing. There are times that are just not real good to be invested in equities.
Ron, do yourself a favor (I don't mean to sound condescending), read Unexpected Returns by Ed Easterling (Crestmont Research). It will open your eyes. I read the first version a few years back. They have an updated version out. Basically, it talks about the fact that there are times when you can look at the value of a market and know, with almost certainty, that your future potential returns are doomed. There is simply no way to make money. 1998-2000 was a perfect example. It was clear beyond clear (unless you prescribed to the "New Paradgim") that there was simply no way you could make money going forward putting money into a 40+ P/E market. Conversely, investing heavily in equities when the market P/E was 8 or 9 made sense. You ALWAYS made money. The long cycles (secular cycles) ebb and flow. You need to know where you are in the cycle. When you DON'T know (like now - are we at the beginning, middle or end??), you need to be in "protection" mode, and seek the least risky assets (which is not always what we consider the "least risky " assets like cash or Treasuries - right now, both of those would be poor choices). But simply dumping 60% into equities and 30% into bonds, and 10% into cash is making an assumption that a market P/E of 44 is the same as a market P/E of 7. I think MPT is a perfect starting point, or reference point. A well-balanced portfolio of stocks, bonds, alternatives, and cash. But you need to look at the balance among them during given market cycles. Portfolios cannot just be static representations of a market that is anything BUT static.[/quote] I would venture to say that market P/E's don't often fluctuate outside of a certain range. I don't know for sure, but lets say a majority of the time they are between 16-22. Now what, you sit around and wait for a move either way? It seems to be that rebalancing is an easier way of selling high and buying low when the extremes aren't in play.[quote=Ron 14][quote=B24]Much of it comes back to timing. There are times that are just not real good to be invested in equities.
Ron, do yourself a favor (I don't mean to sound condescending), read Unexpected Returns by Ed Easterling (Crestmont Research). It will open your eyes. I read the first version a few years back. They have an updated version out. Basically, it talks about the fact that there are times when you can look at the value of a market and know, with almost certainty, that your future potential returns are doomed. There is simply no way to make money. 1998-2000 was a perfect example. It was clear beyond clear (unless you prescribed to the "New Paradgim") that there was simply no way you could make money going forward putting money into a 40+ P/E market. Conversely, investing heavily in equities when the market P/E was 8 or 9 made sense. You ALWAYS made money. The long cycles (secular cycles) ebb and flow. You need to know where you are in the cycle. When you DON'T know (like now - are we at the beginning, middle or end??), you need to be in "protection" mode, and seek the least risky assets (which is not always what we consider the "least risky " assets like cash or Treasuries - right now, both of those would be poor choices). But simply dumping 60% into equities and 30% into bonds, and 10% into cash is making an assumption that a market P/E of 44 is the same as a market P/E of 7. I think MPT is a perfect starting point, or reference point. A well-balanced portfolio of stocks, bonds, alternatives, and cash. But you need to look at the balance among them during given market cycles. Portfolios cannot just be static representations of a market that is anything BUT static.[/quote] I would venture to say that market P/E's don't often fluctuate outside of a certain range. I don't know for sure, but lets say a majority of the time they are between 16-22. Now what, you sit around and wait for a move either way? It seems to be that rebalancing is an easier way of selling high and buying low when the extremes aren't in play. [/quote] Rowing versus sailing. When times are good, as you have suggested, and markets are in equilibrium (think 1983-1998), you just sit tight and keep rebalancing (sailing). Yes, bull markets are longer and deeper than bears. But when you do hit the extremes, that is the time for action. Extended bull markets have always been followed by devastating bear markets. Most people aren't lucky enough to have all their money ready to be invested at the beginning of a secular bull market. You just have to have a plan (rowing). And there is a difference between the plan for a 35 year-old and a 60 year-old. And since most of our clients are closer to 60 than 35, you better have a pretty good plan.[quote=BondGuy][quote=Ron 14]
Well what if you bought in Mar of 09 or Nov 08 ? You can cherry pick time frames all day long. People are saying this was "the lost decade." Yeah, the decade sucked, two big crashes. That doesn't mean the global equity market will cease to produce returns that will get clients to their financial goals moving forward. And even though the decade was a bad one it wasn't a world ender. Investments contain risk. Home ownership contains risk. Bank Cd's contain risk. It all contains risk. Having a systematic plan to manage that risk and to prevent panic and euphoria is our value. [/quote] Cherry picking? What would you call 5.9%? It's all cherry picking. And much of it is lying with statistics. Of course the global economy will perk along and equities belong in all long term investor accts. That's not in question. The problem is we, as in the street in general not you personally, doesn't have a systematic plan to manage risk. MPT is sold as that plan but clearly, it hasn't protected investors. Another word on cherry picking. Ok, fair enough, i can pick periods that show poor performance and the counter arguement can hand pick good periods. Neither is the point. The point is the 50 something pre-retiree who doesn't have time to rebuild if we fall off the tracks. That person doesn't get to cherry pick. They are operating in real time. They need the growth equities can provide, but can't stand a catastrophic wipeout. How do we protect that investor? It's time for the street to go back to telling investors not only what to buy, but when to buy. Tech analysis anyone? [/quote] That is what I use and nothing else..math never lies...[quote=B24][quote=Ron 14][quote=B24]Much of it comes back to timing. There are times that are just not real good to be invested in equities.
Ron, do yourself a favor (I don't mean to sound condescending), read Unexpected Returns by Ed Easterling (Crestmont Research). It will open your eyes. I read the first version a few years back. They have an updated version out. Basically, it talks about the fact that there are times when you can look at the value of a market and know, with almost certainty, that your future potential returns are doomed. There is simply no way to make money. 1998-2000 was a perfect example. It was clear beyond clear (unless you prescribed to the "New Paradgim") that there was simply no way you could make money going forward putting money into a 40+ P/E market. Conversely, investing heavily in equities when the market P/E was 8 or 9 made sense. You ALWAYS made money. The long cycles (secular cycles) ebb and flow. You need to know where you are in the cycle. When you DON'T know (like now - are we at the beginning, middle or end??), you need to be in "protection" mode, and seek the least risky assets (which is not always what we consider the "least risky " assets like cash or Treasuries - right now, both of those would be poor choices). But simply dumping 60% into equities and 30% into bonds, and 10% into cash is making an assumption that a market P/E of 44 is the same as a market P/E of 7. I think MPT is a perfect starting point, or reference point. A well-balanced portfolio of stocks, bonds, alternatives, and cash. But you need to look at the balance among them during given market cycles. Portfolios cannot just be static representations of a market that is anything BUT static.[/quote] I would venture to say that market P/E's don't often fluctuate outside of a certain range. I don't know for sure, but lets say a majority of the time they are between 16-22. Now what, you sit around and wait for a move either way? It seems to be that rebalancing is an easier way of selling high and buying low when the extremes aren't in play. [/quote] Rowing versus sailing. When times are good, as you have suggested, and markets are in equilibrium (think 1983-1998), you just sit tight and keep rebalancing (sailing). Yes, bull markets are longer and deeper than bears. But when you do hit the extremes, that is the time for action. Extended bull markets have always been followed by devastating bear markets. Most people aren't lucky enough to have all their money ready to be invested at the beginning of a secular bull market. You just have to have a plan (rowing). And there is a difference between the plan for a 35 year-old and a 60 year-old. And since most of our clients are closer to 60 than 35, you better have a pretty good plan.[/quote] That is great in theory, but last spring when the Dow was at 6500 people and advisors were scared to death about buying. Very few advisors on this site, if any, were signaling to purchase equities. (there was a thread about this at the time) All numbers look terrible when the market is in the sh*tter and more often than not that is the exact time to buy. The numbers also show this is when the average investor sh*ts himself. I still haven't heard a good explanation from anyone as to what their core principles are when it comes to advising their clients. Let me ask it again... If asset allocation, diversification and rebalancing are philosophies of the past, what is the philosophy of the future ?[quote=chief123][quote=BondGuy][quote=Ron 14]
Well what if you bought in Mar of 09 or Nov 08 ? You can cherry pick time frames all day long. People are saying this was "the lost decade." Yeah, the decade sucked, two big crashes. That doesn't mean the global equity market will cease to produce returns that will get clients to their financial goals moving forward. And even though the decade was a bad one it wasn't a world ender. Investments contain risk. Home ownership contains risk. Bank Cd's contain risk. It all contains risk. Having a systematic plan to manage that risk and to prevent panic and euphoria is our value. [/quote] Cherry picking? What would you call 5.9%? It's all cherry picking. And much of it is lying with statistics. Of course the global economy will perk along and equities belong in all long term investor accts. That's not in question. The problem is we, as in the street in general not you personally, doesn't have a systematic plan to manage risk. MPT is sold as that plan but clearly, it hasn't protected investors. Another word on cherry picking. Ok, fair enough, i can pick periods that show poor performance and the counter arguement can hand pick good periods. Neither is the point. The point is the 50 something pre-retiree who doesn't have time to rebuild if we fall off the tracks. That person doesn't get to cherry pick. They are operating in real time. They need the growth equities can provide, but can't stand a catastrophic wipeout. How do we protect that investor? It's time for the street to go back to telling investors not only what to buy, but when to buy. Tech analysis anyone? [/quote] That is what I use and nothing else..math never lies...[/quote]Chief, I like your posts and think you are a smart guy. But the interpretation of math is the biggest problem.
While math may not lie, technical analysis runs into some of the same problems faced by MPT and EMH. Technical analysis as a scientific method for forecasting is inconclusive at best.
That doesn't mean it doesn't work, just that as a method for advisors to invest client assets it is just as limited as other models.
I agree I think you can get carried away with technical analysis. I stick to the basics, keep investment costs down(use etfs), and it has worked for my clients.
[quote=chief123]I agree I think you can get carried away with technical analysis. I stick to the basics, keep investment costs down(use etfs), and it has worked for my clients. [/quote]
Awesome!
To go back to BG’s OP, I wonder if it’s possible that we’re already doing things that are benefiting our clients.
Fortunately in our business, there are many ways to skin the cat. So I wonder if maybe we’re worrying over nothing.
Given the dynamic nature of global economics and the differing theories on the financial markets, it might be better for each individual to find what works and stick to it.
A unifying theory sounds nice (in theory), but I think the best thing is to continue to debate and poke holes in each others methods. It will make us better at our jobs and benefit our clients as well.
And maybe justify our fee.
Well said.[quote=chief123]I agree I think you can get carried away with technical analysis. I stick to the basics, keep investment costs down(use etfs), and it has worked for my clients. [/quote]
Awesome!
To go back to BG’s OP, I wonder if it’s possible that we’re already doing things that are benefiting our clients.
Fortunately in our business, there are many ways to skin the cat. So I wonder if maybe we’re worrying over nothing.
Given the dynamic nature of global economics and the differing theories on the financial markets, it might be better for each individual to find what works and stick to it.
A unifying theory sounds nice (in theory), but I think the best thing is to continue to debate and poke holes in each others methods. It will make us better at our jobs and benefit our clients as well.
And maybe justify our fee.
Great thread.
What I take from BG’s original post is that we should pay attention to what the client is hearing us say. ‘Asset allocation’ and ‘diversification’ probably sound great to us, but how does that get a prospect excited?
What does the prospect or client want?
My opinion is that he wants some kind of income or distribution strategy and not a growth strategy.
Our clients are older now (boomers are starting to retire) and more concerned with distribution strategies rather than growth strategies; also, the economic times are far more uncertain.
So my evolving POV is to tell prospects that we will protect their money, generate predicatable, guaranteed income whenever possible and only put long term (10 years and out money) in stocks, ideally with a GMAB.
When a man is 45 he wants to grow his money at all costs. At 65, he’s wiser, more cautious and wants different things.
My clients aren’t older. I am trying to avoid the worthless boomers.
Asset Allocation is the firms answer to how we free ourselves up to have the time to bring them more assets to wrap. I have said it before, bringing institutional style money management to institutions is great, but not appropriate for most individuals In a bull market MPT is a magnificnet thing. In a bear market MPT = My Portfolio’s Tanking, and it cant get up. Or from another paradigm, in a bear market, MPT = my advisor sounds just like every other advisor i have ever met. Stay the course.
I drank the kool aid. Then i got smart and vomitedBob, I totally agree. with you. MPT works…until it doesn’t.
Ron, I never said you could sell at the top and buy at the bottom. I never said you can get all the upside and none o the downside. I never said you can forecast the market. What you CAN do is get your clients out of harms way, and stay away from overpriced assets.
There ARE better ways.
BINGO - YOU HIT IT- dont try to pick tops and bottoms but for heavens sake, stay out of the way of the freight train when it rolls thru townBob, I totally agree. with you. MPT works…until it doesn’t.
Ron, I never said you could sell at the top and buy at the bottom. I never said you can get all the upside and none o the downside. I never said you can forecast the market. What you CAN do is get your clients out of harms way, and stay away from overpriced assets.
There ARE better ways.
John Mauldin, who I respect but often disagree with, in his book “Bull’s Eye Investing” observes that in evaluating money managers all the theory, education, philosophy, etc of managers is often trumped by those who simply “get it.” They just figure out a way to make money and are quick to acknowledge when they are on a wrong path. The most succesful hedge fund managers he has found are, perhaps, less dogmatic and more adaptive than those who fiercely defend their particular investment prediliction.
To paraphrase Darwin.... it's not the strongest or smartest but the most adaptive to their environment that survive and live through tough markets. MPT works fine when it works. Perhaps it will again, but it doesn't now. Buying 30 yr treasuries was a fine strategy in the early '80s. I wouldn't think it so good now. There is an art and a science to managing money. We tend to debate the science. Yet perhaps it's the art that makes the manager.[quote=Northfield]John Mauldin, who I respect but often disagree with, in his book “Bull’s Eye Investing” observes that in evaluating money managers all the theory, education, philosophy, etc of managers is often trumped by those who simply “get it.” They just figure out a way to make money and are quick to acknowledge when they are on a wrong path. The most succesful hedge fund managers he has found are, perhaps, less dogmatic and more adaptive than those who fiercely defend their particular investment prediliction.
To paraphrase Darwin.... it's not the strongest or smartest but the most adaptive to their environment that survive and live through tough markets. MPT works fine when it works. Perhaps it will again, but it doesn't now. Buying 30 yr treasuries was a fine strategy in the early '80s. I wouldn't think it so good now. There is an art and a science to managing money. We tend to debate the science. Yet perhaps it's the art that makes the manager. [/quote] Agree to a point...[quote=iceco1d]Why are there exactly ZERO posts addressing Ron’s statement of, “Back when the Dow was @ 6500, there were no advisors on this site beating the “buy, buy, buy” drum?” All of this talk about how things have changed, blah, blah, blah. There was NO talk on here of buying back then, except from a few of us “stay the course” types. Now, all of sudden, the merits of technical analysis and market timing are coming out of the woodwork? What gives guys?
A few other points…
B24 - I agree with you, regarding “extremes.” If the P/E of the S&P is in single digits, it’s probably safe to assume you can buy (especially the index, since your exposure to nonsystematic risk is basically zerO). Likewise, a P/E of 40 is probably a bad time to get in. My question is, what about lesser extremes? How much gain do you miss out on if you get out at a P/E of 25? Or 20? Or what type of loss do you experience if you start buying back in around 12 or 15? And furthermore, after costs (of trading, and of research), how much further ahead of the game do you make out?
-Much talk on here about firms wanting to “wrap” everything. I don’t think “we” care about wrap fees; I think we care about annuitizing our businesses. C share funds. L share annuities. Fixed annuities with a trail. Wrap fees. It doesn’t matter to most of us. But even in the case of RIA or a wrap program, this doesn’t explain the push to asset allocation. Gaddock wraps options accounts; complete with shorts. There are fixed income SMAs. There are guys running bonds in fee accounts. There are ETFs and funds for bonds. Variable annuities pay the same, regardless of your allocation. Fixed annuities of many types pay trails. Trails don’t explain the push for asset allocation.
I’m going back to my main points…
1. The more equity exposure, the more hands the firms and advisors can put in the “cookie jar” adding unnecessary risks to clients portfolios. Lower expenses, take less risk, get the same return with less volatility.
2. I’ll agree that if you want to do “other things” to protect clients…use stops. Use puts. Write covered calls. Use living benefits. Use EIAs. “Just buy bonds!” Fine. Magically proclaiming some master technical analysis post-crash isn’t going to fly with me. If technical analysis really worked consistently, we’d all do it; and then it wouldn’t work at all.
3. There was more, but I’m tired.
[/quote]
Yes, but a lot of people use “proper” asset allocation and it hasn’t worked either. Before you go into a rant - I realize that you have used it successfully. That doesn’t mean that everybody else isn’t attempting to follow it as well. They are just not as successful as you.
The problem with having a holy book (MPT) is that everybody’s interpretation of it is different (thus jihad or not to leave Christians out, the Crusades).
As for Ron’s post about 6500, there were a few people saying buy. Ron was one of them. Ron said DCA in like a mofo and he was right.
I believe in that same thread, I said I moved form 25% cash to 10%. Not all in, but I bought. And still buy. I’m not really sure who else was saying buy. But I do remember the “sky is falling” attitude of a lot of people. But I’m pretty sure I wasn’t talking about asset allocation and MPT either.
By the way, I’m giving a presentation to about 500 people in March about this kind of thing, and you better believe I’m using BG’s post.
BG - I’ll send you a check.
I don’t think Ron’s statement about no advisors banging the ‘buy, buy, buy drum’ is right. There were a few, at least, and I don’t recall anybody seriously suggesting we sell out.
In
the real world, everybody I know, including myself, kept our clients in
the market at the bottom, (when appropriate and unless the client just
freaked.) I’m glad I did, but those clients who had more than 50 pct
equity still aren’t whole.
And while it wasn’t stocks, I remember
rankstocks and a few other vets pounding the buy quality munis while
they were trading at 80 cents on the dollar. They recognized that there
are buying opportunities when assets are underpriced. They recognize
that the market does not always fairly price assets, contrary to the
theorist’s assumptions.
That’s my problem with the theories – people saying that the market is rational, or that risks can be measured. For all we know, U.S. Treasuries might be the riskiest investment out there right now, but the risk-return curve won’t tell you that.
I should clarify what I said earlier regarding market P/E’s. One should only use the market P/E as ONE indicator of future potential returns. I was not suggesting that you ONLY invest based on the P/E of the market. I didn’t mean to suggest it was all-in or all-out based on the P/E. However, the extremes (high and low P/E’s) are good examples of when to sell or buy. When the P/E is extremely high, your chances of future success are near zero. When the P/E is extremely low, your chances of future success are near 100%. It’s a mathematical fact. The only way this DOESN’T work is if a sinking market NEVER turns around, or if a soaring market NEVER drops. And that has NEVER happened before. Capitalism simply won’t allow it. So that is ONE indicator of future potential returns. This is what can prevent either the HUGE losses (i.e. 2000-02/2008), or tilt things heavily in your direction (future gains).
So now the issue is the all the valuations in between. What do you do when the market is "fairly" valued? Asset allocation. Balance. Moving Averages of asset classes. Whatever. Remember, we're not trying to knock the ball out of the park here. We're trying to get a reasonable rate of return without enduring massive losses (and being forced into full-investment to recoup losses). So you try your best to miss most of the downside, but you will also miss some of the upside. In the 07-09 debacle, if you only lost 10%, then you only needed to make back about 12% in 2009 to get back to even. Look at what the markets did in 2009. If you only captured HALF of the up market, you would still be WAAAY ahead of the people that lost 40%+ in 2008. But when you allow losses of such magnitude, you have NO CHOICE but to stay fully invested to gain back your losses. Why don't most people do this? Fear. Fear of being wrong. Why don't most fund managers do this? Prospectus. Most prospectuses don't allow for exiting the market. Investors need to know what the manager is doing. That's why "Global Allocation" funds and "go anywhere"-type funds have become popular. And why do you think most fo the good ones (i.e. First Eagle, Blackrock, IVY, MFS, Mutual Disc, etc.) only lost 20-25% in 2008? Because they had more lattitude. Now, the other problem with funds is asset bloat. It's tough to quickly exit multi-mullion dollar positions quickly. And they are also afraid of the "big mistake". One big "oops" and they lose tons of assets and their jobs. Look at Fido Magellan's legacy. And that, my friends, is why we have to rely on our own thinking to help our clients. The fund managers are NOT going to protect us. The type of funds described above (and good managers in general) will REALLY help in a sideways, choppy, not-sure-where-we're-going-from-here market, as they have the skill to pick sectors, assets, and companies with the highest potential. But we have to be students of the game. We get paid a lot of money to think for our clients. Most advisors are simply asset gatherers, and rely on their firm's generic recommednations.[quote=BondGuy]
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. [/quote] Well thats great. You sell bonds. But what of all the other folks that need the growth potential of equities to make retirement a possibility?Ice, I will agree with you that using the wrap to beat on is probably a bad example. But my point was that using a strategic asset allocation approach that is “market, or environment blind” is what the firms push, that is the easiest way to free up time to gather more assets.
I have tried to buy in, and i dont practice market timing with a definition of always trying to be right, but i just cant see sticking with that thru the types of environments we are in. The easiest assets to bring in are the ones you retain. I would rather spend as much time keeping existing clients feeling like they are getting their moneys worth, than buying holding rebalancing and forgetting, and then I'll take on the challenge of having a good time management technique to allow for time to market myself. Some advisors are great at educating clients and managing their expectations. I am probably not one of them, I suspect you are because the Asset Allocation approach works for you.[quote=Sportsfreakbob]Ice, I will agree with you that using the wrap to beat on is probably a bad example. But my point was that using a strategic asset allocation approach that is “market, or environment blind” is what the firms push, that is the easiest way to free up time to gather more assets.
I have tried to buy in, and i dont practice market timing with a definition of always trying to be right, but i just cant see sticking with that thru the types of environments we are in. The easiest assets to bring in are the ones you retain. I would rather spend as much time keeping existing clients feeling like they are getting their moneys worth, than buying holding rebalancing and forgetting, and then I'll take on the challenge of having a good time management technique to allow for time to market myself. Some advisors are great at educating clients and managing their expectations. I am probably not one of them, I suspect you are because the Asset Allocation approach works for you.[/quote] Agree with you...For you MPT guys… 2 questions…
1. What do you think about the Sortino Ratio? 2. Is Post-MPT the answer?Lots of good stuff!
When i wrote this it wasn't to stick a pin in anyone's balloon. It was to point out the fact that most investors, as in the mass throngs, weren't protected and aren't protected. Yet, as evidenced by the mailers I've received the street is still slinging the same BS. The machine needs to be fed. And more victims will be created the next time one of B24's Black Swans pays a visit. Along with being a broker I also look like your best prospects. I'm in my 50s and have enough dough to make the pursuit worth while. Dough i can't afford to lose. I'm out of time to make it back. That said, the words of Mark Twain ring true: I'm more concerned with the return of my money than the return on my money. And dudes and Dudettes, I'm not alone! From that POV, and taking from this thread, it should become obvious the competitive advantage that can be gained from becoming the alternative. The street hasn't learned its lesson. it's time for all of us to teach them. It's time for those of you who don't, to take back managing the money. Even if that only means applying some momentum analysis with some common sense along with a smidge of stop losses thrown in. IT doesn't have to be complicated. It could be as simple as trailing stop losses. With MA i'm not talking actively trading these accounts. Just getting them off the tracks before they get run down. Tech Analysis isn't just for day traders. It can work for diversified accts as well. And ,please, no more giving the money to five different managers who puts them into 250 different stocks. That craziness has got to end! Most of us are smart enough to cover about 150% of the world's equity markets with about a dozen or so funds or ETFs. Ok, we can only cover 98%, still, the point is made. Out before the top, in after the bottom. Clients don't get the full ride up. Nor the full ride down. We want to give the Disney World version where they get a great experience, but in a very controlled environment. To offer an alternative you have to have an alternative. That's gonna take some work. Once you have it down, it's showtime!amen
[quote=BondGuy]Squash, rant of the week huh? Actually, I’ve been at this for a decade. Not anger, frustration.
Rather than focusing on me, the messenger, think about the messege. You need to be able to answer this question at your next client/prospect meeting: The market's been down over 40% twice in the last ten years, what will you do to protect me the next time? In your practice you need to develope a way, a process, that pulls your clients who have entrusted their life's saving to you off the tracks. You, me, us, need to think long and hard about what we are doing. Looking at a screen, collecting a fee, and hoping for the best doesn't cut it! [/quote] At the risk of getting my head chopped off- i dont think its possible to be consistently right getting clients in and out of the equity market. Let me put it to the boards right now- ARE WE SELLING NOW, HERE. We've broken support levels, the news is bad. Maybe this is a march down to 6500 again? I've thought about it, but haven't done a thing. Its too damn hard to make a sell call to a client here. IMO- advisors have to be able to hold cash and fixed income in bigger amounts. In NY you can get GO munis yielding 4.5% going out 15 years. That is like getting 7% taxable and income tax rates are going up so the value of these munis will increase. Its not sexy or lucrative for us but it will get clients to where they need to be. Whatever negative remarks you want to make about Warren Buffett, he held all his top holdings thru this crisis. He has held KO from 90 down to 40. He held WFC and AXP as well. If he's not smart enough to sell than we aren't either. I'll put this to all- For all we know we could be embarking on a 40% decline right now- whose reducing risk? If you are reducing risk what is your buy discipline to get back in? If you're not selling, why? Is there some point where you will sell? This is a tough business that doesn't conform to a model or 'system', don't over expose your clients to equities, if they don't like holding cash or munis then kick em out!I think its time for everyone in this thread to take a deep breath and re-read “The Intelligent Investor” over the weekend. Market and client hysteria are clouding the issues we need to be thinking about. Everyone’s human, even stock brokers/advisers.
CC,
We really need to stop comparing Warrenn Buffett to mutual fund managers or financial advisors. He does not get "in and out of the market". That's like saying Donald Trump should sell all his real estate before the RE market drops, or that GE should sell their turbine business before orders slow down, and then "jump back in" to turbines when orders start coming back. And as I've said before, most of Buffett's positions are so large, that he can not just jump in and out. He is not concerned about short-term setbacks. He buys good companies and holds them, theoretically, forever.[quote=ccmachine][quote=BondGuy]Squash, rant of the week huh? Actually, I’ve been at this for a decade. Not anger, frustration.
Rather than focusing on me, the messenger, think about the messege. You need to be able to answer this question at your next client/prospect meeting: The market's been down over 40% twice in the last ten years, what will you do to protect me the next time? In your practice you need to develope a way, a process, that pulls your clients who have entrusted their life's saving to you off the tracks. You, me, us, need to think long and hard about what we are doing. Looking at a screen, collecting a fee, and hoping for the best doesn't cut it! [/quote] At the risk of getting my head chopped off- i dont think its possible to be consistently right getting clients in and out of the equity market. Let me put it to the boards right now- ARE WE SELLING NOW, HERE. We've broken support levels, the news is bad. Maybe this is a march down to 6500 again? I've thought about it, but haven't done a thing. Its too damn hard to make a sell call to a client here. IMO- advisors have to be able to hold cash and fixed income in bigger amounts. In NY you can get GO munis yielding 4.5% going out 15 years. That is like getting 7% taxable and income tax rates are going up so the value of these munis will increase. Its not sexy or lucrative for us but it will get clients to where they need to be. Whatever negative remarks you want to make about Warren Buffett, he held all his top holdings thru this crisis. He has held KO from 90 down to 40. He held WFC and AXP as well. If he's not smart enough to sell than we aren't either. I'll put this to all- For all we know we could be embarking on a 40% decline right now- whose reducing risk? If you are reducing risk what is your buy discipline to get back in? If you're not selling, why? Is there some point where you will sell? This is a tough business that doesn't conform to a model or 'system', don't over expose your clients to equities, if they don't like holding cash or munis then kick em out! [/quote]This is the problem. People think that "equities" is a blanket term that means ALL equities. Individual positions, managed right, aren't always affected by the overall equities market. For instance, one particular position was up 18% yesterday.
[quote=B24]CC,
We really need to stop comparing Warrenn Buffett to mutual fund managers or financial advisors. He does not get "in and out of the market". That's like saying Donald Trump should sell all his real estate before the RE market drops, or that GE should sell their turbine business before orders slow down, and then "jump back in" to turbines when orders start coming back. And as I've said before, most of Buffett's positions are so large, that he can not just jump in and out. He is not concerned about short-term setbacks. He buys good companies and holds them, theoretically, forever.[/quote]When he saw problems at FNM he sold the stock. I grant you that his positions are generally too big to dance around in and out, but the main point survives- $ that is allocated to the market for us and our clients should be left alone. If anybody has been invested in indexes over the past 10 years versus some kind of magical, voodoo strategy, i bet the person in the index won. But someone in munis over this same time period did fantastically.
DCA into a portolio of indexes- if someone has an initial allocation of 50% equities and that grows to 60% then maybe sell it down to 50%. If it gets down to 40% add to it.
I would look to innovate by increasingly using guaranteed insuarnce solutions as clients approach retirement. There are fixed and indexed annuities that have 8% compound income riders. Also, if there’s enough time, UL can also be a good solution for wealthier clients. You can’t lose principle, you guarantee a good income stream, and you eliminate downside market risk. Additioanlly, the actual account values grow at rates that beat other guarnateed solutions.
As mentioned previously, people are concerned, and shooting the same bullets that seeminly backfired last time won't go far in attracting new clients. Its important to differentiate yourself. I find it gives my clients incredible peace of mind having at least a portion of their retirement guranteed or insured. BTW - for full disclosure, I'm a big fan of MPT during earning years. As people approach retirement, I find it hard to beat simple annuity and insurance based solutions. If clients don't NEED higher returns, then why take the risk?[quote=ManOnTheCouch]I would look to innovate by increasingly using guaranteed insuarnce solutions as clients approach retirement. There are fixed and indexed annuities that have 8% compound income riders. Also, if there’s enough time, UL can also be a good solution for wealthier clients. You can’t lose principle, you guarantee a good income stream, and you eliminate downside market risk. Additioanlly, the actual account values grow at rates that beat other guarnateed solutions.
As mentioned previously, people are concerned, and shooting the same bullets that seeminly backfired last time won't go far in attracting new clients. Its important to differentiate yourself. I find it gives my clients incredible peace of mind having at least a portion of their retirement guranteed or insured. BTW - for full disclosure, I'm a big fan of MPT during earning years. As people approach retirement, I find it hard to beat simple annuity and insurance based solutions. If clients don't NEED higher returns, then why take the risk?[/quote] I think you can put together fixed income solutions that are as good as annuity/insurance based solutions, for less cost and more control, and adding in appropriate amounts of equities will help grow the long-term assets. However, I agree that annuities are good for a portion that you want a guaranteed "paycheck" from.This market changed my philosophy just a tad. Before, I was completely against fixed income for people my age but now I believe everyone can benefit from having some fixed income in their portfolio. With that being said, I will continue to believe in equities and MPT because over the long haul, it has worked. Using annuities and fixed products when someone nears retirement is a great idea to reduce risk but doesn’t that go hand in hand with asset allocation?
I will continue to believe in the United States of America and capitalism. I’m not going to follow the naysayers on CNBC and other media outlets who talk about the gloom and doom. This country has gone through this before and the same things were said: “This time it’s different”! “The world’s going to end”! “Go to cash”!
When you look at 10 year periods ended of the S&P 500 since 1935, 10 year returns were positive 95% of the time. I’ll take those odds any day of the week.
You, my friend, are the definition of sanity!!!This market changed my philosophy just a tad. Before, I was completely against fixed income for people my age but now I believe everyone can benefit from having some fixed income in their portfolio. With that being said, I will continue to believe in equities and MPT because over the long haul, it has worked. Using annuities and fixed products when someone nears retirement is a great idea to reduce risk but doesn’t that go hand in hand with asset allocation?
I will continue to believe in the United States of America and capitalism. I’m not going to follow the naysayers on CNBC and other media outlets who talk about the gloom and doom. This country has gone through this before and the same things were said: “This time it’s different”! “The world’s going to end”! “Go to cash”!
When you look at 10 year periods ended of the S&P 500 since 1935, 10 year returns were positive 95% of the time. I’ll take those odds any day of the week.
Army, you are missing the point. So what if 95% of 10 year periods are positive? How about the 10 year periods with 4% average annual returns? What about the 10 year period that was positive but had a big 40% negative “whoops” in it? Some people miss the concept of Compound Annual Growth Rates (CAGR). You could have two 10 year periods with identical 10 year average returns (which is what virtually all funds and software use to depict average returns), but one of them has a far lower ending value, as in dollars in your pocket, because the big negative year dropped the compound return.
Simple example: Investment A Year 1: +10% Year 2: -10% Average return = 0% Ending Value of $100 invested = $99 Investment B Year 1: 0.0% Year 2: 0.0% Average return = 0% Ending Value of $100 invested = $100 Point is, big negative years have a MUCH bigger impact on returns than positive years in a series of sequential returns. SO people can look at annual returns and say "WOW -40% was bad, but, hey they made back 45% the next year." WRONG! You start with $100, after a -40% and a +45% you are left with $87. You need to make 67% to get abck to even after losing 40%. I know you know all this, but the point is in trying to miss the BIG MISTAKES. If you miss the big downers, you don't need much of the upside during the recovery.Not with my money you won't. To be clear, i'm not talking doom and gloom. I'm talking protection for people who need it. I've already made my money. I don't want to hang around for ten years to make it back again because some genius with a pie chart pointed to a long term stat instead of moving me from harm's way. This thread isn't about charts. It's about people.This market changed my philosophy just a tad. Before, I was completely against fixed income for people my age but now I believe everyone can benefit from having some fixed income in their portfolio. With that being said, I will continue to believe in equities and MPT because over the long haul, it has worked. Using annuities and fixed products when someone nears retirement is a great idea to reduce risk but doesn’t that go hand in hand with asset allocation?
I will continue to believe in the United States of America and capitalism. I’m not going to follow the naysayers on CNBC and other media outlets who talk about the gloom and doom. This country has gone through this before and the same things were said: “This time it’s different”! “The world’s going to end”! “Go to cash”!
When you look at 10 year periods ended of the S&P 500 since 1935, 10 year returns were positive 95% of the time. I’ll take those odds any day of the week.
Those aren't very good numbers and poor statistical sampling... So in roughly 7 samples(70 years plus 1935) you are positive 95% of the time... But what about the 5% that kills your entire portfolio?This market changed my philosophy just a tad. Before, I was completely against fixed income for people my age but now I believe everyone can benefit from having some fixed income in their portfolio. With that being said, I will continue to believe in equities and MPT because over the long haul, it has worked. Using annuities and fixed products when someone nears retirement is a great idea to reduce risk but doesn’t that go hand in hand with asset allocation?
I will continue to believe in the United States of America and capitalism. I’m not going to follow the naysayers on CNBC and other media outlets who talk about the gloom and doom. This country has gone through this before and the same things were said: “This time it’s different”! “The world’s going to end”! “Go to cash”!
When you look at 10 year periods ended of the S&P 500 since 1935, 10 year returns were positive 95% of the time. I’ll take those odds any day of the week.
Those aren't very good numbers and poor statistical sampling... So in roughly 7 samples(70 years plus 1935) you are positive 95% of the time... But what about the 5% that kills your entire portfolio?[/quote] Everyone has a unique circumstance, and the question really comes down to how soon are you going to need this money? I think that is the all important first determination. If it is 10 years or more, equities have historically made the most sense. I understand B24 with black swan events, but would like to know how you are going to predict them with regularity going forward. It is one thing to say avoiding them is key. How you avoid them is a different matter all together.[quote=army13A]This market changed my philosophy just a tad. Before, I was completely against fixed income for people my age but now I believe everyone can benefit from having some fixed income in their portfolio. With that being said, I will continue to believe in equities and MPT because over the long haul, it has worked. Using annuities and fixed products when someone nears retirement is a great idea to reduce risk but doesn’t that go hand in hand with asset allocation?
I will continue to believe in the United States of America and capitalism. I’m not going to follow the naysayers on CNBC and other media outlets who talk about the gloom and doom. This country has gone through this before and the same things were said: “This time it’s different”! “The world’s going to end”! “Go to cash”!
When you look at 10 year periods ended of the S&P 500 since 1935, 10 year returns were positive 95% of the time. I’ll take those odds any day of the week.
I just follow Mel’s twitter feed.
Those aren't very good numbers and poor statistical sampling... So in roughly 7 samples(70 years plus 1935) you are positive 95% of the time... But what about the 5% that kills your entire portfolio?[/quote] We're talking like 70 rolling 10-year periods, not just round decades. But your point is still correct. If you fall into the 5%, YOU LOSE![quote=army13A]This market changed my philosophy just a tad. Before, I was completely against fixed income for people my age but now I believe everyone can benefit from having some fixed income in their portfolio. With that being said, I will continue to believe in equities and MPT because over the long haul, it has worked. Using annuities and fixed products when someone nears retirement is a great idea to reduce risk but doesn’t that go hand in hand with asset allocation?
I will continue to believe in the United States of America and capitalism. I’m not going to follow the naysayers on CNBC and other media outlets who talk about the gloom and doom. This country has gone through this before and the same things were said: “This time it’s different”! “The world’s going to end”! “Go to cash”!
When you look at 10 year periods ended of the S&P 500 since 1935, 10 year returns were positive 95% of the time. I’ll take those odds any day of the week.
Those aren't very good numbers and poor statistical sampling... So in roughly 7 samples(70 years plus 1935) you are positive 95% of the time... But what about the 5% that kills your entire portfolio?[/quote] We're talking like 70 rolling 10-year periods, not just round decades. But your point is still correct. If you fall into the 5%, YOU LOSE![/quote] The other point that is overlooked is that most people will be taking money out, so even if the return was positive what does it look like with a 4% withdrawl rate?[quote=chief123][quote=army13A]This market changed my philosophy just a tad. Before, I was completely against fixed income for people my age but now I believe everyone can benefit from having some fixed income in their portfolio. With that being said, I will continue to believe in equities and MPT because over the long haul, it has worked. Using annuities and fixed products when someone nears retirement is a great idea to reduce risk but doesn’t that go hand in hand with asset allocation?
I will continue to believe in the United States of America and capitalism. I’m not going to follow the naysayers on CNBC and other media outlets who talk about the gloom and doom. This country has gone through this before and the same things were said: “This time it’s different”! “The world’s going to end”! “Go to cash”!
When you look at 10 year periods ended of the S&P 500 since 1935, 10 year returns were positive 95% of the time. I’ll take those odds any day of the week.
[quote=B24]Army, you are missing the point. So what if 95% of 10 year
periods are positive? How about the 10 year periods with 4% average
annual returns? What about the 10 year period that was positive but
had a big 40% negative “whoops” in it? Some people miss the concept of
Compound Annual Growth Rates (CAGR). You could have two 10 year
periods with identical 10 year average returns (which is what virtually all funds and software use to depict average returns), but one of them has a far lower ending value, as in dollars in your pocket, because the big negative year dropped the compound return.
Then what's your strategy? The way you put it, exposure to equities should be limited. Invest in fixed annuities for the rest of their lives?
Where did I imply that 100% of a client's portfolio would be 100% invested in the S&P regardless of where they are in their life? That's where asset allocation comes in. Let's just see where the market is a couple of years from now. The markets always recover, always.
[quote=BondGuy]
Not with my money you won't. To be clear, i'm not talking doom and gloom. I'm talking protection for people who need it. I've already made my money. I don't want to hang around for ten years to make it back again because some genius with a pie chart pointed to a long term stat instead of moving me from harm's way. This thread isn't about charts. It's about people. [/quote]Genius with a pie chart? I never insulted you in any way but whatever.
Again, where did I say 100% of a client's assets should be invested in the S&P? As an individual gets closer to retirement, of course they need to start shifting more conservatively. But the notion that some people have that when someone gets to 65 and needs to be 100% fixed income is crazy. You can have equities inside of protected vehicles such as VA's and there's nothing wrong with that.
I think what they are saying is timing the market a little is ok. Allocations should change, and not just on “age” and “risk tolerance”. I know it’s counter-intuitive to everything the FPA stands for, but the financial markets are so complex that it makes sense to constantly monitor our theories.
Asset allocation to me, is short term thinking dressed up as long term strategy.
[quote=Moraen]I think what they are saying is timing the market a little is ok. Allocations should change, and not just on “age” and “risk tolerance”. I know it’s counter-intuitive to everything the FPA stands for, but the financial markets are so complex that it makes sense to constantly monitor our theories.
Asset allocation to me, is short term thinking dressed up as long term strategy.
[/quote]
True. Never heard it put that way, but totally true.
I will try to post a link, but Bank Investment Consultant has a decent article this week about MPT. It actually stated in the article that if you were to buy 20 yr Treasuries from 1969 - 2009 you would have beaten the S&P. There wasn’t much detail to the authors comment. Can that be true ? If so I need to change my thinking!
http://www.bankinvestmentconsultant.com/bic_issues/2010_2/rethinking-modern-portfolio-theory-2665530-1.htmlThe typical person is screwed when it comes to retirement. It has very little to do with what investment strategy they used. Most people simply never put enough money away. It’s awfully tough to have a fighting chance for a decent retirement when one is 65, still has a mortgage and other debt and never put more than 5-10% of their income away.
In general, whoever puts away the most money ends up with the most. The other advantage to putting away more money is that it's easier to maintain one's standard of living. In fact, isn't that what people typically want in retirement? Compare two people who make $100,000 after taxes. One put away 10% of his income. The other put away 20%. Obviously, the one who put away 20% will have more money, but not as obvious to our clients is the fact that he'll only need to maintain an $80,000/year lifestyle and not a $90,000 life style.[quote=anonymous]The typical person is screwed when it comes to retirement. It has very little to do with what investment strategy they used. Most people simply never put enough money away. It’s awfully tough to have a fighting chance for a decent retirement when one is 65, still has a mortgage and other debt and never put more than 5-10% of their income away.
In general, whoever puts away the most money ends up with the most. The other advantage to putting away more money is that it's easier to maintain one's standard of living. In fact, isn't that what people typically want in retirement? Compare two people who make $100,000 after taxes. One put away 10% of his income. The other put away 20%. Obviously, the one who put away 20% will have more money, but not as obvious to our clients is the fact that he'll only need to maintain an $80,000/year lifestyle and not a $90,000 life style. [/quote]Amen to that. It's a fact that most Americans will not live the life they want in retirement because they're too worried about "keeping up with the Jones" now.
I have a close friend who wanted me to help them get a budget straight because they were living paycheck to paycheck and contemplating taking money out the 401k to make ends meet. I start going through the budget and I see personal training sessions, private kung fu lessons for the kids, new car note, etc. I start looking at the person and say which one of these do you want to cut out? Answer was none b/c they couldn't live without those things.
Ice, I wish I had more clients like that. That’s somebody that you couldn’t screw up if you tried.
More typical is the 63-year-old man with 200k, invested at 50-50 because the models show the worst than can happen is he loses maybe 10 pct. Only last year he fell to 150k.
So that guy was SOL. He’s lost three years of his retirement.
Or the guy who was 66 and retired with 200k, taking 8k per year to supplement Social Security (except he’s really taking 10k because he has decided he’s not going to live to 90) and invested 50-50 because I told him he’s got a 30-year horizon and he’s got to keep up with inflation. Now he’s sitting at 140k and he really’s SOL.
The typical person makes 50k a year can’t possibly save enough for retirement. He’s got kids to raise, car payments, taxes… his company doesn’t have a pension anymore. He knows he needs to save something, but he has a chance to spend his kid to U of M so he’s going to bite the bullet and pay for that so his kid can have a better life. He had a 401k but the match is gone and it just lost 40 percent. Maybe he loses his job for six months and spends whatever he has. I just don’t know how these people are going to make it.
[quote=iceco1d]Your 66 y/o guy can buy a SPIA for less than $130K that will give him 10K a year for the rest of his life. He’ll have $20K leftover to deal with inflation (which will probably involve him buying another SPIA at a certain point).
It’s not your fault that moron clients only saved $200K to live on for the rest of their lives. Both situations are manageable.
[/quote]
Damn, you are icecold. …
Lots of good people haven’t been able to save 200k, either because of employment problems (the blue collar sector has been pretty much wiped out), divorce for women who stayed home with kids, illness, etc.
This is one of the best threads I have ever read on this forum. I have never posted before but I just couldn’t resist any longer. I am new to the FA industry, however I have spent the last decade researching issues in political economy in academia. Regarding theories, MPT or otherwise, they should always be used as a guideline, not as hard and fast rules. MPT does seem to provide some loose guidelines when creating portfolio recommendations for a client but MPT doesn’t take consumer behavior into account. It assumes consumers/the market are rational and efficient. This is certainly not true since the entire stock market is a game of confidence in price.
I understand that FA's are primarily chasing after the commissions and fee's received from gaining new accounts, so the game rewards rainmakers and not money managers. But surely FA's can make more money from managing their clients dollars (assuming their book is a high AUM) since successful money management will be a big draw to new clients. This seems to be the implicit message that BG was driving at in the beginning of the thread. I think the FA's who want to drink the company kool-aid and sit on their intellectual butts spouting asset-allocation, dollar-cost averaging, and staying white-knuckled to a particular finance model like the MPT, EMH or whatever, while their clients pay the price, will not make it through a bear market/recession. The bottom line should always be, "Am I making my client money or at least staving off losses?" Who cares whether you do it through stocks, options, bonds, index annuities or mutual funds - "Am I making my client money?" Who knows, I could be wrong and out of business before the next year, but I believe I am correct. I leave folks with one question, and hopefully BG will weight in. How many of you use stock image coefficients for your book, as well as using behavioral models to get a quick look at the entire market?MLGone is 150% correct. That is good advice.
Odysseus - think seriously about what he said.ML and Sportsfreak… certainly no offense taken. I’m a few months in and doing well, though nothing to brag about yet. I’m over in NY with MSSB, it seems that the folks I’m around who do know their stuff never say a word and its always the complete muppets who give the free advice. (true in all walks of life really.) I was just wondering what the big guys do after they drag in the assets.
[quote=iceco1d]
The people that are "screwed" so close to retirement are a group I can't get my brain around.
Suppose you are in a plain vanilla asset allocation fund or target date fund over the past 5 years, and you are supposed to retire 1/1/10. Ok, you took a big hit during the sh*tstorm. But, if you are retiring soon, you SHOULD be putting away massive amounts of money for retirement. If you aren't, then that's YOUR PROBLEM. So you are maxing out your 401K, and probably adding to a Roth IRA. You're putting away $25K a year into your portfolio, that is now down 30%. Now that market has recovered, and you've stuffed a ton of money in at low values, to bolster your recover. You are now positive. Ok, so what if the economy DIDNT recover by now. Now, give me a little room to tweak my scenario here, and lets pretend this investor is in a 50/50 allocation, still plain vanilla, through the whole shat storm. He still shouldn't be down more than 25% (and that's a bit much, IMO). Keep in mind, this Joe Blow investor has been saving through the 80s, 90s, and 2000s. He's done well with this "moronic" strategy of asset allocation. So the market environment wasn't as favorable at the end as he would have liked, and now he has to retire with $750K instead of $1MM. What can we do for poor Joe? He must be f*cked because MPT failed. In the door comes Mr. Reality. Sorry Joe, life happens. You needed $45K a year from your portfolio to retire, and because MPT failed and the market went down, that would be an unsafe 6% withdrawal rate from your portfolio, and you can't retire. WRONG! Simple solution. Well Joe, you can still retire. Here is what we'll do. To get you to 45K, we are going to use $625K of your portfolio to buy a SPIA, and your 45K will be guaranteed for life. The other $125K, we are going to continue to invest, and use that for your COLA over the years. Gee Joe, and I bet you thought you were SOL! PS - FWIW, I don't recommend a withdrawal rate over 4% for a < 65 y/o, unless there is an obvious reason as to why it's OK (i.e. health, etc.). That would bolster my argument above even further (I used a 4.5% withdrawal rate, and assumed "Joe" was age 62). But I don't want to force my opinion on anyone else (wink wink). PS2 (haha) - This isn't how I run my practice, but it's one way you can make up for retirement shortfall in a bind. Heck, probably taking liquidity AWAY from baby boomers, is going to end up being a smart move...time will tell. Too bad it doesn't pay better to do so... [/quote] Ok, what to do after you've lost the client's money is one way to go. How about not losing it? Do you have plan for that?[quote=Ron 14]I will try to post a link, but Bank Investment Consultant has a decent article this week about MPT. It actually stated in the article that if you were to buy 20 yr Treasuries from 1969 - 2009 you would have beaten the S&P. There wasn’t much detail to the authors comment. Can that be true ? If so I need to change my thinking!
[/quote] Yes, it is true. There was a bull market in both equities and Treasuries. The return difference was slight, but Treasuries don't expeirence the same drawdowns as equities, nor do they see the same raging bull markets. But don't go so fast...the landscape ahead looks mighty different. Also keep in mind, that's if you invested in 1969 and held those Treasuries for 40 years. Who does that with ANY investment these days? If your client is 65-70, they might see 3% returns for the next 10 years in Treasuries. And take out the couple of implosions in equities, and equities would VASTLY outperform bonds. So the numbers ARE correct, but you have to put it all in perspective. If we were having this conversation in 1999, we would be laughing our arses off. Timing is EVERYTHING when it comes to measuring returns. And that's why equity investors have absolutely horrible real-life returns. They buy at the peak, and sell in the trough. If you are buy-and-hold, you can't be buy-and-sell when the sh!t hits the fan.Iceco1d just became my favorite on this entire thread.
The problem with starting out is that you are getting clients because someone else fck’d their portfolio up and you’re dealing with trying to turn Rosie O’Donnel into Megan Fox right before they need to double their $ and turn the spiggot on. Unless they are hooked up to a breathing machine on two packs a day they usually always will run out of $ well before they expected to die. It must have been easier back in the day for FA’s to plan for someone who retired at 65 and was dead by 70. Health care was non-existant then so there wasn’t $100k spent on keeping someone alive for the last 3 weeks of their life. Everyone nearing retirement that “needs” 12% a year for their fixed expenses has a problem but doesn’t want to give anything up that they “need” like a 3rd car for taking their grandkids to the park every first Sunday of the month. Fact of the matter if clients saved more it would be easier to help them plan accordingly because then they wouldn’t have to get 18% a year for the Monte Carlo to work out.
When I first started these were the people that I had the unfortunate luck to be getting in front of and with firm production req’s you took anyone with a pulse (big mistake, I admit it). If everything was rational in this industry things would make more sense and be easier to help people. Clients are irrational, brokers/advisors, analysts, markets, THE MEDIA makes me look up when I go outside sometimes to see if a unicorn is going to land on me from iceco1d’s client “the weekend hunter” shooting it out of the sky. There are 1001 ways to make and lose your shirt in the market. And they all worked at one point if you bought low and sold higher. Hell, if you bought AIG on the bounce it could be called a theory. What I do agree with is being conservative and giving up some of the upside for not getting Tommy Lee standing behind you while you’re grabbing your ankles in the bad times thinking you’re a $2 hooker he’s about to abuse. Clients never care how much you make them until you lose them a lot, and then you can expect an ACAT form being delivered even if you beat the market 7 out of 8 years. While I’d rather be Mr Aggressive and be the big swingin’ dck with returns, 90% of your client’s probably should be in front of Ron14’s Jr FA talking about money markets and CD rates because they don’t want swings in their money. They want the solid line moving upwards at all times but none of the pot holes along the way to grandma’s house. I agree with BG that Just because it’s boring doesn’t mean it doesn’t work.
And that this is probably the best thread I’ve come across. Good job BG throwing a bone in between 30 hungry dogs. It makes you think about how to be a better advisor and what YOU bring to the table even if none of us agree with anyone else.
[quote=BondGuy]
One of the perks of this business is the ability to live in a nice neighborhood. One of the downsides of living in a nice house surrounded by other nice houses is that the solicitations from financial advisors and consultants never ends. Many on this board who live in these types of places can relate.
This week i received not one but two solicitations from MSSB. One from their local in town office and another from an office located in Capital City about 10 miles away. First, the good news- Hats off to these advisors for their prospecting effort. At least that I respect. Next, the messege to us advisors - If you aren't contacting your clients rest assured someone else is. Finally, the bad news - Mailing number one comes from a three advisor group. The group consists of the typical two senior veeps and a junior FA. They have invited me and my guest to a dinner at one of the area's top restaurants. We will be entertained by Blackrock Investments. Opening for Blackrock that evening, Roosevelt Investments will do its act. The entertainment should be interesting. The invitation is entitled: A Consultative Approach to Investing It says and I quote: In today's complex world, investors need to develope a sound investment process that addresses asset allocation, developing an investment strategy, evaluating investment managers, and measuring performance. OK folks, what's wrong with that statement? If you answered, nothing listed in the invitation stopped investors from losing money throughout the past decade give yourself a gold star. Nothing in the invitation talks about protecting assets from decline. There's a reason for that. It doesn't work, it's failed strategy within a broken process. Yet "they" continue to push it. If it doesn't benefit the investor, who does it benefit? On to mailing number two: This one comes from an advisor without the Veep title, so I'm guessing rookie. The letter is four paragraphs long and totally fails by any standard to grab my attention. The letter focuses on retirement asks: How much should you save for retirement? What level of risk can you live with? How much do you need to live on? These are all good questions that we as profesionals ask as a standard course of business. The letter goes on: I believe that MSSB's comprehensive approach to retirement planning sets a new standard in the industry. We begin with your vision for retirement and try to estimate what that may cost to fund. (and here's the part i really love) We'll also look at risk factors-longevity,health care costs and others-that could threaten the lifestyle you envision. Then we'll develope a long-range investment plan that details where your income will come from in retirement. OK, I'll give trying to estimate retirement funding a pass. You either can estimate it or you can't. My question is this: When looking at the risk factors that could threaten my retirement lifestyle who proctects me from this Advisor and MSSB? Ya gotta love rookies. This kid obviously drank the Kool Aid because he believes that MSSB sets a new standard in retirement planning. Did i miss something here? Did MSSB protect it's clients in 2008? Did thier clients have a positive return in 2008? Are they back to even this year? How have MSSB clients done over the past decade? Were they immune to the tech bubble popping and decade opening 45% sell off? We all know the answers to those questions. The point: On main street people have gotten screwed by this process. Retirees and pre-retirees have little to show for the past decade of investing. Many have had their retirement plans scuttled. This firm, my firm , all our firms, did nothing to protect these people. Yet the beat goes on. The fees are racked up and the cash register rings. Whether you call it a Consultative Approach to Investing or Comprehensive Retirement Planning any program that puts investors money at risk without the safeguards in place to protect those assets is a failed process. A well stuffed mattress has outperformed most if not all of the cookie cutter fee based programs on Wall Street over the past decade. What do you call that when you continue to do the same thing and expect a different result? In this case, it should be called criminal.[/quote]
zzzzzzzzzzzzz..... zzzzzzzzzz..... How long did it take you to write that email??
[quote=hedge212]
[quote=BondGuy]
One of the perks of this business is the ability to live in a nice neighborhood. One of the downsides of living in a nice house surrounded by other nice houses is that the solicitations from financial advisors and consultants never ends. Many on this board who live in these types of places can relate.
This week i received not one but two solicitations from MSSB. One from their local in town office and another from an office located in Capital City about 10 miles away. First, the good news- Hats off to these advisors for their prospecting effort. At least that I respect. Next, the messege to us advisors - If you aren't contacting your clients rest assured someone else is. Finally, the bad news - Mailing number one comes from a three advisor group. The group consists of the typical two senior veeps and a junior FA. They have invited me and my guest to a dinner at one of the area's top restaurants. We will be entertained by Blackrock Investments. Opening for Blackrock that evening, Roosevelt Investments will do its act. The entertainment should be interesting. The invitation is entitled: A Consultative Approach to Investing It says and I quote: In today's complex world, investors need to develope a sound investment process that addresses asset allocation, developing an investment strategy, evaluating investment managers, and measuring performance. OK folks, what's wrong with that statement? If you answered, nothing listed in the invitation stopped investors from losing money throughout the past decade give yourself a gold star. Nothing in the invitation talks about protecting assets from decline. There's a reason for that. It doesn't work, it's failed strategy within a broken process. Yet "they" continue to push it. If it doesn't benefit the investor, who does it benefit? On to mailing number two: This one comes from an advisor without the Veep title, so I'm guessing rookie. The letter is four paragraphs long and totally fails by any standard to grab my attention. The letter focuses on retirement asks: How much should you save for retirement? What level of risk can you live with? How much do you need to live on? These are all good questions that we as profesionals ask as a standard course of business. The letter goes on: I believe that MSSB's comprehensive approach to retirement planning sets a new standard in the industry. We begin with your vision for retirement and try to estimate what that may cost to fund. (and here's the part i really love) We'll also look at risk factors-longevity,health care costs and others-that could threaten the lifestyle you envision. Then we'll develope a long-range investment plan that details where your income will come from in retirement. OK, I'll give trying to estimate retirement funding a pass. You either can estimate it or you can't. My question is this: When looking at the risk factors that could threaten my retirement lifestyle who proctects me from this Advisor and MSSB? Ya gotta love rookies. This kid obviously drank the Kool Aid because he believes that MSSB sets a new standard in retirement planning. Did i miss something here? Did MSSB protect it's clients in 2008? Did thier clients have a positive return in 2008? Are they back to even this year? How have MSSB clients done over the past decade? Were they immune to the tech bubble popping and decade opening 45% sell off? We all know the answers to those questions. The point: On main street people have gotten screwed by this process. Retirees and pre-retirees have little to show for the past decade of investing. Many have had their retirement plans scuttled. This firm, my firm , all our firms, did nothing to protect these people. Yet the beat goes on. The fees are racked up and the cash register rings. Whether you call it a Consultative Approach to Investing or Comprehensive Retirement Planning any program that puts investors money at risk without the safeguards in place to protect those assets is a failed process. A well stuffed mattress has outperformed most if not all of the cookie cutter fee based programs on Wall Street over the past decade. What do you call that when you continue to do the same thing and expect a different result? In this case, it should be called criminal.[/quote]
zzzzzzzzzzzzz..... zzzzzzzzzz..... How long did it take you to write that email??
[/quote]
Less time than it took you to read it!
Bondy guy check out the new site.....
Bondguy- has anyone of these Jehovah’s Witnesses shown up on your doorstep with an ICA pamphlet and Kool-Aid spots on their shirts?
[quote=Odysseus]This is one of the best threads I have ever read on this forum. I have never posted before but I just couldn't resist any longer. I am new to the FA industry, however I have spent the last decade researching issues in political economy in academia. Regarding theories, MPT or otherwise, they should always be used as a guideline, not as hard and fast rules. MPT does seem to provide some loose guidelines when creating portfolio recommendations for a client but MPT doesn't take consumer behavior into account. It assumes consumers/the market are rational and efficient. This is certainly not true since the entire stock market is a game of confidence in price.
I understand that FA's are primarily chasing after the commissions and fee's received from gaining new accounts, so the game rewards rainmakers and not money managers. But surely FA's can make more money from managing their clients dollars (assuming their book is a high AUM) since successful money management will be a big draw to new clients. This seems to be the implicit message that BG was driving at in the beginning of the thread. I think the FA's who want to drink the company kool-aid and sit on their intellectual butts spouting asset-allocation, dollar-cost averaging, and staying white-knuckled to a particular finance model like the MPT, EMH or whatever, while their clients pay the price, will not make it through a bear market/recession. The bottom line should always be, "Am I making my client money or at least staving off losses?" Who cares whether you do it through stocks, options, bonds, index annuities or mutual funds - "Am I making my client money?" Who knows, I could be wrong and out of business before the next year, but I believe I am correct. I leave folks with one question, and hopefully BG will weight in. How many of you use stock image coefficients for your book, as well as using behavioral models to get a quick look at the entire market?[/quote]
You are not correct. You will wash out of the business if you believe managing portfolios will winn you more biz.
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