Modern Portfolio Theory, it sounds like a jazz trio but it's how a good many of today's investors manage their money. Harry Markowitz is the fellow who picked up a Nobel Prize for economic sciences for his pioneering work in MPT. Unfortunately Harry, now 81, doesn't pay much attenton to MPT when investing his own money. Harry admits he doesnt think about his own money all that much and as a result his portfolio is pretty much a hodge-podge of this and that.
MPT is a lot more complicated than the simple asset allocation most people use when working with their investments. There are computer programs designed to do nothing else than manage money-using MPT.
The average investor doesn't need all the bells and whistles of a complete MPT plan and only the basics, which include diversification and asset allocation to build portfolios.
MPT and asset allocation are like drugs for certain investors. Find yourself among a group of serious middle-aged amateur investors and Sharpe ratio, beta and alpha are passed along in the same serious vein as the names of new teeth whiteners. Me? I've sort of moved aside to a kinder, gentler place where I keep things simple for my clients and myself. For MPT junkies this is the worst sin of all. Acccording to them people like me should be taken outside the city wall and stoned.
Professionally designed asset allocation progarms sometimes run 20-to-30 mutual funds or half a dozen pages of individual stocks and bonds. The reality is you don't need all that. I read where you can effeciently asset allocate return and risk with as little as a dozen stocks. One mutual fund and a handful of individual bonds can do the trick too. Unfortunately this doesn't do for the true asset allocation purist. 'Where is your micro-cap, your REIT? OMG!'
So why the big push for asset allocation? As one mutual fund wholesaler explained to me, it sells. Clients love it. They like to see pages of individual mutual funds on their statement. The more complicated the better. It's like a Tom Clancy novel. The story is in the minutia not in the plot. Investors feel that with all that bulk in their investment portfolio something good just has to be happening. Certainly after the 2008-2009 crash you will see more and more creative asset allocation plans being touted by investment firms and I dread the disappointment that investors will have when they discover it doesn't do them any good than simply owning 2 or 3 mutual funds and a handful of individual bonds.
Another advantage of selling asset allocation plans to investors by some money management firms is that investors get a piece of some real bad funds that they wouldn't have purposely chosen if they had their druthers. Every mutual fund family has its share of dogs. These are funds that should be taken to the pound and skip the 10-day grace period and go right to the needle. Unless you're stuck in one of these awful funds because you bought it from a long-forgotten brother-in-law you wouldn't be buying it now. The fund company knows this and understands that not a new penny will hit those fund's ledgers by today's sophisticated investor unless the management company does some sleight of hand, mainly make the woof-woof fund part of a 'comprehensive asset allocation' portfolio. The reason fund management doesn't want to close a crummy fund or combine it with something else is because managers still get a handsome fee for just hanging on to investors who haven't looked at their statement in ages or lazy pension managers who haven't pulled the plug and replaced the woof in their menu.
The mutual fund company isn't stupid and won't put a substantial amount of your total investment into this woof. But, it will invest one-percent of your total investment into it, just to keep the fund doors open and allow the portfolio manager to play with some new money.
If you own one of these creations take a peek at the most minimal percentage funds and ask yourself how 1% invested in anything is going to affect your return or overall risk? Why did someone stick you with one-percent of whatever it is you got? It probably can't buy a cup of coffee but it sits proudly on your statement supposedly there to do something especially make you think it is meaningful.
It's a shame but it happens and that's that.
No comments:
Post a Comment