The definition of insanity
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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.
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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![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.