Tracking positions
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Dont quite understand your statement that MPT and fee based portfolios are mutually exclusive. Why is that? If for example an FA is using SMA’s and does it the right way, he builds an asset allocation based on MPT and plugs in the managers. So you have a portfolio that is based on MPT and is Fee Based.
I am and have been for quite a while, running portfolios in a managed account that i run with discretion. I use ETF’s and some stocks. Theory doesnt run my portfolios, my decisions are based on the environement that we are operating in at any given time. With help from tech analysis along the way (DWA)
[quote=Sportsfreakbob]Dont quite understand your statement that MPT and fee based portfolios are mutually exclusive. Why is that? If for example an FA is using SMA’s and does it the right way, he builds an asset allocation based on MPT and plugs in the managers. So you have a portfolio that is based on MPT and is Fee Based.
I am and have been for quite a while, running portfolios in a managed account that i run with discretion. I use ETF’s and some stocks. Theory doesnt run my portfolios, my decisions are based on the environement that we are operating in at any given time. With help from tech analysis along the way (DWA)
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Did you learn all that neat stuff in your little cfp classes?
The entire fee complex is built upon MPT. 'Let us run the money staying fully invested at all times. We'll manage the risk through asset diversification giving the money to the best mangers money can buy. And we'll do it all for a non conflict of interest annual fee." To answer your question 01-03 was proof enough for me that as theories go, MPT wasn't up there with other theories, like gravity for instance, in staying power. So, no I don't use it to manage anything. There is nothing anyone who uses MPT can say to their clients. Well, except for sorry it didn't work, we need another theory.[/quote] BG, The last bear was 00-02 IMO...by '03 we were on the upswing. Also, I'd beg to differ that MPT did not work in that bear. All you have to do is look at a simple global asset allocation fund, like American's Capital Income Builder, which made money all three years, to realize the value of asset allocation. Just because MPT and asset allocation has been less than completely successful in this bear market is no reason to discard it as a completely invalid theory. I'm not aware of any strategy that has worked to any significant degree in every bear market ever experienced. Do we discard the theory of jet propulsion simply becaue once in a blue moon a 747 fails to successfully lift off the runway? It's fairly obvious that a stock and bond portfolio suffered in this bear market because the root cause was credit issues, which affected bonds when they would ordinarily function as a counterweight to stocks. Not every bear market will be the same and the next bear could be caused by factors that have little effect on bond portfolio performance. Voila! MPT lives again! If you have clients invested in both stocks and bonds, to some degree, you are practicing MPT. If you don't allocate to both stocks and bonds, I'm curious about what you are investing in and why you think allocating investments into various asset classes is a bad idea. My intent here is not to create conflict...I really am interested in what your angle is here and I'm looking forward to your input.[quote=Sportsfreakbob]BG, Indy,
Curious to know - Regading the discussion of MPT dead or alive?, …is this something that came up in your mind(s) as a result of whats happened this year? Did you use MPT to run client portfolios in the past, till this disaster?
And if you did, what are you saying to clients in terms of why you are changing your approach?
Whether you call it MPT or just plain ole’ “being diversified”, the reason it didn’t work in this bear market is that nearly ALL asset classes were inflated due to easy liquidity and the use of leverage…once the leverage started to unwind all asset classes were hit, with the final shoe dropping in the commodity markets…especially oil.
If you don’t think MPT worked in the 00-02 bear, take a look at the performance of good value managers, especially small value and international value. If I’m not mistaken, REITS did well during much of that time frame too.
One of the underlying messages we are missing here is that there is more than one way to skin a cat in the investment game. MPT is just one way. It’s sort of like getting to Houston St. from 158th st. There’s a few different ways to get there, all in about the same amount of time. But each employs certain risk, and may encounter certain unforeseen obstacles (traffic jam, accident, construction, etc.). We know that certain times of the day, different routes are better. 9 times out of ten, the West Side would be better, but on Tuesday the 1st of August, there was a massive jackknifed trailer, and you had now way of knowing it, and sat in traffic for 2 hours. You could go Broadway/Amsterdam/10th ave., but you know that traffice generally moves slow. However, if there’s an accident, you can easily cut over to 8th avenue. I won’t continue, as you get the point.
Bottom line, you can use MPT, try to time which sectors are in favor, use technical analysis to get in and out of investments (i.e. point & finger charting), use all annuities, use all bonds, use high yielding equities, use hedge fudns or hedgin techniques, use some combination of all of the above, whatever. But each method relies on the theory always working, on the FA always executing at the right time (or at all), and it also relies on avoiding "black swans" (which is probably the definition of what happened to MPT in our current environment). Annuities are a real safe alternative, but who's to say that the insurance companies have not over-extended themselves on income guarantees, and that's the next "black swan"? It's just an example (unlikely), but then again, who would've thunk Bear, Lehman, Merrill, AIG, and Wach would all (essentially) collapse within months of each other?Good point on the black swan.
BTW, what's a "point & finger" chart...you been in the egg nog again?damn fellas—
didnt quite expect to get all these replies....you guys sure are generous with your knowledge and expertise.. on a side--the piss poor performance of the sma managers is the primary reason for the question that started this thread.. anyway--got my answer on the first page--thanks.