Conventional Investment Management“You must unlearn what you have learned.” -Yoda
OUTDATED .. or maybe OLD SKOOL (yes that is a word, especially for all of us vintage rap music fans) in my opinion, words that best describe what the mainstream financial services industry promotes, as far as investing concepts.
Think about that. We live in a world that changes rapidly. Are you still wearing the same clothes that you did in the 1970’s (I hope not! LOL!)? or sporting the same hairstyles of the ’80’s…better yet, the ’50’s? What about your car or computer…still using the Commodore 64 or driving in a Ford Fairmont Station Wagon? I seriously doubt it! My list could go on, but I think you get my point.
Proponents of Conventional investing use several “sales” tools to rationalize their recommendations:
The famous Ibbotson Study: http://corporate.morningstar.com/US/documents/MarketingOneSheets/ LicensedData/INS_LDT_OneSheet_SBBI_datafeed.pdf
Jeremy Siegel’s book, Stocks for The Long Run
Modern Portfolio Theory (MPT) … Pioneered by Nobel Prize winner Harry Markowitz
Dive into the above and you’ll see 80 years of market data with beautiful charts, read about things like correlation matrixes, and Captial Asset Pricing Model. You’ll learn all about the “Efficient Frontier.” Brokers and other financial advisors, after citing information from the above sources, will assure you that “If you had a $1 in 1925, and you invested it in various equity classes, you would have several thousand dollars today…through Great Depression, World Wars, Geo-Political crisis, Oil Embargos…etc……”
Today, I want to begin challenging all of the mainstream and conventional financial advisors and media. IN THE NATURE OF BEING BRIEF, I will pose some questions in bullet format to my readers. You be the judge. It doesn’t matter what I think. It is your money…you are the investor…spend some time researching what is in this blog today, and come to your own conclusion. Obviously, for someone, who has a tagline of “Strategically Managing the Environment of Change”, I am biased.
- We are investors today, in 2008. We may be retired, we may be saving for a college education for our kids, we may be getting ready to retire. Certainly, the list can go on. Is an 80 year old study relevent for your investing goals and challenges today? Or is a 10 to 15 year time period more relevent? According to morningstar.com, data as of 12/11/2008, the S&P 500 has returned an annualized rate of return of -1.20%.
- Should it be considered prudent risk management to buy and hold an asset or index fund through thick and thin…hoping that it will come back in your lifetime or investing time frame? Or would it be better risk management to accept that market conditions change (like everything else in life) and that one may be more successful if he or she incrementally adapts their portfolio to changing market conditions? Is a static portfolio right for changing market conditions?
- How does the stock market really work? What are “SECULAR” markets? How has your money manager responded when you posed the following data to him:
- Source: Bull’s Eye Investing, By John Mauldin (published in 2004) and Stock Cycles: Why Stocks won’t beat money markets over the Next Twenty Years, by Michael A. Alexander (published in 2000)
- Secular Bear Markets…1966 to 1982, total of 16 years, rate of return -1.5% per year. 1929 to 1949, total of 20 years, rate of return 1.2% per year. 1906 to 1921, total of 15 years, rate of return -1.9% per year
I believe that in March of 2000, we entered a Secular Bear Market, that has the potential to last 15 years or more…man, I hope it is shorter…but valuations suggest otherwise, unfortunately. What do you think? Start with your portfolio, how has it performed since 2000? Has it waxed..or has it waned? Perhaps, it has marched to the beat of a different drummer (I hope)? Where are we headed for the next 10 years?
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