What are the numerous decisions individuals have to make in managing their investment portfolios.
Topics covered include:
- Why individual investors should invest like family offices and university endowments in order to build and preserve wealth
- Why even buy and hold investors make portfolio changes
- What are examples of the numerous decisions individuals have to make in overseeing their investment portfolios
- How badly have value stocks underperformed growth stocks
- How our mindset should change when it comes to investing
CalPERS board learns about embedding leverage in asset allocation by
The Crucifixion of Ben Meng by Amanda Cantrell—Institutional Investor
Mutual Fund Manager Abruptly Leaves Janus by Edward Wyatt—The New York Times
Wabi Sabi: Japanese Wisdom for a Perfectly Imperfect Life by Beth Kempton
Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo
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306: Three Approaches to Asset Allocation
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354: Now Is the Best Time Ever to Be an Individual Investor
356: How, When, and Why Should You Rebalance Your Investment Portfolio
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode—313. It’s titled “There Are No Buy and Hold Investors.”
I got an email last week from a member of Money For the Rest of Us Plus. He has been listening to my show for over four years and loves it. He continued “I like the way you explain financial strategies and how you occasionally cover the more personal aspects of life, as well as investing.” This gentleman retired three years ago when he turned 56. He has four million dollars in investable assets, half of which is in cash and bonds. He follows one of the adaptive model portfolios on the website and converted over 10% of his assets out of stocks in March, based on the monthly investment conditions and strategy report we do on Money For the Rest of Us Plus.
He wrote: “To be honest, a decision I now heartily regret.” He continued “I really like the sound logic of the analysis-based approach you promote to help decide how to dial up or down allocations to different asset classes, and I acknowledge your modifications have resulted in some investment success. That said, I’ve typically been a classic buy and hold investor, riding out the dips. But this time in March, I followed the logic to reduce the allocation to stocks and wait for conditions to improve. We all know how that turned out.”
How did it turn out? We have had the fastest bear market recovery ever, in the U.S. and around the world. His concern is that by the time investment conditions deteriorate or improve, is it already being reflected in market prices? Is there even a reason to make any adjustments to our asset mix?
He continued, “I also know this was a very unusually fast drop and recovery, but as I plan to stick around as a Plus member and take some level of guidance from the investment conditions, it seems like a fair question to ask about what level of back-testing is available to see how this method works, as an alternative to my old approach to just buy and hold. I also recognize your approach covers asset classes vs. just stocks vs. bonds and types of bonds, such as real estate looks good/bad, high-yield looks good or bad, etc.”
Now, this monthly investment conditions and strategy report has commentary and metrics to help individuals stick to their portfolio plan, or perhaps to make adjustments as risks change. It focuses on valuations, economic trends, and investor sentiment. It relies on my over two decades of investment experience but also draws on data provided by institutional investment and economic research services that we pay tens of thousands of dollars per year to access.
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Now, I’m not trying to sell you on Plus membership in this episode, but to be frank, his email kind of bothered me a little bit. Not that he wrote it, I think these are absolutely fair questions and deserve a fair response. What bothers me was the challenges I’ve had in trying to explain what portfolio management is. This member feels regret for a decision he made. One decision. But portfolio management involves many, many decisions.
I saw a tweet last week that also kind of bothered me. Not because there was anything wrong with the tweet, but it raised the question “Is it better to trade buying individual stocks, or these options?” Her view was it’s better to use options because they’re less expensive. That might be true. Again, deciding to buy individual stocks with options—that’s just one decision.
My background is in institutional portfolio management. I worked with major universities like Texas A&M University. I was their investment advisor for 13 years. They have over a billion dollars in assets. I’ve worked with other universities and private foundations. We often met with investment committees to tackle all the decisions involved in managing a portfolio. The same decisions that individuals have to make. In fact, individuals have to make even more decisions when it comes to managing an investment portfolio.
What I have found is institutional investors and serious individual investors—they follow a disciplined portfolio approach. They focus on global multi-asset-class portfolios. They rely on reasonable expected return and risk assumptions to make asset allocation decisions. Their focus is on achieving real, net of inflation growth. They spend a lot of time discussing, making adjustments as markets and economies evolve. Disciplined investors control their fees and taxes.
And then with an institutional portfolio—an endowment, a foundation, a pension plan—you have all the group dynamics involved in making a group decision as a committee. Ultimately, no one knows what’s going to happen. We make the best decisions we can under the circumstances.
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