Present Day Insight into Asset Allocation

Few people have heard the name Harry Markowitz, even fewer know the contribution he made to the world. However, every investor has heard and used his theory over and over again.

If you ever seen a pie-chart of your investments, you should know Markowitz. If you’ve ever been told that it is a long-term investment, you should know Markowitz. If you have ever used a buy-and-hold strategy, you should know Markowitz.

Harry Markowitz is a finance professor and Nobel Prize winner who in 1952 wrote a research paper that gave birth to buy and hold investing. He is also known as the Father of Modern Portfolio Theory, from which asset allocation was derived. These theories have been at the base for all financial institutions and professionals for decades.

The financial industry has used his teachings as a crutch and for years, we have been beating against it. Have you ever called your financial professional about a poorly performing stock or mutual fund? Have you ever gotten the answer that you need to understand that it is a long-term investment? When is there a good time to own a bad investment? The answer you receive is a lazy excuse because there is no management on your account. However, we have seen many retirees and widows lose fortunes due to owning unsuitable investments based on this advice.

It has then always been us against the Nobel Prize winning Markowitz. That is until a January 2010 Chicago Tribune interview was published. Harry Markowitz gave some very interesting insight into his own theory and the way the financial industry has applied it.

Markowitz said in the interview “I’ve never been a buy and hold guy…” and continued on that his ‘Modern Portfolio Theory’ has been misapplied in staying the course when deeper analysis is warranted. The article continues on that he did NOT hold onto all of his investments during the market crash in 2008. He did this not because of some certainty he knew, but made adjustments on what he perceive as increasing risks.

He goes onto say that there are times when portfolios should be adjusted if risks appear outside the norm, periods such as the technology bubble and the recent financial crisis. Markowitz thinks some fail to understand that part of modern portfolio theory.

So what does this all mean to you, the investor? It means you need to take the steps to understand your investments. You should know the strengths and weaknesses and whether or not it is suitable for you.

Don’t let buy and hold keep you from not having sound management for your assets. These times are still outside the norm.

To hear the Smart Money Radio Show segment focused on this topic, Please Click Here! (about 7 minutes long)


To hear the full Smart Money Radio Show where Bruce discusses this topic and more, Please Click Here! (about 25 minutes long)

OUR Financial Roadmap

Let’s plan a trip. Make that a road trip. You and your spouse or three of your best friends are going to San Diego by car! What all do you need to pack? Beach clothes, check. Sun tan lotion, check. A few snacks for the drive, check. You get to the end of the driveway and then realize that none of you know how to get there.

What do you do now? One possibility is to stop at the local convenience, buy a map, and figure it out from there. There are several “What if” questions that come from this situation. What if the map was done before the new construction in Kansas? What about the bridge that got washed away last week in Illinois?

The thought of buying a map to travel somewhere so far away may seem silly, especially given all of the technological advances. Yet, almost everyone does the same thing when they look at their finances. We go through a financial planning process, where essentially a map is drawn for our drive to San Diego.

Through the years of being in business, we have met some of the nicest financial planners. In no way is this conversation an attack on them. The problem with financial planning is the process. You have hundreds of software packages to choose from, thousands of strategies to fill in problems and answer questions, and tens of thousands of investment choices and products to answer the needs of the client. The possible combinations are endless and we haven’t even added in what all of your needs could be!

Financial planners set a roadmap for you, but the journey and the risks are on your shoulders only. The biggest problem is that there is NO MANAGEMENT that continues along. There is something inherently wrong when a plan allows you to lose 30% or more of your money and the only explanation is that this is a long term strategy.

The financial planning process has become a sales tool. It allows an agent to point out problems and offer you solutions from a limited pool of choices. These choices never answer the question of “what if the bridge is out”.

To hear the Smart Money Radio Show segment focused on this topic, Please Click Here! (about 7 minutes long)


To hear the full Smart Money Radio Show where Bruce discusses this topic and more, Please Click Here! (about 25 minutes long)