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Friday, October 24, 2014


I'm a fan of Barron's.  Let me say that right off the bat.  Part of my every weekend is devoted to reading it cover-to-cover.  Even though I'm an indexer, buy-and-hold guy, I like to see ideas and read what people think about the market.  I especially like articles on specific companies and analyst outlooks.

It seems that recently the publication has made a push to present "Top Advisors" and "All Star Advisors."  Every weekly publication now has a list of such advisors.

I even like these lists and reading what the advisors think.  A lot of it is total hogwash, and I have to say that I'm amazed that higher wealth families pay dearly for this advice.  I admit that high-wealth individuals and families need comprehensive services; but, from a lot of what I read, the investment services they are getting are worth nowhere near what they are paying.

What bothers me, though, is that there may be individuals who read this stuff and actually act on it.  Let me give an example.  Top advisor presented on page S19 of last Saturday's issue:  Joseph W. Montgomery of Wells Fargo Advisors.  The write-up says "Old school diversification, with stocks, bonds, and cash, served to pare portfolio risk for many years.  But it failed in the 2008 crash..." It goes on to tout commodities, etc., for diversification.

Really? I sn't there a point where we need to look at the data.  Check out Asset Class Returns A 20-Year Snapshot. by BlackRock.

In 2008, stocks were down -37% (Large Cap Core) and bonds (which "failed"?) were up +5.2%, as evidenced by the Barclay's Aggregate Bond Index, and cash returned + 2.1%.  Reflecting on these numbers and the much ballyhooed pounding of retirees in 2008, one has to seriously question diversification.  UNLESS THERE ARE EXTENUATING CIRCUMSTANCES, RETIREES SHOULD HAVE AT LEAST 40% IN BONDS AND CASH.  Following this fundamental rule enabled many retirees to weather the worst stock environment since the 1930s and come out fine in the ensuing sharp rally.  But, of course, this isn't a "man bites dog story" and, therefore, is not as sexy as the scary "crash destroys retirees nest eggs" write-up.

Just for the record, you may want to check out the returns in 2008 of commodities.  Still interested in diversifying into commodities?

Hopefully, you aren't reading this the wrong way.  I'm not anti-commodities as a diversifying asset class.  The point is to be careful.  If you sell bonds and buy commodities thinking you are reducing volatility, you may be in for a shock.

In the world of investing, math sometimes makes us lazy.  Give me a bunch of asset correlations, based on past data, and I'll construct an optimal portfolio.  Easy...I just feed the correlations into the program and it spits out weightings.  Twelve months down the road, we find that the world has acted a lot different than it has historically.  The price has been paid for lazy thinking.

Here is what investors, even "Top Advisors," need to know and think through.  Bonds are the "flight-to-quality" asset - especially U.S. Treasuries.  Long periods go by and investors forget about this feature of bonds--especially periods like the end of the 1990s and 2007.  Behavioral finance people find that investors ramp up their risk tolerances during these periods and shun bonds and increase stock exposure.  If stocks go up and commodities go up more, a light bulb goes off and the diversifying quality of the asset class is widely emphasized.

The bottom line is:  as always, check claims.  We live in a world where this is very easy.  If you don't, you could fall prey to pure gobbledygook; and it could cost you.

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