Hi Guys,
I’m in a reflective mood on this last day of 2014.
For fun, I took the “2014 Recalled” 20-question business quiz in the LA Times today. Here is a Link to that quiz which has a little West coast, Los Angeles bias to it:
http://touch.latimes.com/#section/5/article/p2p-82335409/I easily flunked the test with a devastating low score. Somehow, I was not particularly troubled by my poor showing. That would not have been my reaction a few years ago when I was a more active investor; my ignorance would have been harmful to my retirement wealth.
Given today’s Mutual Fund industry and its ETF wingman, a deep knowledge of business happenings is not an essential element to enhance or maintain a portfolio’s risk/return profile. That goes double when an investor decides to emphasize passive Index units in the construction of his portfolio.
The benefits of investment product diversification was recognized in biblical times. From Ecclesiastes 11.2: “Divide your portion to seven, or even eight, for you do not know what misfortune may occur on the earth”.
The Talmud advised: “Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve”. Diversification for safety purposes is really old stuff.
Harry Markowitz updated this solid diversification advice when he formalized it in his 1950s Modern Portfolio Theory studies. But the diversification must be done with care.
Markowitz said: "To reduce risk it is necessary to avoid a portfolio whose securities are all highly correlated with each other. One hundred securities whose returns rise and fall in near unison afford little protection than the uncertain return of a single security."
Thanks to the Mutual Fund (MF) industry and the blossoming of ETFs, broad diversification can now be accomplished with minimal time commitment, and with near zero costs. And the low cost structure decreases annually. That’s measurable progress.
So, on this day of reflection, I want to acknowledge and praise the contributions that the MF industry makes to the average investor. Like every human project, it’s not all goodness, but it is respectably close to that impossible hurdle.
Yes, charlatans and frauds do populate the MF business. Regardless of the rather frequent complaints, the swindles and the swindlers are few in number. Most of the complaints registered on the MFO Discussion Board are petty and innocuous to end wealth. The easy solution is a little monitoring and simple avoidance.
I recollect and contrast my investment demands a couple of decades ago with my current efforts. They are magnitudes apart in terms of committed time and worry.
Yesteryear, I owned 20 to 30 stocks and numerous bonds. I researched another 30 or so candidates as likely substitutes in case things headed South. It was a tough assignment just to keep the equity names correctly coupled to their basic fundamental data. I kept plots with pencil and graph paper which was very error prone. I drew silly linear lines on these plots that eventually meant nothing.
As Benoit Mandelbrot observed, the world is not linear, but is more responsive to power law relationships. Complex interactions and feedback loops greatly matter. See Mandelbrot’s book “The (Mis)Behavior of Markets” for insights in this arena. In yesteryear, investing was a total nightmare.
Today, the situation is reversed. Investing is an easy, but still challenging, task.
The necessary time commitment has been tremendously reduced by easy access to a host of fine MF and ETF offerings that are operated by dedicated, smart, and trustworthy men and institutions. Some worry will always exist because of the uncertainty of market returns. That worry can be substantially attenuated by the old-time religion of diversification which can cut volatility by one-half.
Over the last few years, I have reduced my investment work load by perhaps 90% without compromising my financial expectations. The year 2014 has been financially good to me. I anticipate the same for 2015. If not, there is always 2016 and beyond.
Thank you for the patience to read my year’s end mind wandering and reflections.
I wish you all a safe, a healthy, and a prosperous 2015--------and beyond.
