When investors most need diversification -
in down markets - it fails to work. Diversification
works best in up markets, when arguably investors could use a little less
of it. New research explores the myth
of diversification and why advisors may be overpaying for portfolio construction and
Chris Whalen, Managing
Director of Institutional Risk Analytics, is a leading expert on the
banking system. In our interview, Chris ranks the US banks based on their risk exposure, and outlines what steps
the government must take to put the problems in the financial
sector behind us.
Advisors want know to how to respond to the
question of how their clients did last year. In some
cases, apprehension about getting this query is a key obstacle preventing
advisors from approaching prospects.
Dan Richards provides a plan to
boost confidence in your ability to address this issue.
Loeper, CEO of Financeware, looks at the difference
between time-weighted and time-and-dollar weighted returns.
He shows that superior time-weighted returns are of questionable value to
the investor, and asks what it really
means to "successfully" manage "superior" returns.
More articles below:
We have several letters to the Editor.
Two of these address issues raised in last week's article, The Case for the All-Bond Portfolio,
which was an interview with Hildy and Stan Richelson (see the Richelson's
response below). The third letter responds to an earlier article
about technical analysis.
Hildy and Stan Richelson
respond to one of the letters to the Editor. They argue that among
the points that differentiate bond from
stock investors are that the former do not advocate market timing and that they do not view volatility the same way as
Next, we have two guest contributions arguing that active management can
avoid the trauma of bear markets.
Passive asset allocation works well
during bull markets, especially the last one - the greatest bull
market in history - which lasted from 1982 until 1999. But buy-and-hold has a fatal flaw,
according to Brian
who outlines a strategy he believes
delivers superior performance.
Mebane Faber offers simple trading model works
in the vast majority of markets most of the time. The results suggest
that a market-timing solution is a
risk-reduction technique rather than return-enhancement one- an
investor just needs an approach that signals
when they should exit a risky asset class in favor of risk-free
Lastly, we highlight submissions to Advisor
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Historically, when both the US
and the world (excluding the US)
markets were up by more than one standard deviation above their mean, the
correlation between them is 35%. When both are down by more than one
standard deviation below their mean, their correlation rises to 85%,
precisely the opposite of what investors desire. New research shows
why this is happening and how advisors can build better diversified
Banking industry consultant Chris Whalen examines the risks in the
financial system. He says "Open bank assistance will continue
and common shareholders will suffer more dilution. Ultimately,
conservatorship is the right legal structure, but the Obama administration
is reluctant to put bond holders to the sword."
to Prospects about Last Year's Performance
Fairly or not,
many investors are frustrated by what they see as passive, stand-pat advice
from their advisors. Some investors take the view that the market
environment has changed dramatically, so why is their portfolio the same?
Dan Richards shows how to respond to this concern and others as you speak
with clients about last year's performance.
Difference between Measuring and Managing Investment Results
Measuring "success" with time-weighted returns may not
necessarily equate to anything other than random one or two year observations,
we are merely attempting to measure the temperature of one's wealth with a
ruler. All of this return measurement produces nothing more than misleading
information, as Dave Loeper demonstrates in this article
to the Editor: Reactions to the All-Bond Portfolio and to
Legitimizing Technical Analysis
In regard to last week's interview with Hildy and Stan Richelson ("The
Case for the All-Bond Portfolio"), one reader questions whether the
Richelson's superior performance was caused by a fortuitous measurement
period. Other readers asked for more information about using
tax-exempt bonds in an IRA. One reader responds to our article
several weeks ago, "Can Andrew Lo Legitimize Technical Analysis?"
Bond and stock investors think about investing in different ways, according
to Hildy and Stan Richelson. Many bond investors are not total return
investors. We do not plan to sell bonds because they have appreciated or
depreciated. We do not consider market fluctuations particularly relevant,
as long as the decline in value is not reflective of credit quality
Management: Not a Silver Bullet, but Better than 'Buy-and-Hope'
If you're tired of 'buy-and-hope,' consider using some simple technical analysis
to limit risk and offer the opportunity for better return. In this
guest contribution, Brian Schreiner argues says you must understand that
the payoff will come when bear market losses are avoided. The benefit
of avoiding the worst of bear markets is far more valuable than
participating in every gain in bull markets.
on Buy and Hold: Tactical Asset Allocation
Mebane Faber's guest contribution shows that a simple-to-follow model can
manage risk for an asset class and, consequently, for a portfolio of assets,
with limited to no impact on returns. Since 1973, an investor could
have increased his or her risk-adjusted returns by diversifying his assets
and employing a market timing solution.