July 24, 2009

How would you feel about outperforming the stock market by 15% – 20%? Holy smokes! That sounds pretty great doesn’t it? That’s the kind of thing you get to brag about at office Christmas parties! What if, however, outperforming the markets by 15% – 20% meant you were only down 17% to 22% as opposed to losing 37%? Is that kind of return still noteworthy? Well, for individuals who lost half of their investable net worth in 2008, I believe they would say so.

“But Brian, losing money is bad. A negative return is never something to be proud of.” Well, I agree. HOWEVER, do you measure your total portfolio performance on your return year to year or on the long-term annualized performance of your portfolio? My hope is that the latter is of more importance to you than the former. When times are good you want growth, but when times are bad you should focus on capital preservation. So how do you do this? Well I believe (and many other advisers who were able to survive the Great Recession so far) that the way to accomplish this is through a well-diversified portfolio that matches an individual’s long-term goals and risk tolerance.

Essentially, what I am describing to you is known as Modern Portfolio Theory. MPT was developed by Harry Markowitz back in 1952. What MPT states is that when you combine or add risky (i.e. not cash) assets to a portfolio, it actually decreases the overall risk of the portfolio. Not only are you decreasing the total risk of the portfolio, but you are also increasing the expected return. More return and less risk is kind of the “name of the game” with investing.

This was all fine and good, but then 2008 happened. Now advisers and individuals in the financial world are saying that Modern Portfolio Theory is dead. Because of what happened in 2008, it just doesn’t work anymore. There was a great article in the July edition of my Investment News Newsletter titled Is Modern Portfolio Theory Dead? As you listen to the show, I share some great points that the author makes about how advisers may be throwing the baby out with the bathwater.

This got me thinking about how I feel money should be managed going forward. In the show, I share my personal investment philosophy as well as how my firm attempts to manage assets for our clients. I talk about how money used to be managed, how it was managed for the last decade, and how I think it will be (or should be) managed going forward.

I also wanted to touch on another “dead” idea: the Roth IRA. There was a very good article from The New York Times by Ron Lieber talking about the potential planning opportunity available in 2010 for anyone to convert IRA assets into Roth assets. I wanted to share my thoughts on this as well as what you should consider before deciding to make the jump.

MP3 File



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