From the desk of Paul Nichols: President of Financial Abundance Inc.
I recently read an article in the WSJ discussing economic icons not practicing their own investment advice. I understood the article to make the point that we are not all perfect, that even the notable academics mentioned sometimes sway from their disciplines.
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Harry Markowitz, who shared the Nobel Prize in economics in 1990 for his mathematical explorations of the relationship between risk and return, was asked how he diversified his portfolio.
“Dr. Markowitz first got to choose how to divide his assets between a stock fund and a bond fund not long after publishing his pioneering article 'Portfolio Selection' in the prestigious Journal of Finance. Following his own breakthroughs, he should have made intricate calculations, based on historical averages, to find the optimal trade-off between risk and return. But, Dr. Markowitz told me, that isn’t what he did: 'Instead, I visualized my grief if the stock market went way up and I wasn’t in it – or if it went way down and I was completely in it. My intention was to minimize my future regret.'
Dr. Markowitz paused, then added wryly: 'So I split my contributions 50/50 between bonds and equities.'”
So in essence he has picked what the Markowitz Efficient Frontier refers to as a moderate portfolio. In this example, I don’t see the disparity implied.
“John C. Bogle, founder of the Vanguard funds, believes investors should rebalance their portfolios on a regular schedule by selling a portion of whatever has gone up the most or buying some of whatever has gone down. 'I think rebalancing makes a substantial amount of sense,' Mr. Bogle recently said on the Jean Chatzky radio show. With his own money, however, 'I don’t rebalance… I leave it alone. I have not touched my asset allocation since March of 2000.'”
The article goes on to state:
“In the classic 1973 book, 'A Random Walk Down Wall Street,' Princeton economist Burton Malkiel argued that a blindfolded chimpanzee throwing darts at the stock tables of The Wall Street Journal could pick a portfolio as well as a money manager can.
That made Dr. Malkeil one of the intellectual godfathers of index funds, the low-cost, autopilot portfolios that dispense entirely with stock-picking. Surely, as the man who wrote the book on it, he has all of his money in index funds. 'Actually, I have a quarter to a third of my money in individual stocks and actively managed funds,' he says.
He adds with a laugh: 'I call myself a random walker with a crutch.' Why doesn’t his belief in efficient markets determine every step he takes with his own money? 'It’s not necessarily because I think I’ll be any better off than with indexing,' Dr. Malkiel says, 'but I still want to buy a few individual stocks because it’s fun.' Late in 2008, for instance, he invested in Templeton Dragon when shares of this closed-end fund momentarily fell to a 20% discount from net asset value.”
The lesson I take from this is that we all need coaching to help us stay accountable and disciplined. It is very difficult to coach one’s self. I think this is apparent in self directed diet and exercise plans. Why do Hollywood stars look so good? I submit to you they have a whole array of coaches, personal trainers, physical therapists, speech therapists, etc. to help them stay disciplined. We all need a coach. Even Einstein collaborated with others to help keep him accountable and disciplined. Do you have an investor coach?
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The Investor Coach