Financial News

It has been stated by many of the most influential minds in economics that “There is no such thing as a free lunch.” Despite this profound statement, Modern Portfolio Theory (MPT) has been credited by some with identifying the only known “free lunch” in economics.

In our last issue of the Compass & Crosshairs, the underlying theoretical tenets of what we will refer to as the “Global Development Systems” method of investment portfolio management were discussed in some detail. The following assertions were made and topics discussed (See the July ’09 issue for further information):

With the 2007-2009 financial system crisis and economic downturn as an impetus, some portfolio management professionals have begun to ascertain that Modern Portfolio Theory, as it has traditionally been applied, is due for an overhaul. In our last issue of the Compass & Crosshairs, in which we explored some of the various methods that might be applied under a “Multi-Contingency Investing” methodology, we briefly made mention of a Global Development Perspective Strategic Asset Allocation philosophy.

In our last two issues of the Compass & Crosshairs, we introduced the concept of multi-contingency investing and why the current financial/economic crisis has made this a new practice management imperative for financial planners, CPAs that provide financial planning services, and investment managers.

Since October of 2007, Modern Portfolio Theory has been under attack. One cannot read a single issue of the Financial Times or Wall Street Journal without encountering a statement from a behavioral finance academic, nouveau economist, or tactical portfolio manager proclaiming the death of Modern Portfolio Theory, rationalist economics, diversification, asset allocation, and the Efficient Markets Hypothesis.

In our last issue of 4Thought’s Compass & Crosshairs, we considered the ramifications of the world’s current financial crisis on the future of portfolio management philosophy. Specifically, we focused on the most recent arrows slung at Modern Portfolio Theory’s strategic asset allocation methodology, the most dominant form of asset management found among the world’ large institutional investment funds.

For those of us that have been watching the decimation of much of the banking and finance industry, it has become clear that finance-related firms’ compensation arrangements and ethical standards are being called into question through a blanket labeling of all finance industry professionals with some permutation of the word “crook.” The rapacious practices of real crooks, like Bernard Madoff et al., and the over-compensation of the officers of bailed-out financial institutions have clearly left a bad taste in the mouths of the public. This negative perception of the finance industry as a whole has in large part rubbed off on all individual professionals in the financial services, whether such gross agglomeration for the purposes of labeling is warranted or not.

The world’s most recent financial crisis has provided a unique proving ground in which investment planning and investment management firms have tested their mettle on many levels. As the complexities of the crisis continue to emerge, pearls of portfolio management and investment planning wisdom have begun to surface. We will explore ten of these that have so far made themselves apparent. Many of the ideas we will mention here are familiar to veteran advisors, while others may be completely new. On the firm level, 4Thought has utilized the vast majority of these concepts already in the past. However, the severity of the crisis that investors have experienced thus far has highlighted the importance of these practices and reconfirmed the views we previously held. Other ideas illustrated here represent shifts from our past approaches.

Many clients who have been witness to major drops in their investment portfolios over the last year have come to the realization that they are far less risk tolerant than they had originally believed. For these clients, as well as those whose life circumstances may have changed as a result of the financial market crisis, it may become appropriate to reallocate portfolios on a much more conservative basis – using an ultra-conservative methodology.