Investment Strategy (6) Resources

Today’s blogticle concludes our 3 part series on tax efficient investment opportunities. Please see the two previous days coverage for the full story.

This article represents part 2 of 3 in this series. Please see yesterday’s post as well as tomorrow’s for the full article.

If you are a professional in the investment management or economics fields, your entire system of decision making and the basis of everything you do in your workday may be wrong. While the following discussion may seem purely academic, it could actually have far-reaching practical implications for your personal and professional livelihood.

The two years preceding 2010 have resulted in a great deal of criticism of the ideas of rational economic actors and the “Efficient Markets Hypothesis” (EMH), the latter of which attempts to describe the pricing of securities markets. While an in-depth discussion of EMH and its validity is beyond the scope of this article, it is worthwhile to consider the antagonistic viewpoint on this subject, which states that markets are largely inefficient, and by extension means that it is possible for an investment portfolio manager to consistently beat the markets in terms of portfolio risk/return performance based on skill (which is contrary to EMH). But rather than make an absolute judgment on whether markets are 100% efficient or 100% inefficient, we can alternatively make the assumption that markets are sometimes “efficient” and are other times “inefficient.” If we are to take this latter stance, then how should portfolio managers best act for their clients?

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.

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.