Bill Miller to Step Down From Legg Mason Value Trust, reported by AdvisorOne.com. Since the great financial crisis in 2008, there have been numerous high profile managers’ failures including Fairholme’s Bruce Berkowitz (FAIRX). While we can put blame on these individuals, what one should always remember is that all humans are subject to failures, regardless how great they are. By the way, this is also applicable to ourselves and various great committees (recently, Morningstar started to release its new ‘forward looking’ rating system that is decided by committees, we’ll have more on this later).
So what to do with our retirement investments such as 401K, IRA accounts? How do we escape from being trapped in such funds?
3 lessons can be drawn from this:
- Diversification: you need diversification at your overall account level, at your portfolio level and at your security level. Diversified funds are better than individual stocks, especially if you are only dealing with a handful of them. At the portfolio or account level, proper asset allocation determines majority of your returns and risk.
- Fundamentals: yes, we still believe fundamentals such as managers’ track record, investment strategies, fund expenses, etc. These will serve you the first line of defense (and offense). So information provided by firms such as Morningstar.com is still useful.
- Technical or stop loss: on the other hand, we do believe that one need to have a ultimate line of defense: when a fund is not doing well for an extended period based on a systematic and well defined set of rules, you have to liquidate it. The permanent capital loss is just too great to hope for a recovery or rely on superhuman acts.
The last point is the most contentious and sometimes is against our super human or well educated committee members’ consensus. Recognizing that adopting this will result in under performance in a super bull market or for an (extended) period of under performance of a good fund. But that is again an insurance one has to pay to avoid severe damages by such super humans.
Just as a comparison, the David Swensen Six ETF Asset Individual Investor Plan consists of only six broad base ETFs and diversified asset allocation portfolios have outperformed both S&P index and other once great funds by big margins:
Portfolio Performance Comparison (as of 11/16/2011)
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|David Swensen Six ETF Asset Individual Investor Plan Tactical Asset Allocation Moderate||12%||72%||11%||82%||10%||68%|
|David Swensen Six ETF Asset Individual Investor Plan Strategic Asset Allocation Moderate||5%||26%||18%||90%||6%||27%|
More detailed comparison.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.