I had a meeting yesterday with a company (not the Motley Fool) whose online services I’ve been using for a couple years. That has been in a free capacity. It is finance and investment related, but I’m not really looking for a debate on the company specifically. What I looking for thoughts on is what they were pitching to me (through their paid account management). That is asset allocation, and risk management.
In preparation, they went through all of my holdings and analyzed them in a number of ways. The results were interesting to me, but not overly surprising. My portfolio is heavily skewed towards technology companies. Financials and consumer cyclicals were next. Many sectors had scant representation, mostly through the mutual funds I’m forced to own in my 401k. They also showed the breakdown by geography and market capitalization. I had about the mix of US, Foreign Developed and Foreign Emerging markets they recommended. My portfolio leans more to large cap stocks, which they thought should be balanced by more small-cap, which they said recover much faster after a downturn.
Their approach is to divide a portfolio by sector, market cap, geography and other factors. Then they buy individual stocks (for domestic) and ETFs (for foreign). They go top-down, narrowing all the factors, then identify stocks they like within each allocation group. For the stocks, they look at lots of traditional metrics in a very data-centric manner. They also advocate and practice periodic rebalancing, to keep the portfolio near their model for your timeframe and risk acceptance level. While they noted lots of other related features, such as tax-efficient portfolio management, the fundamental key to them is the asset allocation. They claim it both increases ultimate return and reduces downside risk.
That was their pitch. I’m asking about it here, and I’ll tell my thoughts, because I want to see what you all think of it as it relates to the methodologies typical on this specific board, and for Saul in particular.
Overall, I’m not sold on the idea.
One of their points was that a sector (like tech) can take a very long time to recover after falling out of favor or having a meltdown, like the tech bubble era. Fifteen years or something to recover. But to me, that is as a a whole sector, which is only relevant if you are doing things in a macro fashion. Individual companies could be dramatically faster, separating the good from bad in tough times.
It also seems sort of arbitrary to diligently fill all of these specific allocation baskets, even if there aren’t truly compelling investments in all of them. They aren’t going into the level of detail that people on this board do. They select by algorithm, or at least almost completely so.
They showed me their track record over the last number of years. Or, did they show me a backtested, rear-view of how their model would have done? An important clarification when I contact them back. Either way, they pretty much stayed within a percent or so of the S&P 500 during up markets. The apparent difference, which they highlighted, was the points of relative outperformance during down markets. Basically, their claim was “we don’t tank as much as the market”, which leads to a faster recovery and substantial outperformance over a long timeframe. But the risk protection seems to me to carry a really stiff penalty in potential performance. Over the last decade, I’ve beat the S&P 500 by a good margin in my self-directed accounts. I’m not claiming to be the best on this board by any stretch, or even among the top tier of people, by either research quality or performance. And that is the point. If a self-admitted mid-pack investor (from this group) is outperforming their results, why bother? I think the superior performance would more than compensate for the volatility of running a high-beta, closely-monitored portfolio, despite falling harder in inevitable down markets.
My self-directed accounts are 37% of my overall portfolio. Nothing that these folks could do would really impact the rest. None of the options in my 401k(s) are particularly great. I’ve been tempted to quit my job of 13 years, just so I could roll my 401k to a self-directed account. But that may be extreme. Maybe.
Anyway, I welcome thoughts on how the whole top-down asset allocation approach fits (and doesn’t!) with the sorts of investing we seem to be doing here. Do any of you pay any attention to this sort of stuff? It is sort of academically interesting to me, but not really suited to how I have been investing through my adult life. If I was inclined to be a really hands-off investor, it might have some appeal. But then again, what I’ve recommended to some invest-o-phobe friends who hate details is to set up automatic investment into a handful of broad ETFs, and continue blindly until retirement, in an index-focused “if you can’t beat 'em, join 'em” approach. I don’t know how much better the asset allocation model would do, before adding on its own layer of fees. Or if it did better, would it be a wash, net of fees.
I look forward to what you have to say. Thanks.
Justin