Nisiprius:
In this thread you’ve said what I regard as the most important message in the thousands of posts I’ve read here at Bogleheads.
After a fine first post near the top of page 1 about the absence of data for MPT, in your third post just below the middle of that page you rang the bell with this:
A further sour remark. I certainly don't pretend to understand the social structure of the overlapping worlds of financial economics and investment companies, but I have been doing a long, slow double-take on the interrelations thereof. It appears as if economists who make important discoveries in financial economics either found very-much-for-profit commercial enterprises or get snapped up by very-much-for-profit commercial enterprises. This inevitably is going to lead to situations where legitimate-enough work is overhyped as a hugely important secret miracle ingredient.
Harry Markowitz serves on the "advisory panel" of Research Affiliates, the firm led by Rob Arnott which creates and sells "fundamental indexes" and I-don't-know-what-all else. I am sorry to say I can't retrieve details on a quick Google, but IIRC Markowitz also has some connection with a firm that actually provides commercial mean-variance optimizer software to financial advisors. If someone happens to know the name of the firm and the product, I'd like to know it.
The name of that product is AllocationMaster. The company was Frontier Analytics. Acquirer and current purveyor of that product is the giant SunGard.
Within months after Markowitz was handed his Nobel Prize, an article authored by Markowitz was published in which he honorably warned that for guiding individual investors, his theory is not the right approach. He said he designed his theory for pursuit of best interests of mutual funds! For people, Markowitz advised, one should instead use life-plan simulation.
But then a shocking reversal: Markowitz appeared on the website of little Frontier Analytics’s website, assuring the world that he endorsed its AllocationMaster software’s use of his MPT for guiding individual investors!
That Markowitz-backed product, along with a twin named Portfolio Strategist from the firm of Ivy League Yale Professor Ibbotson, rose to establish two decades of MPT-based misleading and fleecing of the investing public through these three steps:
- 1. Use MPT and asset classes to divert the investor’s focus from his investment purpose, his future dollar goals, to a pair of technical specs of return-rate probability for the mere individual year – where he can’t see where he’s going and can’t see the long-term effect of fees.
For this, change the names of those single-year technical specs to “expected return” (or just “return”) and “risk.” That will make those single-year technical specs appear to mean much more than they do.
2. Mislead the investor to think that a speculation on any damn fool gamble WITHIN an asset class is the same as an investment in any of his chosen whole diversified asset classes. Entice investors with oceans of statistically meaningless “data” on thousands of actively managed funds -- with of course greater risk –- and higher fees!
This is the very opposite of what the name of Bogle represents! Its presentation is blatantly dishonest!
3. Give the investor false comfort that the result for his future dollar goals will be what “expected return” would deliver – which of course the basic math shows he will probably fall short of, likely short of by a lot.
For the last two decades, guidance of the investing public has been contaminated by this MPT-based three-step deception, under the banner of Nobel Prize winning theory taught by the universities, featured in required training for the financial advisor credentials said to provide assurance of guidance investors can trust.
Now there’s a great campaign to award this three-step misguidance another banner: that of “The Fiduciary Standard.” Under the banner of that campaign lurks the same MPT-based three-step misguidance introduced two decades ago by the Markowitz-backed AllocationMaster. It’s most clearly exposed by the “fiduciary” investor-guidance rules and tool of the leader of the campaign for “The Fiduciary Standard” named “Fiduciary360,” where the only change is to move AllocationMaster step 3, misleading use of the label of deception “expected return,” to the front of the three-step deception. That process’s wholly anti-fiduciary nature is exposed here:
http://www.fiducio.com/
Nisiprius, I praise you for shining some light on the source of this prevailing MPT-based investor misguidance. I think that with all the banners of
appearance of trust under with it marches – Nobel Prize winning, taught in our universities, required training for financial advisors said to be most trustworthy, and now “The Fiduciary Standard” – it represents an even greater opponent of what the name of Bogle represents than the financial industry fee-extracting machine into which this misuse of MPT feeds the investing public.
With this Bogleheads website’s marvelous concentration of people who understand the math and can see through this MPT-based misguidance, I hope that others here will join you in exposing this great deception.
Dick Purcell