Is Cosmo Directing Your Portfolio?

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Rick Ferri
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Is Cosmo Directing Your Portfolio?

Post by Rick Ferri » Mon Jul 11, 2011 9:19 am

Asset allocation questionnaires are often as useful as taking a Cosmopolitan magazine quiz to determine if your date is a dunce. They are overly simplistic, don't ask the right questions, and lead to the wrong conclusion more often then not.

In this latest Forbes blog (also available on my blog site), I compare investment questionnaires to the Cosmo approach and suggest a better way.

Rick Ferri

Note: As a manly-man, I could never admit to taking a Cosmo quiz. My wife tells me about them. :wink:
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Is Cosmo Directing Your Portfolio?

Post by Michael Baker » Mon Jul 11, 2011 9:27 am

Rick Ferri wrote:The questionnaires pay no attention to what is going on in your life or what your financial goals are. For example, the questionnaires never ask if you are employed, unemployed or retired. They don’t ask when you want to retire or how much you wish to accumulate before retirement or how much to take during retirement. Those are important questions, don’t you think?
Yeah, I think that there is a lot that could be improved with AA decisions. I agree with you, thanks for the good post.

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Re: Is Cosmo Directing Your Portfolio?

Post by tfb » Mon Jul 11, 2011 10:30 am

Rick Ferri wrote:They are overly simplistic, don't ask the right questions, and lead to the wrong conclusion more often then not.
Our "ask portfolio questions" template doesn't ask some of those questions either. What do you think of that? A 25/25/25/25 portfolio gets blessings without answers to those questions. I read somewhere "you are unique" is overrated. The author argues that we are not nearly as unique as we think we are. Comments?
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Dick Purcell
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Post by Dick Purcell » Mon Jul 11, 2011 11:44 am

Rick, in Forbes and your blog you’ve written a great critique of those “risk tolerance” questionnaires and the software products that use those questionnaires to spit out investment plans. But I wish that instead of placing all the blame on the financial industry, you had put the spotlight on the real source of that stuff – so-called investment education taught in our universities, which have surrendered control of investment education to their financial-industry-friendly business schools.

Check the massive Bodie Book, Bodie-Kane-Marcus, used to teach investment in our universities, in their financial-industry-friendly business schools. It’s not about seeking best financial futures for the 99% of investors who are individuals. Just the opposite. Instead, it’s a giant overload of ivory tower theory about the volatility-dominated individual year, with short-term volatility labeled with the fear-word “risk,” leading to choice of investments based on investors’ short-term fears, aka “risk tolerance.”

Check who’s behind those software products that use those "risk tolerance" questionnaires to spit out those investment plans, and you find the so-called “optimizers,” misapplying investment theory straight from the universities. The first of those software products won acceptance and widespread use through endorsement from Nobel Prize winning Professor Markowitz. The second was developed and marketed by the firm of Yale Professor Ibbotson.

This stuff from the universities' business schools is certainly loved by their friends in the financial industry. With investor attention misdirected to their fear of short term volatility, aka “risk,” for the individual year, investors do not see the terrible long-term cost to their futures from financial industry fees.

To overcome the widespread use of those questionnaires and software products that you so rightly criticize, we have to get to the source of the problem. We need our universities to establish a new kind of investment education, for guiding people – developed and taught in parts of the universities shielded from the financial-industry-friendly business schools.

Dick Purcell
Last edited by Dick Purcell on Mon Jul 11, 2011 1:15 pm, edited 1 time in total.

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Post by Rick Ferri » Mon Jul 11, 2011 12:35 pm

Great post, Dick. Well said.

Rick Ferri
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Dick Purcell
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Post by Dick Purcell » Mon Jul 11, 2011 1:07 pm

Rick, thanks.

I’ll be anxious to learn your reaction to my forthcoming fact-based novel. A little team on a very dangerous mission, investigating how it got this way – the universities teaching investment as an ocean of theory that helps the financial industry confuse, mislead, and fleece the investing public.

Dick Purcell

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Post by empb » Mon Jul 11, 2011 1:11 pm

I've been very happy with Kramerica Industries.

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Post by Scott S » Mon Jul 11, 2011 1:14 pm

Time to work "I'm just not into your portfolio" into our lexicon?

Maybe not. :lol:
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Post by xerty24 » Mon Jul 11, 2011 1:45 pm

I guess ER's are slightly higher on average for equity funds rather than bond funds, but is that really enough of a bias that you think it's driving an unreasonable preference for risky AA's in these software products due to conflicts of interest? I mean either type of actively managed fund charges 5-10x what an index equivalent would, and that seems like a much more relevant bias for Wall Street's profit margin.

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Post by dkturner » Mon Jul 11, 2011 3:17 pm

Dick Purcell wrote:
To overcome the widespread use of those questionnaires and software products that you so rightly criticize, we have to get to the source of the problem. We need our universities to establish a new kind of investment education, for guiding people – developed and taught in parts of the universities shielded from the financial-industry-friendly business schools.
You mean like in the parts that teach art history or modern dance? That should be rich. :?

I'd cast my vote for the psycho, er pychology, faculty. :lol:

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Post by HomerJ » Mon Jul 11, 2011 3:39 pm

empb wrote:I've been very happy with Kramerica Industries.
Aren't they Masters of their Domain?

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Post by stratton » Mon Jul 11, 2011 5:14 pm

My first thought when Rick mention "Cosmo" was the Beetle Baily character:
Private Cosmo — Camp Swampy's sunglass-wearing, resident "shady entrepreneur" and huckster. Loosely based on William Holden's Sefton character from Stalag 17; almost forgotten in the 1980s.
Paul
...and then Buffy staked Edward. The end.

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Post by Rick Ferri » Mon Jul 11, 2011 6:18 pm

Well, it's close to your Cosmo!

Rick Ferri
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Random Musings
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Post by Random Musings » Tue Jul 12, 2011 1:57 pm

I didn't know that Cosmo was a financial advisor. Anyway, he'll have to keep his cost structure low in order to compete with Rick down in Texas.

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Post by jimkinny » Wed Jul 13, 2011 5:25 am

Thanks for posting the links. Very good article.

Those asset allocation risk assessment calculators are misleading at best.

Dick Purcell makes some very good points also and when combined with his other posts illustrate the weakness of these calculators. They fail not only as long term tools to assess risk tolerance but fail to even address the greater risk of not reaching a planned goal.

empb, thanks for the laugh.

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