Word for the week is Information.
"I think that the Information Age is great, but there's a downside to it obviously as well, and it's that false information can be perpetuated so quickly. And it's sad that so many people will believe it." Josh Hopkins
"The sea of change that has come is the information age. We don't have to just read The New York Times anymore. We can pull up something on the Internet and get any news that we like." Pete du Pont
"We are no longer in the dispensation of age and experience. We are in the era of knowledge and information. Information leads a true leader and a true leader leads others."
"Information is the oxygen of the modern age. It seeps through the walls topped by barbed wire, it wafts across the electrified borders. ... The Goliath of totalitarianism will be brought down by the David of the microchip." Ronald Reagan
"We're not in an information age anymore. We're in the information management age." Chris Hardwick
"It is the greatest truth of our age: Information is not knowledge." Caleb Carr
I was invited to a conference in Chicago this week and listened to nine different Investment Managers talk about the investments they offer and their outlook on markets.
Every week, I interact with eight to ten outside sources for information and analysis of what other "experts" think on the economy and investing.
With cell phones, computers, and web based education we are truly in a time where you can access information quickly, immediately. The trouble with all this access is, information analysis and management.
I was especially excited to go to this conference because Andrew Lo was one of the main speakers.
Dr. Lo is the Harris Professor of Finance at the MIT Sloan School of Management. He was named by Time Magazine as one of the world's most influential people in 2012. He is also the founder of the Alpha Simplex group.
He talked about the changing and very complex world of investing in today's world.
Portfolio Construction 1.0 has been 60 percent stocks and 40 percent bonds some are still stuck there.
We have now moved from portfolio construction 2.0 as he described it, and where many are still stuck.
Investment Portfolio construction 2.0 consisted of;
- Investment Style Boxes
- Country Diversification
- Asset Diversification
These themes have been held onto by many but have failed over the last fifteen years.
Not that Modern Portfolio Theory is wrong but it is incomplete.
Diversification has actually increased volatility since 1998. Markets are efficient at reacting to information however they are not efficient at preparing for the unexpected, for catastrophy, black swans and fat tails.
The truth is, the world through max information, has become smaller and macro interventions have synchronized risk.
Managing volatility has become much more important than in the recent past.
Investment Portfolio Construction 3.0 now must consist of;
- Put Risk First
- Maximize Asset Class Diversification
- Include Alternative Assets and Strategies
- Smarter Use of Traditional Assets (Active Share-Smart Beta)
- Alternative sources of Return and Risk
- Be Adaptive-Not Static
Moving from Mean Variance Optimization and the Efficient Market Hypothesis to Risk Budgeting and outcome based methodology that adapts as markets and economies change.
I was also very interested to listen to John Mauldin speak in Chicago this past week.
John is a much sought after thinker and speaker. He writes prolifically and you can subscribe to his weekly free newsletter "Thoughts from the Front Line".
John also talked about the rapidly changing world environment and how it will change our investment outlook and our lives.
The untenable position of rising debt well above percentage to GDP ratios which countries may not be able to recover.
Also the deflationary environment that has been developing with little impact from massive stimulus from Central Banks.
I will give you some of his thoughts in his last newsletter below.
Mauldin writes; "Recessions are by definition deflationary. Two things we learned from This Time is Different by Rogoff and Reinhart are that economies are more fragile and volatile than we knew and recessions are more frequent after a credit crisis."
"When we enter the next recession (and there is always another recession), the Flat Debt Society will be screaming for more stimulus, more quantitative easing, and more debt. Count on it. Their prescription for dealing with the problems arising from debt is similar to telling an alcoholic to drink more whiskey. They deny that debt can be a problem. Their theories prove it. They even have books and papers by noted academics to show that there is no such thing as too much debt, at least as long as you can print money. Currency wars be damned."
"We're entering a period of renewed global volatility. Adjust your portfolios and hedges accordingly."
Mohammed El Erian was not at the meetings in Chicago but in a recent column in Financial Advisor magazine I thought he gave some very pertinent reminders, given the last few weeks volatility in the stock market.
Mohammed El Erian
1. It doesn't take much to severely dislocate markets, both down and up.
2. Liquidity is elusive when traders need it most, even when it comes to the deepest of all markets.
3. Market positioning and related risk-taking are no substitute for solid fundamentals.
4. The Fed still doesn't have much appetite for financial volatility, and markets will readily embrace its reassurances that it will try to act to counteract these gyrations.
The Dow Jones World Index trended up last week +3.14%
The 10 year Treasury Yield index trended up last week.
The US Dollar index trended up last week. +.58%
The CRB Commodities index trended down last week. - .89%
The Gold Index trended down last week -.54%
Inflation Linked Bonds trended down last week -1.53%
US Aggregate Bond Index trended down last week -.24%
The International Aggregate Bond Index trended down last week -.45%
The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.
2014 2nd qtr + 2.91%
Stocks retake leadership along with real estate.
It pays to stay diversified and not chase prior winners!
Many investors take the wrong approach looking primarily at recent return.
Overall risk measures and managing downside risk play an increasing role in end results.
Investors instead should be focused on managing Dynamic Beta exposure, evaluation of Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.
The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. Decisions on making any investment should be made only subsequent to a thorough professional analysis of the overall individual financial picture and the goal for the investments.
Please forward this on to anyone who you think may be interested.
You can also follow updates at: www.marrswealthmanagement.blogspot.com
The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.