Despite the tricky markets over the last two years, self-directed investors have never had it so good. In fact, there’s never been a better time to do it yourself and construct an investment portfolio.
You may have read the fascinating interview that Edward Chancellor, a member of GMO’s asset allocation team, gave IndexUniverse.eu a few days ago. In fact, I had to cut down the original interview transcript as our conversation took the best part of an hour.
One of the points that didn’t make the final version was a digression on the subject of career risk for investment managers. To paraphrase Edward’s outlook on this, even if a fund manager has a strong view (such as when GMO’s internal models showed that cash had the highest prospective risk-adjusted return in the summer of 2007), it’s unlikely that the person or firm concerned would follow this conviction through to its logical conclusion by switching the portfolio into cash. Why? Because a fund manager faces an “asymmetric payoff”. If he goes ahead and turns out to be right, he’ll hit the headlines and have a good chance of attracting new clients. But if he’s wrong he’ll almost certainly get the sack. This is why fund managers are so unwilling to stick their necks out too far and in reality tend to follow each other’s asset allocation quite closely, an excellent example of crowd behaviour and groupthink.
Edward talked about this quite openly and said that at GMO they recognise the potential problem and tackle it by making sure that their clients are aware of what their asset allocation models suggest, as these institutions often have a big say in setting overall portfolio asset class weightings. There may be others involved in this process (investment consultants, for example), so it’s not merely a question of the fund manager taking responsibility.
But investors who design their own portfolios, within a self-directed pension plan, for example, have no such qualms. They are not constrained by the institutional investment industry’s asset weightings, which are the product of fashion and a great deal of style drift. While diversification remains a key principle, there’s nothing stopping DIY investors from being much more radical in their selection of asset classes and their weightings.
When you combine that flexibility with the amount of high-quality investment data, analysis and commentary available for free on the internet and the ever-decreasing cost of putting together a portfolio via ETFs, there’s never been a better time to do it yourself as an investor.
You may have read the fascinating interview that Edward Chancellor, a member of GMO’s asset allocation team, gave IndexUniverse.eu a few days ago. In fact, I had to cut down the original interview transcript as our conversation took the best part of an hour.
One of the points that didn’t make the final version was a digression on the subject of career risk for investment managers. To paraphrase Edward’s outlook on this, even if a fund manager has a strong view (such as when GMO’s internal models showed that cash had the highest prospective risk-adjusted return in the summer of 2007), it’s unlikely that the person or firm concerned would follow this conviction through to its logical conclusion by switching the portfolio into cash. Why? Because a fund manager faces an “asymmetric payoff”. If he goes ahead and turns out to be right, he’ll hit the headlines and have a good chance of attracting new clients. But if he’s wrong he’ll almost certainly get the sack. This is why fund managers are so unwilling to stick their necks out too far and in reality tend to follow each other’s asset allocation quite closely, an excellent example of crowd behaviour and groupthink.
Edward talked about this quite openly and said that at GMO they recognise the potential problem and tackle it by making sure that their clients are aware of what their asset allocation models suggest, as these institutions often have a big say in setting overall portfolio asset class weightings. There may be others involved in this process (investment consultants, for example), so it’s not merely a question of the fund manager taking responsibility.
But investors who design their own portfolios, within a self-directed pension plan, for example, have no such qualms. They are not constrained by the institutional investment industry’s asset weightings, which are the product of fashion and a great deal of style drift. While diversification remains a key principle, there’s nothing stopping DIY investors from being much more radical in their selection of asset classes and their weightings.
When you combine that flexibility with the amount of high-quality investment data, analysis and commentary available for free on the internet and the ever-decreasing cost of putting together a portfolio via ETFs, there’s never been a better time to do it yourself as an investor.
