quote:
In recent years numerous white papers have been published on this subject. This article cites one of them and addresses my comment that they have been shown to be risk inefficient. However, risk inefficienies are but one shortcoming of these "set it and forget it" strategies, the whole of which is far beyond the scope and spirit of this thread. I did not state that they are not easy and I did not state that they are not cheap as most of them are both. As well, most of them are poorly executed and flawed under scrutiny. Use them if you wish; they'll do little harm (i.e. not likely to blow up a portfolio), but there are better solutions. The good news is that the investor won't know it, or care.
Remember, no hurt feelings! Next question.
Thanks for the link and feedback. I am all ears when it comes to new viewpoints, and enjoy learning new things about investing. As I see it though, there are some flaws in the article and the implied premise that a manager could find subsectors of the market where the risk/reward profile is out of line and therefore can be taken advantage of, thus making a portfolio more risk efficient without sacrificing return. This is the mindset of an active manager. At a minimum, I think its fair to say that this is a debatable point and shouldn't be presented so strongly.
Just as a note: There is an undertone of "we are dumb so I won't bother explaining" within your post. While this may be very true
, please don't say things like "good news is that the investor won't know it, or care."
To critique the article:
1) That article talks about Target Date Funds being risky compared to funds such as "Folio Funds" which are invested in very specific subsectors of the market which have lower correlation (using recent results). The article does not speak to overall risk/reward profile, and focuses entirely on risk, although it does mention that "recent performance through 2012 has been better than typical Target Date Funds". The article mentions at one point that different market sectors correlation changes over time, but then ignores that point when it comes to reviewing the "Folio funds".
2) Regarding "recent performance" and "risk/reward": As of October 2015, the "Folio moderate 2040 fund" has an average annualized 5 year return of 4.38%. The Vanguard Target Retirement 2040 fund has an average annualized 5 year return of 9.8%. So, as expected, along with lower risk comes lower performance.
3) The author: This is an excerpt of the Wiki article about James Glassman. As expected from this article, the author seems to take very black-and-white stances on grey areas depending on which way the wind is blowing.
quote:
His first book, Dow 36,000, was published in 1999, near the peak of the late-1990s stock market bubble.
The book was later criticized by Washington Post reporter Carlos Lozada, who asked, "You don't feel the need to apologize to someone who read your book, went in and got creamed?" Glassman replied, "Absolutely not".[url=https://en.wikipedia.org/wiki/James_K._Glassman#cite_note-Lozada-10][10][/url] Nobel laureate Paul Krugman argued on his faculty website that the book contained basic arithmetic errors and was 'very silly'.[url=https://en.wikipedia.org/wiki/James_K._Glassman#cite_note-11][11][/url] Economist and blogger Nate Silver described the book as 'charlatanic' and suggested on empirical grounds that the authors had failed to notice that the time of writing stock prices were 'as overvalued as at literally any time in American history'.[url=https://en.wikipedia.org/wiki/James_K._Glassman#cite_note-12][12][/url]
In 2011, in his third book, Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence, he wrote "I was wrong" about his predictions in Dow 36,000, noting that the Dow Jones only went up 20 percent since publication of the book and returns during the intervening years were only "a few piddling percentage points".[url=https://en.wikipedia.org/wiki/James_K._Glassman#cite_note-Lozada-10][10][/url] In Safety Net, he argued that "the world has changed" over the past decade; that the U.S. relative economic position had declined and that the risk of catastrophic events had increased. He warned investors to adopt a new definition of risk, moving beyond the notion of financial volatility.
