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RITHOLTZ: Why It Is Important For Asset Managers To Be Able To Admit That They Don’t Always Know (The Big Picture)
In investing, many people make forecasts and then marry themselves to these forecasts. But Barry Ritholtz of Fusion IQ argues that this sort of thing “usually leads to catastrophic results.” Instead, he writes that he takes pride in saying “I don’t know.”
“In the world of investing, recognising what you do not know and therefore should not be betting on is paramount. It is an important trait for an investor/asset manager to own. Too many people assume they are making decisions based on what they know, but oftentimes their decisions are based on what they think they know but really don’t.” Ritholtz says this ability is important not just because it “prevents you from being blindsided,” but “it shifts your focus to process over outcome,” and because it “prevents you from being fooled by randomness.”
Advisors Need To Help Young Clients Prioritise Different Financial Buckets (The Wall Street Journal)
Young adults can be overwhelmed by all the different financial buckets that they are faced with (like housing, emergency funds, 401(k) plans, insurance and so on), writes Rand Spero of Massachusetts-based Street Smart Financial in a new WSJ column. Instead, Spero writes that advisors should help them prioritise these buckets and remind them that not all of them need to be filled now.
“I see there are three problems with focusing on too many buckets: potentially filling the wrong bucket first, becoming overwhelmed and therefore doing nothing, and potentially purchasing a financial product without considering whether it’s truly a priority. To avoid these problems, advisers need to help clients come up with a systematic plan for saving.”
JPMorgan’s chief U.S. equity strategist Tom Lee already has an S&P 500 price target of 1,775. But after meeting with 80 wealth advisors he writes that he is even more bullish than before.
“A final but interesting anecdote, at a large group lunch earlier this week with 80 or so wealth advisors, we heard how most individual investors are spectators in the equity markets, having a greater share of their assets in bonds, particularly munis — apparently, stocks are for ‘other people’ (who want to take the risk).
“In our view, sentiment tends to have contrarian implications — that is, if investors are generally (anecdotally) cautious, this suggests that a lot of the negatives are already reflected in current prices. Consequently, as much as investors are concerned about a potential pullback (which we acknowledge is possible), the current caution suggests better implied risk/reward.”
We heard a lot of chatter about the ‘Great Rotation’ out of bond funds and into equity funds. But our Matthew Boesler writes that Bank of America was successful in pushing this, with its retail investors pouring $US23 billion into equity funds, and redeeming $US21 billion from funds invested in bonds and cash. But a look at investors from EPFR Global which reports fund flow data, not just BAML clients, shows that money market funds have seen large cash outflows. Equity funds have seen a lot of inflows, but money has also flowed into bonds.
“Thus, while BAML has been wildly successful in selling the concept of the ‘Great Rotation’ to its private clients (retail investors), the rest of the investment community isn’t necessarily buying it,” writes Boesler. Here’s a look at BAML’s retail investors:
And this chart shows EPFR fund flows:
Investors who are tired of rebalancing their portfolios should consider allocation funds according to Morningstar’s Cara Esser. If investors want something other than a target fund, i.e. funds in which asset allocation tends to become more conservative as this date approaches.
Instead Esser suggest allocation funds, with the options of conservative-allocation funds, which place more of an emphasis on bonds and related securities (50-80%) and 20-50% in stocks. Investors also have moderate-allocation funds and aggressive-allocation funds. “Overall, allocation funds can offer investors some respite from rebalancing between equity and fixed-income funds, but a solid understanding of the underlying strategy is imperative,” she writes.
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