Efficient Market Theory and Its Discontents
Out with the Old, In with the New—Overhauling the 60/40 Portfolio
Before we dive into our alternative world, we first want to talk about ways to tune up your basic stock and bond portfolio so you are maximizing the expected return for the risks you are taking. If you are like most people, your current portfolio would get comments from the teacher like “Needs work” or “Not working up to abilities.”
Example: Your authors were having lunch at Nonna in Beverly Hills, when a man we had never met comes up to the table clutching a thick envelope from a well-known brokerage firm. Introducing himself, he pulls out his statement—about 50 pages long—and asks us what we think of his portfolio. This is the equivalent of the free curbside consultation that doctors are subjected to, now transplanted to finance. We asked him what he does for a living. He’s a business executive and has an M.B.A. from Stanford. If this guy can’t figure out his brokerage statements, what chance do the rest of us have?
Thumbing through the statement, we find page after page of stocks. Abbott Labs . . . Abercrombie & Fitch . . . Altria . . . and so on, down the alphabet. What do we say? Do we opine about each ticker, pro and con?
No. Not necessary.
Right away, we know that this guy is following the strategy of individual stock picking, one that seldom provides the best returns. It comes as no surprise that even by holding each page up to the light we can find ...