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Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Today's portfolios can benefit from a splash of the same investment fundamentals that made common sense in centuries past." |
Vancouver, BC (January 02, 2007): It would be interesting to count how many investing resolutions are being made this year. Can investors reach back into history, learn from investment practices of long ago and apply them to their 2007 investing needs?
Journalist Norman Cousins once wrote, "History is a vast early warning system."
Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, “Investors often think that portfolio theory is a modern event. Perhaps, with particular emphasis on the last fifty years or so. After all, it is commonly referred to as Modern Portfolio Theory (MPT).”
There are stacks of books, magazines, journals, newsletters and educational papers devoted to MPT. Along with television, the internet, radio and a variety of print media sources.
Today, professionals and investors have a large basket of MPT tools to analyze, select, benchmark, monitor and attend to every conceivable portfolio requirement. It’s remarkably easy to drown in MPT.
You guessed right. My perspective is a little different. Modern portfolio theory is not that modern. And nobody need drown in it. The math parts; however, are mainly attributed to modern times. Just thumb through publications like the Financial Analyst Journal from the CFA Institute.
In my view, portfolio theory has a long and rich history, spanning centuries. Its fundamentals have remained very much the same. The ones that delivered long ago still deliver very well.
The following quotation ought to interest every investor:
“Divide your fortune into four equal parts: stocks, real estate, bonds and gold coins. Be prepared to lose on one of them most of the time. During inflation, you will lose on bonds and win on gold and real estate. During deflation, you lose on real estate and win on bonds. While your stocks will see you through both periods, though in a mixed fashion. Whenever performance differences cause a major imbalance, rebalance your fortunes back to the four equal parts.”
A very insightful quotation. It reads as something published by a modern day scholar of MPT. While that may appear so, it is actually attributed to Jacob Fugger the Rich, (1459-1525).
Let's take a step back for a moment. Jacob, who lived in Germany five centuries ago, captured the essence of wealth management. Much before MPT came along.
He was a very astute portfolio manager of his day. I would hire him to dispense the same powerful guidance today.
Jacob's quotation is the executive summary of how to manage wealth. For both then and now. The fundamentals of what every investor ought to follow. Full of downright common sense.
What can be learned from Jacob's investment wisdom? Here are a few points:
- His approach is the spirit of simplicity. He followed an asset mix. He was aware of market losses. He was diversified. He monitored results. He tweaked the mix periodically. I'd say he had it right.
- His disciplines served him well. He minimized unnecessary risks. The situation is not different today. A disciplined investor is likely to be right more often.
- His methodology was logical and void of emotional attachments. Especially in rebalancing, which involves shaving the leaders and adding to laggards.
- His investment insight has truly withstood the tests of time. Something all investors want for their portfolios. Hence, don’t reinvent the wheels of investing. MPT is deeply rooted in history.
Today's portfolios can benefit from a splash of the same investment fundamentals that made common sense in centuries past. Vintage portfolio theory, but very modern for its day.
Jacob's wisdom deserves investor attention for 2007 and beyond. His perspective serves as well today as when it was so eloquently recited. For both growing and preserving wealth.
Investors may have to dig deeper today to design a suitable asset mix. Equal parts are not always best. Temporary capital preservation may suit at times. There are other asset class choices.
The vast MPT tools of today make it easier to deal with portfolios, when compared to Jacob's day. However, the fundamentals of portfolio management are ageless. Timeless common sense.
I look forward to the deep rooted historical tradition of MPT to be continued for next five centuries. And many more after that.
A happy, safe, healthy and prosperous New Year to all.
I welcome your questions comments and opinions.
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