Friday, November 26, 2010

Now You Tell Me! A Dying Banker’s Last Financial Instructions - Your Money -

Interesting Ron Lieber column today in the New York Times.

Gordon Murray was a bond salesman for Goldman Sachs, Lehman Brothers and Credit Suisse for 25 years, making a small fortune along the way. Then he received a cruel blow, when he was diagnosed with brain cancer. After battling the disease for a number of months, he got the news that another tumor reappeared, making his eventual recovery problematic.

However, instead of giving up, he decided to write (with the help of co-author Dan Goldie) a book called "The Investment Answer", where he distilled his own personal investment experiences as well as his research on investing into a short book that he hopes will help individual investors.

Lieber's column has been very popular today on ,and it is truly a "feel good" story about a man making the most of his remaining days on the planet. Still, although I give Mr. Murry an enormous amount of credit, I am not sure I totally agree with all of his points, so I thought I might comment here.

First, true confession: I haven't read the entire book yet - I just downloaded it on my Kindle - so some of my points might be addressed in the full book.

Anyway, here's the key thoughts that Murray makes, according to Ron Lieber:

First, the two authors suggest hiring an adviser who earns fees only from you and not from mutual funds or insurance companies, which is how Mr. Goldie now runs his business.

Second, divide your money among stocks and bonds, big and small, and value and growth. The pair notes that a less volatile portfolio may earn more over time than one with higher volatility and identical average returns. “If you don’t have big drops, the portfolio can compound at a greater rate,” Mr. Goldie said.

Then, further subdivide between foreign and domestic. Keep in mind that putting anything less than about half of your stock money in foreign securities is a bet in and of itself, given that American stocks’ share of the overall global equities market keeps falling.

Fourth, decide whether you will be investing in active or passively managed mutual funds. No one can predict the future with any regularity, the pair note, so why would you think that active managers can beat their respective indexes over time?

Finally, rebalance, by selling your winners and buying more of the losers. Most people can’t bring themselves to do this, even though it improves returns over the long run.

This is not new, nor is it rocket science. But Mr. Murray spent 25 years on Wall Street without having any idea how to invest like a grown-up. So it’s no surprise that most of America still doesn’t either.

A Dying Banker’s Last Financial Instructions - Your Money -

I have a couple of issues with these guidelines. First, the argument that a U.S. based investor to have at least half of their assets based overseas simply because the U.S. represents only half of the world's market capitalization doesn't ring true to me. I think that investors should place their money in sectors which offer the best possibility of long-term returns as measured in their local currencies.

Also, selling your winners and reinvesting the proceeds in your losers is a good idea only if you truly believe you're smarter than the market. Sometimes it's better to just let your winners ride, especially if the fundamentals are still working in your favor. Conversely, hoping onto a losing position, or even adding more to a losing position, works only if you truly believe you're savvier than the market as a whole. Sometimes it's better to just admit you're wrong, take a small loss, and move on.

But still, on the whole, I think that Messrs. Murray and Goldie have done a good service to individuals looking for help in managing their financial assets. If nothing else, giving a clearly stated set of guidelines is surely welcome in a field that too often has been made complex.