Tuesday, September 15, 2009

Trust Your Intuition?

A colleague of mine in the Alliance of Cambridge Advisors recently received this email from a client in reference to a blog post from the Wall Street Journal, which interviews author David Adler:

Dear ____,

In case you missed this, popular research is finally catching up with where you've been for years. "Behavioral portfolio" and "asset location" to maximize tax advantage sound like you, today - and 20 years ago!

Hope you're well,


It certainly is nice to see the fundamentals of our ACA philosophy beginning to achieve mainstream validation. Especially the ideas that internal (endogenous) factors such as behavior impact personal wealth much more than external (exogenous) factors such as interest rates over which an individual has no control and that managing taxes with asset location is at least as important to resulting wealth as asset allocation. Both are great examples of the differences between an investment manager and a financial planner: true financial planners are more intersted in achieving bottom-line client goals than gross investment returns.

I do take issue with one comment by Adler that "...the idea that the markets are so rational that we don't have to touch them? That idea is gone." As pointed out in our July teleseminar "Why the Smart Money Indexes" even though the S&P 500 is down for the decade ending 12-31-2008, a diversified index portfolio was up 40-60% depending on the mix of stocks and bonds over that same time.

Adler is right that the markets aren't always rational 100% of the time, but over any reasonable invesment time horizon they tend to be. Moreover there is no evidence that anyone has the skill to predict when they are and when they are not accurately priced. So even though in reality, and certainly in the short term, the markets are not perfectly efficient, investors are best served by acting as if they are.


  1. Good one on Intuition and it helps a lot.

    Karim - Mind Power

  2. Im no expert, but I believe you just made an excellent point. You certainly fully understand what youre speaking about, and I can truly get behind that. Houston accounting firms