ITA Wealth Management

“Academic theory and the Wall Street establishment (including the financial media) are clearly at odds over the issue of the value of security analysis and stock selection. The active managers of Wall Street and the mutual fund industry must believe that they can add value or they would be committing economic suicide. Academics have no such biases. They study the historical evidence and report their findings.”

The above quote comes from Larry E. Swedroe’s book, “What Wall Street Doesn’t Want You To Know: How You Can Build Real Wealth Investing in Index Funds.” While I subscribe to the above argument, there is still room for additional research when it comes to the benefits of Asset Allocation. For example, I would like to see more work focus on portfolios that are using multiple asset classes as opposed to the three and four-factor models that have been studied. Although I know it is difficult to gain access to private investor data, it would be useful to see studies that analyze more than large pension and mutual funds. The new research should embrace a similar number of portfolios managed by small investors.

A comprehensive study would include investors who build portfolios using a variety of index funds as well as portfolios constructed using only individual stocks. Would such an investigation support the Ibbotson & Associates study that portfolio return is 100% dependent on portfolio policy and that stock selection and market timing add no value to the portfolio return? I need to quickly add that the Ibbotson study looked at averages. Individual managers will break from the average results to both the high and low sides of market returns.

When it comes to the AA-Mosaic, Mosaic2, and GLW portfolios, we seek to outperform the Vanguard Total Market Index (VTSMX) by tilting the portfolio toward the value side of the market spectrum and allocating a significant percentage of the portfolio to developed international countries as well as emerging markets. Right now, the decision to go with international and emerging market equities is having a negative impact on portfolio performance. Including these asset classes is definitely a policy decision and not one tied to market timing.

Lowell Herr

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Photograph: Entrance to the interior of Fort McHenry in Baltimore, MD