Newsletters

 

Address

9501 W. 144th Place
Suite 202
Orland Park, IL  60462

> SEE MAP

Phone Number

708-226-5633

Fax

708-226-5644

Email

gis@gallag.com

UNHERD OF RISK
Published: 4/2/04

There are many inherent risks to investments such as geopolitical, inflationary, and cyclical. All are very real and are obvious to every one that owns a TV or subscribes to a news periodical. These threats should be monitored by all investors and their import cannot be diminished. Yet, to paraphrase the old war saying "you never see the one that kills you".

What is a bigger threat than the aforementioned? I believe it is herd mentality. More and more capital is the hands of fewer and fewer portfolio managers. More and more assets are bundled together in pension plans, mutual funds, and managed portfolios so markets tend to move in a lock step fashion. They are managed by similar types that study from the same texts and hold the same designations. This homogeneity of thought is the bomb that few see coming.

If every money manager is trained to invest the same way, to look for the same factors, to buy at the same time, to diversify the same way aren't we guaranteed huge swings in the market? If fact, isn't that what happened in the bear market of 2000-2002 and then in the bull of 2003? My guess is this pattern will repeat itself as often as a paisley on a 70's tie.

Now I'm not saying this is the only cause of the vagaries in markets nor am I willing to completely discount macroeconomics. It is just that this threat is not fully understood so we are not sure how to counter it.

Currently, many portfolio managers hold the CFA® designation, (as do I for full disclosure). It is earned by passing a series of difficult exams covering most aspects of investing. The material tested is constantly updated and includes the best theories and practices of managing money especially large pools of assets. The program itself is exemplary and not really at fault here. The problem is the uniformity of training; the similitude of thinking that it fosters. If you add the holders of the CFP® designation, a more retail based program, and you can surmise just how many of the people managing funds, think thus react the same way.

This situation becomes more acute every year as these designations become almost compulsory for anyone that wants to become a portfolio manager. As the universe of money managers becomes smaller the diversity of thought shrinks even more.

Unfortunately, I do not have a comprehensive solution, but I do have one thought. True diversity is not merely owning 30 different stocks; it is having your assets truly spread over many asset classes. Hopefully some assets with professional managers and some assets managed with your own handprint. Therefore, you can be more comfortable that one bomb, no matter how large or powerful, can't blow up your entire net worth.

Written by: Marty Gallagher

<- Back to Home Page