Monday, January 11, 2010

Investment Policies for Investment Personalities


One of the basic tenets of my book MONEY WISE is that one's personality will shape how one invests. In Chapter 14, I briefly identified ten investment personalities as shown below:

* Absolute

* Confident

* Uncertain

* Relative

* Fiduciary

* “Star”

* Bored

* Guilty

* Financial Death Wish

* Paralytic

Actually each of us is likely to be some combination of these personalities and some of us will change personalities in the future due to life circumstance changes. Nevertheless, this framework is a good place to start to evolve one's investment policies. Most of my clients invest with us in various selected funds, but the same principles could be used with individual stocks and bonds as long as there is appropriate diversification.

At this time of the year the press is full of economic, financial, and market predictions. Most of these predictions are for the current period, meaning up to one year. For the most part, the fund investor leaves individual security selection and timing to the funds' managers, so they are not primarily focused on periods as short as one year. For the investors that we serve, our approach is to look to the longest term that the account will permit. For me, that is the rest of my life and to the extent that I am dealing with my heirs, both individual and charitable, to the rest of their lives. To put this into practice, I will focus at looking into the next ten years by reviewing the past ten. Bear in mind no one can truly foretell the future, and based upon the past, we have every reason to believe new discoveries, new industries, new laws and certainly new taxes, will impact us in this ever-changing geopolitical world.

The ten year data by my old firm (now known as Lipper, Inc.) is shown for groups of funds sliced into various categories. Depending on the availability of data, I use fund averages or established fund indexes.

Ten Year Compound Growth Rates
as of December 31st, 2009


Emerging Market Debt 11.09%
US TIPS 6.77%
General Bond 6.59%
US Treasuries 6.24%
Corporate Bonds BBB 6.11%
High Current Yield 4.80%
Balanced 2.79%
Money Market 2.60%


Global Natural Resources 14.57%
Emerging Markets 9.40%
Small Company Value 8.73%
Global Flexible 5.63%
Small Company Core 5.24%
US Diversified 1.13%
Small Company Growth -0.63%
S&P 500 Index -1.19%
Growth -4.51%


In looking at these ten year results, one can reach a number of conclusions:

  1. Emerging market debt benefited from a material increase in the perception of its credit quality and in some cases an improved currency.

  2. Inflation while declining, had a real impact.

  3. Higher credit quality was not penalized.

  4. Being risk adverse still produced positive results.

  5. The world appears to be running short of natural resources at current costs of production.

  6. For the total period, bond investors did better than stock investors in the emerging markets.

  7. The willingness to combine bonds with stocks worked.

  8. US diversified equity funds' putrid returns were still better than the S&P 500 index funds.

  9. Smaller companies did better than large ones particularly of the growth variety.

Being something of a contrarian, I am willing to bet that a number of these trends in the next ten years will not be as strong as they were in the last "lost" ten years, or will be reversed. In setting their investment policies in early 2010, different investment personalities will view both the past data and the odds of reversals differently. The following are my initial suggestions to the investment personalities listed above. These suggestions would be modified in individual discussions with each as accounts:

The Absolute Investor, with her fear of significant loss and willingness to accept more limited gain, might opt for some fixed-income laddering, but would be wise to include some TIPS.

The Confident Investor, believing that he has timing skills at least equal to the market, would be attracted to the global natural resources area as well as emerging markets, with heavy emphasis on the so-called "BRIC" countries.

The Uncertain Investor would feel less anxious with a portfolio of money market instruments, TIPS, as well as exposure to a global flexible fund.

The Fiduciary Investor would be similar to the Absolute Investor, but would add one or two index funds.

An investor who wants to boast about his current successes (the "Star" Investor), would be attracted to the narrowly-based exchange traded funds and similar products that are invested in specific industrial segments or specific emerging countries.

Regarding the Bored Investor: Boring is as boring does, with a combination of S&P 500 index funds and money market funds.

The Guilty Investor, who needs to be punished because of some unidentified sin, will load with larger growth funds because of their recent poor record and could well be punished most severely by having a very successful portfolio. Woe is me.

A cousin of the Guilty Investor, but who is more manic, is the Financial Death Wish Investor, who is likely to be attracted to what is currently doing spectacularly well due to leverage and will be attracted to funds investing in high current yield ("junk bonds").

The Paralytic Investor, often the result of a diverse investment committee, will diversify unhappily into index funds, money market funds and global flexible funds.

Next week I am inclined to describe what policies I would like to follow in some of my own accounts.

Further, I would welcome anyone's thoughts as to what I have suggested in this blog.

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