J. Fredrickson

Complex Simplicity: A Better Portfolio of ETFs

I often find that most people( i.e. those not involved in the financial world) construct portfolios similar to the one above. The thought process I will assume goes something like this, "if I have exposure to just about everything I will not be hurt bad if I am wrong,and have a little skin in the game if an area gets hot, i.e. I will be diversified." It reminds me of putting a little money on every number on the roulette table knowing that you will at least win something.

Most schools (mine included) teach us that diversification is the answer to doing well in the market and that the markets are efficient. I have read the research/books on the topic as well as experienced quite a few years trading and think that it cannot be further from the truth. The reason behind the decision to teach diversification in our institutions has to do with being able to get theories published and needing certain aspects of the research to be constant. Enter efficient market, duh, duh, duh, problem solved, thanks Malkiel, high five (slap!).

But I feel that this strategy leads to mediocre returns. Of course the allocation will very based on many factors, but I feel that it is important for managers and individuals to understand what is happening or going to happen and set-up a strategy to take advantage of the opportunities out there. These do not really provide that incentive. I think that these types of portfolios are lazy, bloated and often times full of "evergreen income" for those lucky managers that get the naive client.