Planning over punditry

John Osbon - January 11, 2012

It’s always a pleasure to read Blackstone Vice Chairman Byron Wien’s annual 10 Surprises list.  For breadth, open-mindedness, and contrarian thinking, Byron’s list, published since 1986, can’t be beat.  But should you invest your money this way?  Is Byron’s list, and those of less talented pundits, a reliable source of investment management guidance?  I say no, and here’s why.

Pick your pundit, take your chance

When I see a headline like, “Wall Street’s Sharpest Minds Predict Where Stocks Are Headed In 2012” I read it, and then run. The article polled 16 experts whose 2012 forecasts for the S&P 500 have it closing the year at 1167, 1500 and everywhere in between. In other words, large cap stocks will go up. Or down. Or hold steady. Now how helpful is that?

I love that headline above because it typifies Wall Street’s relentless torrent of prediction in search of client money. Of course the media loves all the prediction too. It makes for great entertainment, just like a tarot card reader. But does it help investors? I don’t know how it could.

As for Wien, his 10 predictions for 2011 were about half right, as prescient as a coin flip. But he was only one for three on those that translated most directly to what to hold in your portfolio. He predicted gold at $1600 (Right!), the S&P up 20% to 1500 (It was dead flat), and the 10 year treasury yield surging to 5 percent (it fell from 3.3% to 1.9%). Anyone who saw wisdom in Wien’s ideas and abandoned treasuries in favor of large cap stocks (such as bond king Bill Gross) forfeited a hefty gain.

Control what you can, ignore the rest

At Osbon Capital we ignore predictions. Instead we focus on facts and factors we can control:

  • Cost – this is an easy one.  The more you cut your investment expenses, the higher your returns. Commissions, fees, and hidden costs are way too high in the industry, in my view. As an index boutique, we welcome and encourage cost auditing.
  • Cash flow – another easy one.  If you are waiting for your portfolio to appreciate, you can always collect dividends and interest. Interest rates are at rock bottom currently, but the $800 billion dollar global dividend stream is available to all. Selected index ETFs provide a low-cost means to access it.
  • Taxes – easier than it may seem.  We don’t know the future of tax policy but we doubt that taxes are going down. Our advice is to pay the least tax required.  Again, index ETFs are built for tax-efficiency and give you significant control over your tax planning.
  • Diversification and asset allocation – hard to do well. Substantial research, history, and modeling go into the construction and operation of a truly diversified portfolio. Using the powerful software tools of Windham Capital Management, the $30 billion advisor to endowments, hedge funds, and institutions, we build portfolios around your investment goals.

Tune out and tune up

For some, the constant investment news flow is entertaining.  For others, it is distracting, and even harmful. Our advice is to get out of the news cycle and get into disciplined fact-based wealth planning. Flipping coins is no way to run a portfolio.



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