Asset allocation and asset selection

I'm always disappointed to read letters from your readers telling of bad experience with investment advisers.

I understand how they feel because from time to time, people are referred to me, being unhappy with the advice they are receiving.

Some of the portfolios I see can best be described as junk. It is interesting that often these come from advisers working for high-profile franchisers working to a formula, often to meet agreements with a limited number of managed funds or in-house products.

This destroys objectivity and raises serious issues of conflict of interest. The experience these investors have dirties the water for those who are more skilled and truly independent.

I am pleased you make the point there are some good advisers around and that investors should ask the adviser how they invest their own money.

May I clarify one point?

You say that asset allocation is much more important than asset selection.

I assume you have in mind the 1986 Brinson, Hood & Beebower research, which was widely believed to have said that.

But the authors have often pointed out this wasn't their conclusion. And, if you think about it, it doesn't make sense. I have sent you a 1997 article which clarifies their research.

Don't get me wrong, asset allocation, along with asset selection, is important, but for risk management.

To bring others up with the play, I said in the March 9 column, "Research shows that how you spread your money over different types of assets affects your returns much more than which particular assets you hold".

You're right. I did have the Brinson, Hood & Beebower research in mind.

As the article you sent says, "hardly anybody read the study itself". I certainly didn't. But for years, investment experts have been quoting it as saying that about 94 per cent of the return on a portfolio can be explained solely by asset mix.

Your article, from the Dow Jones Investment Advisor, casts doubt on that number. One critic actually says 15 per cent is more accurate, but that seems way too low to me.

Regardless of what the correct figure is, nobody knowledgeable is debating that a portfolio of all shares is likely to bring in a higher long-term return than one of all fixed-interest investments.

The tradeoff is that shares are riskier, particularly over the short term.

While the importance of asset allocation may have been exaggerated, I still say that the first decision in any investment plan - and a major one - should be how much of each asset type to go into.

My response to the first letter in today's column is an example.

Is asset allocation more important than subsequent decisions about which shares, share funds, bonds and so on to buy?

Who cares? They both matter lots.

I've heard about too many people with all their long-term savings in term deposits, and too many others with money they need in six months' time in shares.

I make no apologies for continuing to stress the importance of correct asset allocation.

In response to your information on financial advisers, I would just like to suggest that you also consider The Shape of Money website as an additional website for recommendation to your readers.

We try very hard to ensure that it is a source of "Free, independent and comprehensive personal financial information for New Zealanders".

The information on financial advisers is under "Savings and Investments", then "Before you Invest", then "Getting the Right Advice".

I'm not in the business of publicising websites, but your one does look useful and seems to give sound, unbiased advice.

A bit of useless info for you - irrelevant to the point you were making a few weeks ago.

However, Winston Churchill's shortest speech was a bit longer than such a lot of people believe.

I only learned the full speech recently because of a small assignment I had to do for a family member.

I gather the full speech was to Harrow school and went: "Never give in, never give in, never, never, never never; in nothing great or small, large or petty - never give in - except to convictions of honour and good sense".

Just for info; not for publication.

But I must publish your letter. I'm one of the "such a lot of people" who got it wrong.

I did say that Churchill, "so I'm told", once made a seven-word speech. Still, I should have looked it up.

Had I done so, in my trusty Wordsworth Dictionary of Quotations, I would have found the same words as yours.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Mary cannot answer all questions, correspond directly with readers, or give advice outside the column.