Wednesday, January 4, 2012
True Cost of Tactical Management
Just read an interesting column from Bob Veres in Financial Planning magazine. He is talking about how more and more advisors are adopting a tactical approach. While he doesn't say it is a bad thing he worries that because advisors have trouble predicting where returns, the economy, inflation, etc will be they will have trouble being tactical. This ignores of course that there is more than one way to be tactical. Trying to predict the economy and returns is no better than using modern portfolio theory (MPT). The problem with MPT is that you need to predict asset class returns, correlations, and volatility which is impossible. It is also impossible to predict economic conditions. A better approach is to be tactical by following the trend of the market, moving based on verification instead of prediction.