I recently read a great article from the CFA Institute and I wanted to share it with our clients because I think it’s something we all struggle with. The title of the article is “Best Does Not Mean Optimal” and it discusses the neverending quest by portfolio managers to try to build the “optimal” portfolio for clients.
I’ll admit, I have sometimes found myself running portfolio optimization calculations in an attempt to build the “optimal” portfolio for our clients. The problem with this quest for optimization is that the only way to truly build the optimal portfolio would be if you could see the future! We know that past performance is no guarantee of future results, yet many people take historical data and try to build an optimal portfolio based on what has happened in the past. Others try to predict future returns and correlations for various asset classes and optimize the portfolio based on those numbers. Yet we know that nobody can accurately predict the future of any one asset class, nonetheless all of them and how they all correlate to each other!
Rather than attempt to build an optimal portfolio, we focus our efforts on building the “best” portfolio for each of our clients, then focusing on the more important aspects of a financial plan, like what you are saving for, how you are withdrawing assets, and where you can save on taxes and other expenses. Whether you have 20% or 22% allocation to US Large Cap Stocks won’t really make a major difference in your long-term results, but putting more into savings each month or reducing your tax bill absolutely will.
In all aspects of life we are naturally drawn to optimizing everything. If we want to lose weight we go on the optimal diet, when we want bulk up we look for the exercises that optimize muscle building. In all of these areas we’d probably be better off just shooting for what’s best for us. I could never stick to some of these crazy diet fads out there so I’m better off finding a diet I can live with that helps me maintain a health weight. The same holds true for your portfolio. Stop trying to find the “optimal” asset allocation and pick what’s best for you.
We are here to help with this so feel free to reach out to us anytime!
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.Please see Additional Disclosures more information.