Spreadsheets Can Destroy Your Investment Portfolio - by Larry Unterbrink, Dir. of Research
A lot of portfolio back tests (and their resulting charts) are just silly. Any
moron can go into a spreadsheet to find what worked best in the past
(especially when cherry picking dates). But it takes some real thinking to
work out a strategy that can deal with future unknown risks.
You can't optimize for returns going forward because you don't know what those returns will be. So anyone designing a portfolio based only on what worked best in the past is making a major tactical error with their investments. A mistake that could destroy a retirement plan.
What I liked most about our "Forever" Portfolio is that it eliminates most risk. As a lifelong entrepreneur, I really believe that after 50 years of trading and investing, I understand the nature of the unknown and investing RISK. It's not about going into a spreadsheet, hand
picking some dates and blend of assets to see what did best, and then going out and
buying those investments. If investing were that easy we'd all be filthy rich!
Rather, back-testing can really only show you what DIDN'T work well in
the past, so you can avoid repeating those mistakes, or at least be aware of
those risks. Back-testing can never prove something will work best going
forward. Also, back-testing will never show you extraordinary events, such
as civil unrest, unprecedented government intervention in the markets, inflation, etc.
These risks need to have some diversification applied as well and the
Forever Portfolio actually considers these risks that spreadsheet-only
portfolios do not.
This is why I find it so absurd when some analyst or pundit claims that an
asset like gold is "worthless" in an investing portfolio because of some
biased spreadsheet work they did. I wonder if these people have ever gotten
far enough away from their spreadsheets to see how the world markets
I have travelled to over 79 countries evaluating markets and
searching for investments and I can tell you that economies can move
quickly from good to bad and governments do stupid things all the time.
Having some portfolio insurance like gold around is a really splendid idea.
YES, the Forever Portfolio holds gold, silver and diversifies with other
assets likes stocks (mainly ETFs) , bonds and cash. But what in history
suggests this is not a good idea? Show me the flaw!
It doesn't matter what your chart is showed working best over a particular time period. The fact is that concentrating your bets is dangerous, and sometimes your stocks and bonds don't
payout on your timetable. This is just how life works. I am finding out more each day after
almost 80 years. Diversifying a little bit is prudent.
Using Charts Intelligently
Investing charts are one tool investors have, but I think they need to be
used within their limits. Charts can't predict the future, but maybe they can
guide you away from notably bad ideas. Likewise, they can also be useful to
test out theories for big flaws you might have missed. Even then, they need
to be used with some judgement about the unpredictable future and the idea
that history has many ugly details buried within it that aren't simply
explained in a chart of spreadsheet data. When looking at investing charts,
just keep in mind that pretty colors and compelling growth patterns may not
be enough to prevent disaster if you don't use the data intelligently.
Give us a call if your would like a review of your investments and plans.
Larry Unterbrink, Director of Research
Stetson Wealth Management
Fort Lauderdale, FL