Here is the response from Dave Loeper:

Let us deal with these questions one at a time. Art Patten asked whether the sophisticated portfolio approach was standard practice among planners and if that could be documented as such. There is a simple answer to that and it is NO. Not all advisors have succumbed to the sales spin, and some remain skeptical of product purveyors pitches. I’d like to point out though that the original article was not meant to represent “standard practice” across all advisors. It was merely representative of the portfolio decisions I have debated over the last decade with numerous advisors when I attempted to warn them about the non-systematic risk they were constructing in their portfolios.

As for Mr. Patten’s argument that I am comparing apples to oranges, because apparently he doesn’t put REITS, High Yield, and Hedge funds into the low risk diversifier category as they are often sold, I say fine, pick a better benchmark because of the exposure to risky assets. Our 80% equity allocation model (known as balanced growth) would have been down 29% over the same period the “sophisticated” portfolio was down 40%. To make THAT an “apples-to-apples” comparison, REIT mortgages be classified as equity, as would high yield bonds. Diversified hedge funds would also have equity risks and returns, as would  hedged equity hedge funds. Personally, I would treat all of these assets to be more equity-like, to more accurately model the nature of these assets. The bets on them still had them contributing to a 40% loss versus a 29% loss in a boring portfolio with 80% equity exposure.

Finally, his assertion that the more sophisticated portfolio would produce lower volatility or higher return is undocumented. Produce the evidence. Figure 1 shows an eighty year risk-versus-return chart for our model allocations that we have used for a decade. Please provide the data to support your claim.

Figure 1- Stock, Bonds and Cash, Decade old allocation models:

Next, in response to Craig, 3% cash isn’t going to make up for a 20% additional decline. Compare the sophisticated allocation to our balanced growth model allocation that is 80% equity. The “sophisticated” allocation still declined by an additional 11%, without comparing apples to concrete. I’m sure that few advisors ever pitch hedged equities, or “diversified” hedge funds, high yield bonds, and mortgage REITS as anything other than equities…to make this an apples-to-apples in comparison.

Finally, to the anonymous writer questioning what the cushion of out-performance would have been since 1/2002, I suggest he or she do the homework and calculate it. I can say that over that period, the cushion would have needed to have been about 4% A YEAR superior performance in the 2002-2007 time frame to make up for the non-systematic risk the “sophisticated” allocation experienced exposed over the last year.

David B. Loeper, CIMA®, CIMC®
President/CEO
Financeware, Inc. DBA Wealthcare Capital Management
Richmond, VA

A popular industry speaker and writer, David B. Loeper is the CEO and founder of Financeware, Inc. in Richmond, VA,. He is author of the top selling book Stop the 401(k) Rip-off!, three other books being released in 2009 by John Wiley & Sons (Stop the Retirement Rip-off, Stop the Investing Rip-off and The Four Pillars of Retirement Plans) and numerous whitepapers. Hehas appeared on CNBC and Bloomberg TV, served on the Investment Advisory Committee of the $30 billion Virginia Retirement System, and was chairman of the Advisory Council for the Investment Management Consultants Association (IMCA). Before founding Financeware in 1999 he was Managing Director of Strategic Planning for Wheat First Union. He earned the CIMA® designation (Certified Investment Management Analyst) from Wharton Business School in 1990 in conjunction with IMCA.

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