Most Popular ArticlesMerriman’s Response
Director of Research, Merriman, Inc.
August 25, 2009
Utilities
Utilities are typically among the worst performing sectors coming out of a recession. Yet Mr. Considine nearly doubles his utility position relative to the market. This part of his portfolio has a high likelihood of underperforming the market once the economy stabilizes.
Inflation
We agree with Mr. Considine that it is prudent to structure portfolios to withstand inflation and that REITs can be used for this purpose. His statement that our recommended portfolio has a low exposure to REITs is puzzling, since our allocation, at 6 percent (for a 60 percent equity and 40 percent fixed income portfolio) is the same as his. Our bond portfolio also includes an allocation to TIPs, where the principal adjusts with inflation, and also to short term bonds, where the rates will increase in an inflationary environment as the bonds mature.
Bond allocation
Mr. Considine decided to change the bond allocation from our 40 percent to 30 percent. This makes the portfolio riskier. We help our clients determine their appropriate asset allocation and risk tolerance by focusing on the actual historic losses of portfolios with different amounts of bonds (which is much more concrete and easier for clients to understand than speaking about Beta). We discuss each client’s risk tolerance together with the desired returns necessary to reach the client’s investment goals when choosing an appropriate asset allocation.
Conclusion
Mr. Considine’s suggested portfolio has a large-cap tilt instead of our small-cap tilt. He makes several questionable bets and in so doing he arrives at a portfolio that is riskier than it needs to be.
Merriman articles on FundAdvice.com
We have written a variety of articles over the years describing our investment philosophy and favored portfolio structure. The following provides links to some of the pertinent articles:
- Paul Merriman describes our buy and hold strategy.
- Please note that our most recently published portfolios, which were last modified in May, are slightly different than the older recommended portfolio used by Mr. Considine.
- A quick summary of the underlying philosophy used when creating these portfolios is shown here.
- An article on inflation and investments is here.
- An article on bonds and inflation is here.
- Dennis Tilley writes about why we don’t favor commodities.
- Paul Merriman writes on asset allocation and risk tolerance
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