History is a vast early warning system.
NORMAN COUSINS, (1915-1990) American essayist and publisher.
Investors can be excused for thinking that the concept of portfolio management is a modern day creation. After all, it is commonly referred to as Modern Portfolio Theory (MPT). In addition, the Nobel prize in Economics has been handed out. Today’s professionals and investors have a large basket of MPT tools at their disposal. Tools to analyze, select, benchmark, monitor, tweak and attend to every conceivable portfolio nuance. Fresh takes spring up virtually every day.
It is quite easy to get lost in the MPT forest. The tool chest is so vast that most investors barely scratch the surface of MPT. In reality, MPT is not modern at all and nobody need get lost in it. Portfolio theory, also known as wealth management, has a long and rich history, spanning
Ageless wisdom: The following quotation ought to interest every investor:
Divide your fortune into four equal parts: stocks, real estate, bonds and gold coins. Be prepared to lose on one of them most of he time. During inflation, you will lose on bonds and win on gold and real estate. During deflation, you lose on real estate and win on bonds. While your stocks will see you through both periods, though in a mixed fashion. Whenever performance differences cause a major imbalance, re-balance your fortunes back to the four equal parts.
It reads like something published by a modern day scholar of MPT. In fact, it is attributed to Jacob Fugger the Rich, (1459 — 1525), a German banker. Jacob captured the essence of managing wealth while at the helm of his family’s nest egg. His ageless wisdom is the summary of portfolio management — both for then and now. I view it as fundamentals of what every investor ought to follow. A simple, yet powerful, common sense approach to guiding the nest egg over the long haul.
What can we gleam from Jacob’s wisdom? Here are my top four takeaways:
• Simplicity — His approach is the spirit of classic simplicity. He minimized risks. He had a diversified asset mix. He monitored results. He tweaked the mix. He had a plan.
• Discipline — His discipline served him well. He anticipated losses. He set personal targets. A disciplined investor makes better decisions. The situation is the same today.
• Process — His process was logical and void of emotional attachment. Especially in portfolio re-balancing, which often involves selling some winners and buying some laggards.
• Timeless — His investment insights have weathered the telling tests of time. Something all investors aspire to achieve. Do try your best not to reinvent the proven wheels of investing.
Jacob’s wisdom deserves attention from every investor. His prudent perspective serves as well today as it did five centuries ago. The good news is that many have contributed to improving MPT value so that it can be implemented more easily via computers. Always a welcome sign. Investors may have to dig deeper today to design and follow a suitable asset mix. Perhaps, equal parts are not always best and there are more asset class choices. Today’s vast MPT tools make it easier to deal with portfolios, as compared to Jacob’s day. The pillars of portfolio management contain plenty of powerful, classic, common sense.
Periodically revisit Jacob’s quotation and how to best apply it to your situation. I see it as a vivid reminder of the inner workings of a powerful, yet concise, plan of action. A simple investment blueprint for the long haul, while co-existing with a vast array of bulls and bears.
History repeats, consistency delivers!