Saturday, January 03, 2009

The experts can make airplanes stay in the air, but ...

In today's WSJ, columnist Jason Zweig writes "Investing Experts Urge 'Do as I Say, Not as I do' ...

I once asked Harry Markowitz, who shared the Nobel Prize in economics in 1990 for his mathematical explorations of the relationship between risk and return, how he diversified his portfolio.

Dr. Markowitz first got to choose how to divide his assets between a stock fund and a bond fund not long after publishing his pioneering article "Portfolio Selection" in the prestigious Journal of Finance. Following his own breakthroughs, he should have made intricate calculations, based on historical averages, to find the optimal trade-off between risk and return. But, Dr. Markowitz told me, that isn't what he did: "Instead, I visualized my grief if the stock market went way up and I wasn't in it -- or if it went way down and I was completely in it. My intention was to minimize my future regret."

Dr. Markowitz paused, then added wryly: "So I split my contributions 50/50 between bonds and equities."

He is just the tip of the iceberg.

I love this story because many (many) years ago when I signed up for my university's 403b plan (and had no clue), I filled out the standard forms and when it came to the boxes on allocating monthly contributions, the woman behind the desk casually mentioned that most people just choose 50/50.