When an investor brings his portfolio to a new money manager or broker for advice, he naturally wants to know: what would you do differently than the guy who’s currently managing my money? The imperative to answer this question has given rise to an arms race in portfolio analysis technology, in order to enable mangers and brokers to deploy beautiful pie charts about global diversification, tactical weightings, asset-class style boxes, and so on, which will show why the prospective client’s portfolio is lacking in some “crucial” respect that, happily, the new manager or broker can fix.
Here’s an example from a piece of bank research recently sent to me by a bond broker.
I’m not sure who at the bank is responsible for such beautiful elegance, but it’s worthy of the Yale statistician Edward Tufte, who is legendary in the graphic design world for crafting displays of “beautiful evidence.”
This tactical asset allocation chart is typically used to show why a customer’s portfolio ought to have a matching, color-coded array of funds. So long as all this portfolio complexity isn’t used to hide excessive fees, there’s nothing particularly bad about this approach to investing. Neither, however, is there anything particularly good.
For most investors, it’s difficult to improve upon a simple portfolio of individual stocks listed on the NYSE and NASDAQ. One reason why this is difficult to improve upon, is that you often end up getting basically that even when you think you aren’t. Consider, for example, the Vanguard Total World Stock Index Fund (VTWSX). This fund, which tracks a total world stock index, does give you exposure to world stocks, but it’s still a lot more focused on the U.S. than you might think. Look at the top fifty holding of the fund:
The truth behind all the beautiful pie charts is often quite simple, and this simplicity has a beauty of its own.