Flying back. Leaving the gorgeous Colorado mountains behind with those challenging single and double black diamond runs. The glorious bowls of Vail and Copper. A lot of fun.

Seeing Peter and Audrey, our friends in Silverthorne, was a unique treat, as usual. Peter was a business acquaintance, then a client, now a dear friend. His effervescent and outgoing personality keeps you charmed as he takes you through his captivating stories.

Peter introduced us to a lady who needed my advice. She lost her husband, suddenly. He was a healthy, successful professional with an above average income. Problem: They did not plan for the sudden departure of the husband. The savings were not excessive and needed to be managed carefully. She is, after all, a healthy, pleasant, and dynamic woman. Many years ahead of her.

She chose investment managers whose approach is what I call “recipe management”. This is a way to manage money leaving the “choice” of the performance of the portfolio to the client. If the portfolio does not perform to expectations, oh well, the client has chosen the wrong recipe. It is time to select a new one. Grotesque!

This is how it works. They have a big book full of statistics. Each page shows the performance over 30-60 years of an investment style: income, value, international blend, growth and income, etc, etc. The money is put in mutual funds to reflect the allocation suggested by the recipe. The money is left in the funds, unmanaged. Peter’s friend chose a conservative recipe. Unfortunately she is not young enough to wait for the average results promised by the recipe.

Bonds and stock markets began acting poorly and the portfolio is not performing according to expectations. And it is not growing as promised by the “recipe” and by the numerous spreadsheets prepared by the financial consultants. Time to change recipe, it was suggested.

My advice? Beware of easy formulas. Money management is very hard work, 24 hours a day. Hands off approaches such as indexing, formulas, and recipes are bound to fail. Managing risk cannot be avoided.

(This Observations appeared in the 3-28-05 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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