Our understanding of what exactly ESG investing is, and how successful it is at achieving various desired outcomes, is complicated by several conceptual drawbacks. In ESG Investing: Conceptual Issues, from the Winter 2020 issue of The Journal Wealth Management, Bradford Cornell (Anderson Graduate School of Management) asserts that the very nature of what constitutes an ESG investment is unclear–and that there are no standard measures for evaluating how effective each one is at achieving its desired social outcome. Additionally, while billions of dollars are pouring into ESG investments, the popularity of “green” equities means lower returns, though in some cases upside can be mined by actively “greening” and selling off targeted investments. Practitioners who advocate abandoning the usual imperative to maximize shareholder value in favor of a more holistic stakeholder model are asking corporations to shoulder the burden of solving social problems. Public policy, Cornell says, should be left to democratically elected leaders, not corporate executives. TOPICS: ESG investing, portfolio construction, wealth management
{"title":"Practical Applications of ESG Investing: Conceptual Issues","authors":"Bradford Cornell","doi":"10.3905/pa.8.4.423","DOIUrl":"https://doi.org/10.3905/pa.8.4.423","url":null,"abstract":"Our understanding of what exactly ESG investing is, and how successful it is at achieving various desired outcomes, is complicated by several conceptual drawbacks. In ESG Investing: Conceptual Issues, from the Winter 2020 issue of The Journal Wealth Management, Bradford Cornell (Anderson Graduate School of Management) asserts that the very nature of what constitutes an ESG investment is unclear–and that there are no standard measures for evaluating how effective each one is at achieving its desired social outcome. Additionally, while billions of dollars are pouring into ESG investments, the popularity of “green” equities means lower returns, though in some cases upside can be mined by actively “greening” and selling off targeted investments. Practitioners who advocate abandoning the usual imperative to maximize shareholder value in favor of a more holistic stakeholder model are asking corporations to shoulder the burden of solving social problems. Public policy, Cornell says, should be left to democratically elected leaders, not corporate executives. TOPICS: ESG investing, portfolio construction, wealth management","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-02-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115705469","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide, from the Summer 2020 issue of The Journal of Wealth Management, author Franklin J. Parker (of Bright Wealth Management in Dallas, TX) presents a goals-based system for helping clients allocate assets. Many financial advisors make asset allocation recommendations based on mean–variance analysis, which seeks to determine how much volatility clients are willing to tolerate in exchange for higher returns. But in the author’s approach, advisors ask clients to rank their financial goals in order of importance and value them relative to one another. Advisors then can recommend a wealth allocation to each goal and a different investment allocation within each goal. The aim is to maximize the probability of achieving the given goals, based on the available funds, funding requirements, time horizons, and value of the goals relative to one another. Parker says this approach allows for a wider range of investment options, since investors with aspirational goals (financial dreams that will not harm clients if not achieved) can invest small amounts in riskier things, such as venture capital, which often fail but have the potential to reap huge profits. This improves investors’ chances of reaching all their goals, from high-priority to aspirational. TOPICS: Wealth management, performance measurement
{"title":"Practical Applications of Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide","authors":"F. Parker","doi":"10.3905/pa.8.4.422","DOIUrl":"https://doi.org/10.3905/pa.8.4.422","url":null,"abstract":"In Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide, from the Summer 2020 issue of The Journal of Wealth Management, author Franklin J. Parker (of Bright Wealth Management in Dallas, TX) presents a goals-based system for helping clients allocate assets. Many financial advisors make asset allocation recommendations based on mean–variance analysis, which seeks to determine how much volatility clients are willing to tolerate in exchange for higher returns. But in the author’s approach, advisors ask clients to rank their financial goals in order of importance and value them relative to one another. Advisors then can recommend a wealth allocation to each goal and a different investment allocation within each goal. The aim is to maximize the probability of achieving the given goals, based on the available funds, funding requirements, time horizons, and value of the goals relative to one another. Parker says this approach allows for a wider range of investment options, since investors with aspirational goals (financial dreams that will not harm clients if not achieved) can invest small amounts in riskier things, such as venture capital, which often fail but have the potential to reap huge profits. This improves investors’ chances of reaching all their goals, from high-priority to aspirational. TOPICS: Wealth management, performance measurement","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-02-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130121784","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Psychological Antecedents of Financial Risk Tolerance, from the Fall 2020 issue of The Journal of Wealth Management, authors Heena Thanki, Anushree Karani (both of Shri Jairambhi Patel Institute of Business Management and Computer Applications in Gujarat, India), and Anil Kumar Goyal (of Rukmini Devi Institute of Advanced Studies in New Delhi, India) analyze how psychological and behavioral factors influence financial risk tolerance (FRT) among investors. Past research has focused on how investors’ socioeconomic status, demographic characteristics, and personality types influence their FRT. But the authors say such studies may be of limited value since they do not consider financial satisfaction, financial anxiety, self-esteem, sensation-seeking behavior, and obsession with money. The authors surveyed nearly 400 investors to assess the correlations between these factors and FRT. They found that people who are more satisfied with their financial situation tend to have lower FRT. People who have higher self-esteem or engage in sensation-seeking behavior, and those with Type A personalities, tend to have higher FRT. Obsession with money shows only a weak correlation with FRT. The authors conclude that policymakers and financial advisors should consider such psychological and behavioral factors when deciding what risk level is suitable for investors. TOPIC: Wealth management
{"title":"Practical Applications of Psychological Antecedents of Financial Risk Tolerance","authors":"H. Thanki, Anushree Karani, Anil Goyal","doi":"10.3905/pa.8.4.420","DOIUrl":"https://doi.org/10.3905/pa.8.4.420","url":null,"abstract":"In Psychological Antecedents of Financial Risk Tolerance, from the Fall 2020 issue of The Journal of Wealth Management, authors Heena Thanki, Anushree Karani (both of Shri Jairambhi Patel Institute of Business Management and Computer Applications in Gujarat, India), and Anil Kumar Goyal (of Rukmini Devi Institute of Advanced Studies in New Delhi, India) analyze how psychological and behavioral factors influence financial risk tolerance (FRT) among investors. Past research has focused on how investors’ socioeconomic status, demographic characteristics, and personality types influence their FRT. But the authors say such studies may be of limited value since they do not consider financial satisfaction, financial anxiety, self-esteem, sensation-seeking behavior, and obsession with money. The authors surveyed nearly 400 investors to assess the correlations between these factors and FRT. They found that people who are more satisfied with their financial situation tend to have lower FRT. People who have higher self-esteem or engage in sensation-seeking behavior, and those with Type A personalities, tend to have higher FRT. Obsession with money shows only a weak correlation with FRT. The authors conclude that policymakers and financial advisors should consider such psychological and behavioral factors when deciding what risk level is suitable for investors. TOPIC: Wealth management","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-02-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116829980","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Returns to Option Strategies Following Class Action Lawsuits, from the December 2019 issue of The Journal of Investing, authors Dean Diavatopoulos (Seattle University), Andy Fodor (Ohio University), and Kevin Krieger (University of West Florida) propose that markets underappreciate the dichotomous nature of resolutions to class action lawsuits. The authors explore explicit trading in option positions to determine the possibility of capitalizing on the volatility framework caused by class action lawsuits. They find consistent, positive, and frequently significant returns from holding straddle and strangle option positions over 6-month to 1.5-year horizons after a firm is targeted in a class action. Finally, the authors confirm that their results are not driven by positions formed before large market swings but by the nature of class actions. TOPICS: Legal/regulatory/public policy, volatility measures, options
{"title":"Practical Applications of Returns to Option Strategies Following Class Action Lawsuits","authors":"D. Diavatopoulos, Andy Fodor, Kevin Krieger","doi":"10.3905/PA.9.1.433","DOIUrl":"https://doi.org/10.3905/PA.9.1.433","url":null,"abstract":"In Returns to Option Strategies Following Class Action Lawsuits, from the December 2019 issue of The Journal of Investing, authors Dean Diavatopoulos (Seattle University), Andy Fodor (Ohio University), and Kevin Krieger (University of West Florida) propose that markets underappreciate the dichotomous nature of resolutions to class action lawsuits. The authors explore explicit trading in option positions to determine the possibility of capitalizing on the volatility framework caused by class action lawsuits. They find consistent, positive, and frequently significant returns from holding straddle and strangle option positions over 6-month to 1.5-year horizons after a firm is targeted in a class action. Finally, the authors confirm that their results are not driven by positions formed before large market swings but by the nature of class actions. TOPICS: Legal/regulatory/public policy, volatility measures, options","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123746100","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Information Leakage in Energy Derivatives around News Announcements, in the Summer 2020 issue of The Journal of Derivatives, authors Marc Bohmann and Vinay Patel (both of the University of Technology Sydney) investigate information leakage in commodity option markets, by taking a close look at abnormal changes in implied volatility spreads and skew that precede price-sensitive news releases. The growth of electronic trading platforms has made it easier to trade commodities, leading to an increase in futures and associated option contracts. These options in turn serve as a venue for information leakage. Focusing on crude oil and natural gas futures, the most highly traded markets on the Chicago Mercantile Exchange (CME), the authors examine the implied volatility (IV) spread and skew. They show an increase in crude oil markets’ IV spread within the five days prior to positive and market-significant news releases, and in their IV skew within the days preceding negative news releases. They also find a statistically significant relationship between these abnormal pre-announcement IV measures and abnormal returns on the date of the official announcement. They report similar results in natural gas markets. These findings are relevant to regulators, investors, and firms in these energy markets, for example, in evaluating whether financial markets work properly. TOPIC: Options
{"title":"Practical Applications of Information Leakage in Energy Derivatives around News Announcements","authors":"Marc J. M. Bohmann, Vinay Patel","doi":"10.3905/PA.9.1.434","DOIUrl":"https://doi.org/10.3905/PA.9.1.434","url":null,"abstract":"In Information Leakage in Energy Derivatives around News Announcements, in the Summer 2020 issue of The Journal of Derivatives, authors Marc Bohmann and Vinay Patel (both of the University of Technology Sydney) investigate information leakage in commodity option markets, by taking a close look at abnormal changes in implied volatility spreads and skew that precede price-sensitive news releases. The growth of electronic trading platforms has made it easier to trade commodities, leading to an increase in futures and associated option contracts. These options in turn serve as a venue for information leakage. Focusing on crude oil and natural gas futures, the most highly traded markets on the Chicago Mercantile Exchange (CME), the authors examine the implied volatility (IV) spread and skew. They show an increase in crude oil markets’ IV spread within the five days prior to positive and market-significant news releases, and in their IV skew within the days preceding negative news releases. They also find a statistically significant relationship between these abnormal pre-announcement IV measures and abnormal returns on the date of the official announcement. They report similar results in natural gas markets. These findings are relevant to regulators, investors, and firms in these energy markets, for example, in evaluating whether financial markets work properly. TOPIC: Options","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116542927","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In E, S, or G: Analyzing Global ESG Performance, in the Winter 2020 edition of The Journal of Impact and ESG Investing, Robert Bush, Jason Chen, and Eric Legunn, all of DWS Research Institute, investigate ESG (environmental, social, governance) investing within and across four markets: the United States; Europe, Australasia, and the Far East (EAFE); emerging markets (EMs); and Canada. They apply a three-step framework to assess the risk and return with ESG investing. First, they use linear regressions to quantify any ESG-related excess returns over regional benchmarks. Next, they apply a multifactor model to assess whether any identified alpha comes from value or size premia. Finally, in regions where ESG investing seems to outperform benchmarks, the authors parse the specific pillar’s (i.e., “E,” “S,” or “G”) contribution to that alpha. They find statistically significant ESG-related alpha in EMs and Canada, largely unrelated to size and value factors. They note the pillar-sensitivity of alpha varies across regions: For example, the social pillar is a primary determinant in the United States, EAFE, and Canada. They also observe that the governance pillar, although historically most important to alpha generation in EMs, is declining in significance relative to the social and environmental pillars. TOPICS: ESG investing, portfolio theory, equity portfolio management, behavioral financial, theory, in portfolio management
{"title":"Practical Applications of E, S, or G: Analyzing Global ESG Performance","authors":"Bush Robert, Jason Chen, Eric Legunn","doi":"10.3905/PA.9.1.435","DOIUrl":"https://doi.org/10.3905/PA.9.1.435","url":null,"abstract":"In E, S, or G: Analyzing Global ESG Performance, in the Winter 2020 edition of The Journal of Impact and ESG Investing, Robert Bush, Jason Chen, and Eric Legunn, all of DWS Research Institute, investigate ESG (environmental, social, governance) investing within and across four markets: the United States; Europe, Australasia, and the Far East (EAFE); emerging markets (EMs); and Canada. They apply a three-step framework to assess the risk and return with ESG investing. First, they use linear regressions to quantify any ESG-related excess returns over regional benchmarks. Next, they apply a multifactor model to assess whether any identified alpha comes from value or size premia. Finally, in regions where ESG investing seems to outperform benchmarks, the authors parse the specific pillar’s (i.e., “E,” “S,” or “G”) contribution to that alpha. They find statistically significant ESG-related alpha in EMs and Canada, largely unrelated to size and value factors. They note the pillar-sensitivity of alpha varies across regions: For example, the social pillar is a primary determinant in the United States, EAFE, and Canada. They also observe that the governance pillar, although historically most important to alpha generation in EMs, is declining in significance relative to the social and environmental pillars. TOPICS: ESG investing, portfolio theory, equity portfolio management, behavioral financial, theory, in portfolio management","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121996792","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Small-Cap Allocations: Timing the Entry, in the September 2020 edition of The Journal of Portfolio Management, Eric Sorensen and Sebastian Lancetti, both of PanAgora Asset Management, assert that economic conditions now may favor a small-stock premium. They analyze the performance of small-cap stocks since 1965 and identify connections between small-cap stocks and moves in interest rates, market volatility, and the broader economy. They speculate that although large-cap stocks have outperformed small-caps during the past decade, conditions are ripe for small-caps to reassert themselves. The key factors include: 1) the very low level of long-term interest rates and the potential for interest rates to rise; 2) the anticipated economic recovery following the Covid-induced recession; and 3) the current relatively cheap valuations of small-cap stocks. TOPICS: Portfolio theory, portfolio construction, wealth management
{"title":"Practical Applications of Small-Cap Allocations: Timing the Entry","authors":"E. Sorensen, Sebastian Lancetti","doi":"10.3905/PA.9.1.432","DOIUrl":"https://doi.org/10.3905/PA.9.1.432","url":null,"abstract":"In Small-Cap Allocations: Timing the Entry, in the September 2020 edition of The Journal of Portfolio Management, Eric Sorensen and Sebastian Lancetti, both of PanAgora Asset Management, assert that economic conditions now may favor a small-stock premium. They analyze the performance of small-cap stocks since 1965 and identify connections between small-cap stocks and moves in interest rates, market volatility, and the broader economy. They speculate that although large-cap stocks have outperformed small-caps during the past decade, conditions are ripe for small-caps to reassert themselves. The key factors include: 1) the very low level of long-term interest rates and the potential for interest rates to rise; 2) the anticipated economic recovery following the Covid-induced recession; and 3) the current relatively cheap valuations of small-cap stocks. TOPICS: Portfolio theory, portfolio construction, wealth management","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114469006","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In How Long Is Long Enough? from the Fall 2020 issue of The Journal of Retirement, authors Gerald W. Buetow (of BFRC Services) and Bernd Hanke (of Global Systematic Investors) introduce an easy-to-use system to help defined-contribution plan (DCP) fiduciaries decide when to replace underperforming actively managed mutual funds. Many active funds underperform their benchmark indexes, especially net of fees. This raises two questions: How long should fiduciaries wait to replace an underperforming fund, and should they replace it with another active fund or a lower-cost passive fund? Buetow and Hanke examine historical performance data to calculate the differences between two investment strategies: one that keeps all assets in active funds, and another that switches assets from underperforming active funds to passive funds. They find that switching to passive funds after three years of underperformance generates higher long-term returns than leaving assets in active funds, waiting five years to make the switch, or switching only if underperformance is statistically significant (5% or more). Therefore, the authors say, DCP fiduciaries can better serve plan participants by monitoring active funds and replacing underperformers with passive funds in a timely manner. TOPICS: Manager selection, mutual fund performance, passive strategies, retirement, wealth management
{"title":"Practical Applications of How Long Is Long Enough?","authors":"G. Buetow, Bernd Hanke","doi":"10.3905/PA.8.2.425","DOIUrl":"https://doi.org/10.3905/PA.8.2.425","url":null,"abstract":"In How Long Is Long Enough? from the Fall 2020 issue of The Journal of Retirement, authors Gerald W. Buetow (of BFRC Services) and Bernd Hanke (of Global Systematic Investors) introduce an easy-to-use system to help defined-contribution plan (DCP) fiduciaries decide when to replace underperforming actively managed mutual funds. Many active funds underperform their benchmark indexes, especially net of fees. This raises two questions: How long should fiduciaries wait to replace an underperforming fund, and should they replace it with another active fund or a lower-cost passive fund? Buetow and Hanke examine historical performance data to calculate the differences between two investment strategies: one that keeps all assets in active funds, and another that switches assets from underperforming active funds to passive funds. They find that switching to passive funds after three years of underperformance generates higher long-term returns than leaving assets in active funds, waiting five years to make the switch, or switching only if underperformance is statistically significant (5% or more). Therefore, the authors say, DCP fiduciaries can better serve plan participants by monitoring active funds and replacing underperformers with passive funds in a timely manner. TOPICS: Manager selection, mutual fund performance, passive strategies, retirement, wealth management","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126166953","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Who Is Better at Investment Decisions: Man or Machine?, from the Winter 2020 issue of The Journal of Wealth Management, J. P. Harrison and S. Samaddar (both of Georgia State University) examine whether robo-advisers construct better-performing portfolios than human advisers. Using a simulated contest between a top-rated robo-adviser and prominent human advisers, Harrison and Samaddar observed that the human advisers produced higher returns (even after fees) and advice that was tailored to the ages and investment amounts of hypothetical clients. By contrast, while the robo-adviser tailored advice based on the hypothetical investors’ self-declared risk tolerances, it was insensitive to age and investment amount. The findings challenge the conventional wisdom that robo-advisers can serve customers better and at lower cost than their human counterparts. TOPICS: Manager selection, portfolio construction, portfolio theory, wealth management
《谁更擅长投资决策:人还是机器?》乔治亚州立大学的j·p·哈里森(J. P. Harrison)和S.萨马达尔(S. Samaddar)在《财富管理杂志》(the Journal of Wealth Management) 2020年冬季号上研究了机器人顾问是否比人类顾问构建了更好的投资组合。哈里森和萨马达尔通过模拟顶级机器人顾问和著名人类顾问之间的竞争，观察到人类顾问产生了更高的回报(即使扣除费用)，并根据假想客户的年龄和投资金额量身定制了建议。相比之下，虽然机器人顾问根据假设投资者自我宣称的风险承受能力量身定制建议，但它对年龄和投资金额不敏感。这一发现挑战了传统观点，即机器人顾问可以比人类顾问更好、成本更低地为客户服务。主题:经理选择、投资组合构建、投资组合理论、财富管理
{"title":"Practical Applications of Who Is Better at Investment Decisions: Man or Machine?","authors":"J. P. Harrison, S. Samaddar","doi":"10.3905/PA.8.2.427","DOIUrl":"https://doi.org/10.3905/PA.8.2.427","url":null,"abstract":"In Who Is Better at Investment Decisions: Man or Machine?, from the Winter 2020 issue of The Journal of Wealth Management, J. P. Harrison and S. Samaddar (both of Georgia State University) examine whether robo-advisers construct better-performing portfolios than human advisers. Using a simulated contest between a top-rated robo-adviser and prominent human advisers, Harrison and Samaddar observed that the human advisers produced higher returns (even after fees) and advice that was tailored to the ages and investment amounts of hypothetical clients. By contrast, while the robo-adviser tailored advice based on the hypothetical investors’ self-declared risk tolerances, it was insensitive to age and investment amount. The findings challenge the conventional wisdom that robo-advisers can serve customers better and at lower cost than their human counterparts. TOPICS: Manager selection, portfolio construction, portfolio theory, wealth management","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125775827","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide, from the Summer 2020 issue of The Journal of Wealth Management, author Franklin J. Parker (of Bright Wealth Management in Dallas, TX) presents a goals-based system for helping clients allocate assets. Many financial advisors make asset allocation recommendations based on mean–variance analysis, which seeks to determine how much volatility clients are willing to tolerate in exchange for higher returns. But in the author’s approach, advisors ask clients to rank their financial goals in order of importance and value them relative to one another. Advisors then can recommend a wealth allocation to each goal and a different investment allocation within each goal. The aim is to maximize the probability of achieving the given goals, based on the available funds, funding requirements, time horizons, and value of the goals relative to one another. Parker says this approach allows for a wider range of investment options, since investors with aspirational goals (financial dreams that will not harm clients if not achieved) can invest small amounts in riskier things, such as venture capital, which often fail but have the potential to reap huge profits. This improves investors’ chances of reaching all their goals, from high-priority to aspirational. TOPICS: Wealth management, performance measurement
{"title":"Practical Applications of Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide","authors":"F. Parker","doi":"10.3905/PA.8.2.422","DOIUrl":"https://doi.org/10.3905/PA.8.2.422","url":null,"abstract":"In Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide, from the Summer 2020 issue of The Journal of Wealth Management, author Franklin J. Parker (of Bright Wealth Management in Dallas, TX) presents a goals-based system for helping clients allocate assets. Many financial advisors make asset allocation recommendations based on mean–variance analysis, which seeks to determine how much volatility clients are willing to tolerate in exchange for higher returns. But in the author’s approach, advisors ask clients to rank their financial goals in order of importance and value them relative to one another. Advisors then can recommend a wealth allocation to each goal and a different investment allocation within each goal. The aim is to maximize the probability of achieving the given goals, based on the available funds, funding requirements, time horizons, and value of the goals relative to one another. Parker says this approach allows for a wider range of investment options, since investors with aspirational goals (financial dreams that will not harm clients if not achieved) can invest small amounts in riskier things, such as venture capital, which often fail but have the potential to reap huge profits. This improves investors’ chances of reaching all their goals, from high-priority to aspirational. TOPICS: Wealth management, performance measurement","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133146587","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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