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Friday, March 26, 2010

SOUND INVESTING: Belief Systems Do Not Equal Fact

Sound Investing with Jason Lampa, MBA

Conventional wisdom says that it is almost impossible to consistently outperform the respective stock market indices on a year by year basis. During the past 25 years, investment professionals from Wall Street to Hollywood have preached the same mantra to investors: "Investment performance is driven by asset allocation, not stock selection."

The basis of their argument stems from one research study, published in the summer of 1986 by Gary Brinson, Randolph Hood and Gilbert Beebower. The study said that more than 90% of the variance in portfolio returns could be explained by asset allocation to stocks, bonds and T-bills. The study took approximately 90 pension funds and calculated how closely these well-diversified funds return would relate to similar market indices. Being that a market index is built on the same premise as the pension, to eliminate market risk, it should not have been a surprise when the correlation of these pension funds was very high to that of their respective market indices.

The popularity of this study spread like the chicken pox at a nursery school, advocated most strongly by the likes of Vanguard and other indexing investment shops. These findings turned into a belief system that has perverted the average investors experience for the past 25 years. Folks, it is time that we start to evaluate what is under the hood.

Just because there is belief system in place for a long period of time doesn't mean that this belief is actually correct. In fact, it seems as though the belief system of simple strategic asset allocation is the main ingredient in determining investment returns has began to unravel during the past decade. With most investors either flat, slightly down or a little up in their retirement accounts during the past 10 years, investors as well their financial advisors are beginning to look at new belief systems, challenging the current paradigm that has held the average investor down so very long.

The key to achieving success in the investment universe, in my opinion, is utilizing a combination strategy, otherwise known as Core-Satellite. Using a mix of 70% core positions and 30% satellite positions, I will show how this works.

The core holdings are made up of Exchange Traded Funds which provide investors an inexpensive way to replicate the returns of market indices. Core positions would include buying a basket of ETFs investing in Large Cap, multi-national companies, corporate bonds and large-cap International companies. In addition, investing in small-cap ETFs and mid-cap ETF can be included as well.

The satellite positions though making up only 30% of the portfolio is made up of a select group of investment managers who have consistently provided returns above that of their peers. Of equal importance, is finding managers who deliver returns that do not move in the same direction during a particular market condition. This is where it is important to find a financial advisor who can navigate the satellite portion of your portfolio, finding managers that invest in natural resources, specific corporate events, real estate, life settlements, managed futures and other exotic strategies whose performance has little to do with the daily moves in the stock market.

The action plan for this month is to go to your financial advisor or find a financial advisor and ask them about their strategy for the satellite portion of your portfolio. In addition, I recommend that you go on the internet and look up information on strategic vs. tactical allocation as well as Core-Satellite portfolios. If you have any additional questions please feel free to email me at

For more information, please visit Jason's TNNW Bio.


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The Emergence of The Relationship Economy
The Emergence of the Relationship Economy features TNNWC Founder, Adam J. Kovitz as a contributing author and contains some of his early work on The Laws of Relationship Capital. The book is available in hardcopy and e-book formats. With a forward written by Doc Searls (of Cluetrain Manifesto fame), it is considered a "must read" for anyone responsible for the strategic direction of their business. If you would like to purchase your own copy, please click the image above.


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