Corrupted Investment Solutions

Jahnke, William
October 2004
Journal of Financial Planning;Oct2004, Vol. 17 Issue 10, p26
Academic Journal
This article discusses various strategies and trends in the field of investment portfolio management in the U.S. as of October 1, 2004. For all the hoopla in the profession about managing investment portfolios to meet client objectives, this is one of the weakest areas in practice. Finding the best investment solution involves a complex union of forecasting, modeling, and processing. Most financial planners have been taught that the best forecasts for the stock and bond markets are produced from historical returns. What most financial planners do not know is that the theoretical foundation for extrapolating historical returns has been discredited in the highest circles of academic finance. It is not surprising that financial planners bought into using historical returns as the basis for asset-class return forecasts, it is easy and appears scientific. The solution to matching an investment solution to multi-period consumption goals needs to consider the client's multi-period consumption goals, savings, current investment holdings, other sources of income, taxes, the value added from security selection and market timing, and expenses. The most attractive investment solution is the one that produces the most attractive distribution of funding ratios.


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