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I love this note. I think this speaks directly to some tailwinds driving the popularity of cap-weighted index funds. These products are easy for clients to understand. Cheap. Tax-efficient. Perhaps most importantly (to borrow this framework), the speakers always sound the way the client expects them to sound. Tracking error is hugely problematic for many clients and the less “familiar” the strategy (ahem alts) the more problematic “unexpected” results become for the FA/client relationship and indeed the client’s commitment to the plan. As usual there is no Answer for this but this is a heckuva good suggestion for a Process.
If you can’t help a client overcome his/her own particular behavioral vulnerabilities, it doesn’t matter how much alpha you can generate. In my experience, this is mostly achieved through the planning or pre-investment part of the process. Making sure the client doesn’t have too much of their net worth on the table when risk is expensive. Making sure that the client understands how much downside they can handle before it starts to impact their lifestyle & goals. Getting clear and rational about the real world objectives for the wealth we hope to create so that we can focus on outcomes rather than purely on relative returns. These are better starting places for addressing the CAF issue than portfolio construction.
Just joined ET today. I was drawn in by the home entertainment dilemma you posed. I was getting ready to share what I think is a really good trade-off on cost, quality of sound, size and aesthetics. My mistake! Thanks for the advise to follow my own advise. Honestly, I have found that hard to do as the desire to optimize combined with fear of “what worked before (backtest) won’t work going forward”. The good news is that I am getting better at following my own advise as time goes by. Some people call that discipline, I think there is experience/wisdom in the mix.
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