I usually like Mark Cuban’s articles. He’s a bright guy, a real maverick, an innovator and a good writer. But this week, he wrote an article about the Asset Allocation Lie which was probably his worst work I’ve ever read. Not only do I disagree with his opinion, but I’m concerned that his advice is actually dangerous and gullible readers will lose money as a result.
His main premise is that as Wall Street spews out more and more new investment options (true, many of them useless and high-fee), ETFs (true, many are redundant or don’t do what novice investors expect them to like leveraged ETF decay), REITs (I’m not sure why he picked REITs, there hasn’t exactly been a massive burst of new REIT filings, but it just sounds scary to throw another 4-letter acronym at people?), the advice that investors should diversify into multiple holdings is wrong – because they can’t possibly understand multiple investments. While various asset classes and high-fee investments may have valid critiques, it doesn’t mean investors should throw their arms up and not diversify.
I think this is downright dumb on multiple levels. First of all, what DO we all know? We all know our own company. So, is his premise that we should primarily invest in our own company stock because that’s what we know best? He doesn’t say it, but his premise is such. I would argue you shouldn’t invest in your own company at all! It’s double jeopardy. You’re already getting a paycheck there, you may have a pension tied up with the future survival of your firm, you may have options, a bonus that’s dependent on performance and other facets of your life. Why would you stack another layer of risk on top of it by investing in shares of your own company? Let’s face it, many people are cheerleaders for their own company because they have an emotional attachment to it. But the Efficient Market posits that you’re no better informed on your company’s prospects than the next guy. And if you actually are? Well, that’s insider trading…
Next, he claims someone can’t possibly understand various mutual funds or ETFs and shouldn’t invest in commodities. OK, so understanding a mutual fund or basic ETF is as simple as looking at its top holdings. See what you’re owning. How’s the past performance? What are the fees? Are there any abnormal tax implications? Funds are by their very nature less volatile than an individual stock may be in the future. Think Enron. Think Lucent. Think the biggest company in the world at one time – GE! Top companies can lose over 50% of their value in the blink of an eye. People that don’t understand investments amaze me. They’ll memorize how many touchdowns or RBIs their favorite player has but they won’t learn about investing. What’s more important? Many people DO spend the time to learn about various asset classes, investment vehicles and asset allocation – diversification.
Why not own some commodities? If I’m a senior living on a fixed income, what’s wrong with investing in some energy commodities to hedge a spike in energy prices or owning some gold to help ward off inflation? Not a large portion of the portfolio, but something?
Sorry Mark, I just can’t get behind this populist rant. Using the same anti-Wall Street, pitchfork waving sentiment as Huffington Post and MSNBC isn’t good investing advice. In an era of increasing inflation, the decline of our fiat currency and uncertainty everywhere, you think earning 0.25% interest on a savings account is the way to go?
{ 16 comments… read them below or add one }
I agree that Cuban’s article is terrible. I had a hard time understanding what he was criticizing. Is he against the proliferation of new investment products? Is he against tactical asset allocation? Or, is he just anti-diversification in general?
I also agree with your comments that investing in “what we know best” is especially dangerous when it leads to an undiversified portfolio that is closely tied to our work income.
I don’t disagree with some of what the article says, in that diversification through mutual funds can be misleading. When the market drops, they all drop.
I’m with you though in that I don’t like the patronizing tone. The assumption is that individual investors aren’t smart enough to select stocks on their own.
I think you are missing the point that Mr. Cuban was trying to make. His point was that Wall Street always has something new to sell you – some reason you need to give them your money.
Index funds leave Wall Street out of the loop (aka – not making money in fees). In order for them to try and get your money, they sell you on products you really don’t need. That’s the point that Mark was trying to make. He is not specifically against investing in these asset classes. He’s against Wall Street using them as a premise for why average people should invest with them.
And by the way, the “efficient market” hypothesis is a false one… Would an efficient market be a rollercoaster like what we’ve experienced over the past 2 years with the housing bubble and financial meltdown? Of course not. And some people made quite a bit of money knowing that the market was being inefficient.
The Efficient Market theory does account for panic situations (i.e. the theory states that it breaks down) – check out the post where it’s explained.
He does argue against diversifying; some of the mutual funds he criticizes/links to are basic broad sector funds where an investor could simply check out the holdings and decide if they’re right for them. He closes with how investing is for suckers and we should put our money in the bank.
That’s great – 0.75% gain since pivot low in March 09 vs 80%+ for SPY – I’ll take the S&P500 ETF any day.
I don’t think it’s totally wrong.
I think part of his argument is Wall Street is constantly changing their tune on what’s considered to be the proper way to invest. That they are doing this for their advantage, not the investor.
Yep, but sometimes things really do change. Once mutual funds were invented, that became a better way to go than buying top stocks yourself. Once index funds were invented, that became a better way to go than managed funds. Once high-interest online savings accounts became common, CDs became less important. Less than 150 years ago, the best way to invest was to put most of your money in railroad bonds and putting your money in stocks was crazy risky.
The other aspect, not mentioned in the article has been the increase in correlations between assets, especially during the downturn in 2008-09. It used to be accepted wisdom that US, Europe and Asian markets were not correlated. In the past 10 years (in part to globalism) have all increased in correlation, and I don’t think will drop back. Many companies within the S&P 500 are invested in foreign markets. So investing in say an S&P 500 fund and international index fund will lead to similar returns (not exactly the same of course).
Well, there’s always been a pretty high correlation between developed markets; the surprise in 2008-2009 was when all asset classes showed increased correlation because they crashed together. This was due to panic selling and unloading of accounts, so the correlation wasn’t necessary asset-based, but pretty much anything that wasn’t tied down was sold. So, yes, we saw emerging markets, developed, commodities, currencies, everything crashing at once. He didn’t even go there though.
But this year, S&P500 is outperforming emerging markets.
Bottom line, over a 30 year period, is an investor better off in a diversified asset portfolio? Or cash? We all know the answer to that one.
“The holding period for stocks dropped from 8 years in 1960s to 2 years in the 1990s and 8 months in the 2000s. Today, stocks are bought and sold in milliseconds. Which is one of the big reasons you don’t hear much about buy and hold any more. That and the fact it didn’t work. I think individual owners of stocks finally came to understand that old saying “Fool me once, shame on you. Fool me for 50 years, shame on me. ”
That was all I needed to read to realize that maybe its just that Mark Cuban doesn’t understand the financial markets. The rapid buying and selling the Cuban hates is probably 50% arbitraging the difference between ETFs/CEFs and their NAVs.
I thought that was pretty funny how he diverged from true statistics and went to platitudes. “Today, stocks are bought and sold in milliseconds. ”
OK, well, he cited the actual average hold in the 60s, then 2000, but excluded it from his thesis for 2010. Was he just being lazy? Didn’t know? Or it didn’t support his thesis strongly so he switched his language to “milliseconds” cliche?
I think this was a bit of an overreach on cuban’s part. Unfortunately, there’s probably going to be someone spooked by this and go do something odd. Diversification can help when prices go down in other areas. Sure, wall street is trying to sell you something, but you’ve got to figure out not to buy it.
Asset allocation is the basis for my investing. A little reading goes a long way to explaining a lot of the basics of investing. I stay clear of the complicated things and have done pretty well.
I think the best thing to do if you do not have the time to really work on things is just find a low-cost mutual fund or three that are very diverse. I like Vanguard’s target retirement funds because I know that to some extent I do not have the time (and to a very large extent I lack the resources) to invest in individual stocks, etc.
I agree – for the vast majority of investors, low fees and diversification matter most – over trying to pick the right actively managed fund or exotic instruments.
I believe diversification is probably the best way to protect your money… It allows people to have a shot at some investments and don’t risk it all in only one. But yes, it’s important to know the products and understand them… investing isn’t a matter of just going around and trying to put your money in different places (only because they are different), it’s about choosing the products, understanding them and betting for their future performance.
Agree with you-is Cuban insane? Here’s the most basic advice-forget about the new products. Invest in vanguard total market index , their international index and a bond fund. DONE.
{ 4 trackbacks }