Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor

Portfolio > Portfolio Construction

GMO’s Inker: ‘Stop Worrying About Your Portfolio’

By Emily Zulz

X
Your article was successfully shared with the contacts you provided.

There are flaws in the traditional way of thinking about investment portfolios, according to GMO’s head of asset allocation Ben Inker.

In a new quarterly letter to GMO’s clients, called “Stop Worrying About Your Portfolio,” Inker addresses how these flaws can lead investors to make bad decisions.

“Investors have a tendency to obsess about their investment portfolios,” he writes. “On the surface, this is a perfectly reasonable focus given results in the portfolio are a crucial determinant of success for whatever purpose the portfolio is there to serve.”

(Related: How Prostitutes and Paparazzi Hedge Their Risk)

However, according to Inker, performance of one’s investment portfolio is not the only determinant of success.

“Investors have a tendency to focus on the characteristics of their portfolios almost to the exclusion of other factors that will lead to success or failure for the larger objective that the portfolio is intended to serve,” he writes.

In fact, Inker believes that investors would achieve better overall outcomes if they recognized the risks outside of their portfolios that really matter and invested accordingly.

“By taking into account the characteristics of the assets and liabilities that exist outside of their investment portfolios, they could build portfolios that are a better match for the true problem they should be solving,” he writes.

However, Inker notes that such a shift in mindset could run into a couple of practical hurdles.

The first is that the investment portfolio is the piece of the problem that is easiest to measure, and investment professionals are generally judged on measured outcomes.

“While a particular portfolio might be the right one for the specific assets and liabilities of a given investor, if that portfolio underperforms those of the investor’s peers, it is not clear whether an investment committee will care much about the theoretical superiority,” Inker writes.

The second issue is that once investors move beyond the investment portfolio, estimates of risk and correlation are necessarily judgment calls, and investors or risk managers cannot simply rely on a historical returns-based matrix to estimate overall risk.

— Related on ThinkAdvisor:

Emily Zulz

@think_emilyz

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.