The Perfect Portfolio: A Revolutionary Approach to Personal Investing [ハードカバー]

I give the author credit for pointing out what should be obvious to investors over the past decade - that the old-school approach of simply building a diversified portfolio, with periodic rebalancing (the buy-and-hold approach) carries high risks. The question then becomes, is there a way to get decent returns with less risk? Those who believe there is generally rely on one of two methods - trying to time the market, and trying to pick winners. The author goes for timing the market.

Extensive studies have shown that timing the market is possible, but only if proven, mechanical methods are used. (See below for books and websites that show you the right way to do this). The success rate drops precipitously as soon as an investor introduces vague or subjective strategies for moving into and out of the market. So the first rule is avoid any timing method that depends on subjective evaluation. The second is to pick a mechanical method that has a record proven with sound statistical methods. The record should tell the investor what annual returns to expect, what volatility to expect, and what maximum draw downs of his portfolio to exepct. THE PERFECT PORTFOLIO approach does none of this. The author tells you his approach is good, but without any proof, and without any statistics on what kinds of risks and rewards you can expect if you try to use his system.

In a nutshell, here is the approach advocated by the author, followed by my issues with it:

Invest a portion of your portfolio in a core buy-and-hold allocation to cash, bonds, US stocks, and Foreign stocks. Then allocation another portion of your portfolio based on timing the market in each of the five asset classes of Gold, Real Estate, Energy, Emerging Markets, and Agriculture. These last five did fairly well in recent years, though with wild volatility in 2007-2009, suffering 50%-60% losses. And if inflation takes off, are likely to be good inflation hedges.

Here are the problems: If buy-and-hold is not a good thing, why use buy and hold on ANY part of the portfolio, including a core position? US Stocks and Foreign stocks in the core position are just as subject to major volatility and losses as are any of the asset classes in the timed part of the portfolio. Even bonds are subject to significant losses if interest rates start to rise. Secondly, the timed portion of the portfolio relies the subjective use of various technical indicators, which are notoriously difficult to use effectively. See the book Evidence Based Technical Analysis by Aronson for a severe critique on the hazards, failures, and weak evidence in support of timing the market with the kinds of technical indicator approaches that the author recommends.

I've read perhaps 40 books an the use of such indicators, and spent several years trying to make money with them. A rare few traders with exceptional discipline and skill (and yes, luck) have been known to do this effectively, and even they have bad stretches. The average investor doesn't stand a chance of making consistent gains this way.

So, where does that leave the investor looking for a safer way to invest than the old-school approach? Fortunately there are some excellent web sites and books which have used the discipline of extensive testing and sound statistical methods to figure out what works, and with what degree of success. The following list should be a good starting point:

The recently published book, The Ivy Portfolio, by Mebane Faber, gets it exactly right. He shows you proven methods for increasing returns and reducing risk, and backs up all his approaches with sound statistical evidence and lots of historical data on the risks and returns you can expect with the several approaches he demonstrates. Faber also has a free paper you can download that will give you a proven and easy-to-follow method for safe investing. The method has averaged gains of about 11.5% a year since 1973, with only one losing year in 2008, and even that losing year had a grand total loss of less than 1 percent. Search for the paper titled A Quantitative Approach to Tactical Asset Allocation. Mebane Faber has a free copy available on his website MebaneFaber. There are no guaranteed, fail-proof ways to invest, but the strategy outlined in this paper comes pretty close.

Another book by an author who has done his homework, and provides a full accounting of risks and rewards and a tested mechanical approach is - Beating The Market, 3 Months At a Time by Gerald Appel. This books would be better for investors who don't wish to invest more than once per three months, and wish to stay in their mutual funds rather than trade through a brokerage account. However, the approach in the book is also well suited to the use of ETFs.

The Decision Moose website offers a free [Update 08-31-11: there is now a modest subscription fee] weekly trading strategy with over ten years of steady, positive returns. He updates his website each Sunday night with witty commentary on the economy and various asset classes. Read his FAQ section to get a quick and clear explanation of how he does it. His exact methods are proprietary, but his general approach is outlined. All you do is put your money where the Decision Moose tells you to each week. He does all the work. This is not to say you trade every week. On average, you only trade once every few months.

Fund manager Ulli Niemann runs a free weekly investment strategy which uses sound, mechanical methods published on his web side Successful Investment. His strategy is detailed on the web site, and uses sound methods for avoiding bear market losses. You can sign up for a free weekly email which keeps you in the loop on when to be in and out of the market, how to hedge (protect) yourself from downside risk, what the best funds to invest are, and so forth. My only reservation with Ulli Niemann's approach is that despite its avoidance of Bear Market down turns, it still relies a bit on subjective market timing. But the wiggle-factor is kept to a minimum, and overall the approach is based on proven methods.

The CXOAdvisory website is THE BEST free [Update 08-30-2011: Many articles now require you to join by paying a modest membership fee.] go-to resource for extensive academic researh on what works and what doesn't in the investing world. The site is updated at least once daily with a new research topic - all very concise, very objective, unbiased, and useful. Especially read his essay titled What Works Best for a summary of academic research on the most effective investment techniques.

I like to read many investment books, always looking for guidance.
This is by far the best I've read in a long time. It is the one
book that has most changed the way I invest.

Why do I love it? Because it took away so much of what I hate
about investing.

For example, last year I came to hate buy and hold, which for most
investors during the market meltdown turned into "cry and fold." I
love Hevner's solution--a simple, elegant strategy for being in
the market--any market--for the big upmoves, yet nimbly stepping
aside to avoid the steep downturns.

If you never again want to find yourself helplessly standing
there, frozen like a deer in the headlights, meekly obeying
buy-and-hold conventional wisdom while an enraged bear paws away
40% or more of your wealth--which can happen at any time in any
market--heed Mr. Hevner. He gives you a simple way to know when to
leave the scene before a murderous bear shreds what's left of your
life savings. In essence, he teaches you an easy-to-follow way to
let your profits run and cut your losses short, the essence of
successful investing.

Likewise, I have come to hate rebalancing during a falling market,
as conventional wisdom dictates. Rebalancing assumes that a given
market, like a cork, will reliably and soon pop back up to the
surface. But what if it doesn't? The worst downturns can last for
decades. After the Great Depression, stocks eventually fell 86%
and didn't come back to breakeven for 25 years. In Japan, stocks
plunged 63% after 1989 and still have not fully recovered, some 20
years later.

If that's in the cards for U.S. stocks now, do you really want to
be rebalancing, throwing good money after bad, every miserable
step of the way down for years or even decades to come? How will
you feel if you take more of your life savings to rebalance your
equities and then the market falls another 50% from here? The
market can stay irrationally brutal much longer than you can stay
solvent!

Hevner teaches what I believe is a far more sensible plan--how to be
safe and on the sidelines, or even profiting handsomely, during
major and possibly prolonged downturns. It's a great relief to
know that you don't have to buy and hold or rebalance when every
cell in your brain and your gut is screaming not to throw more
good money after bad and that doing so may turn out to be the
dumbest form of "capital punishment" you'll ever practice. Your
first obligation is to protect your money against further losses,
not remain obedient to buy-and-hold and rebalancing.

I have also come to hate the idea, peddled by many on Wall Street,
that mutual funds and money managers deserve lucrative annual
fees, even though they consistently underperform index funds.
Thanks to John Bogle and now, with Hevner's more advanced use of
index funds and ETFs, I have found how I can consistently
outperform overpaid gurus myself while saving significant fees
each year.

I hate the classic definition of "diversification" being limited
to just stocks, bonds, and cash. I believe that's now too
simplistic for today's world, as it assures you will miss out on
booming upmoves in more precisely defined asset classes. I love
Hevner's strategy for making money when any of nine major asset
classes may be off to the races regardless of what the major
equity markets may be doing. If there's a bull market someplace,
or even better, when several are stampeding at once, Hevner's
targeted "buy-and-sell" strategy for each can let you ride them
for huge gains even while the S&P or Dow are slumbering or
falling. This can add real pop to your results.

Finally, I hate feeling so much uncertainty about where and how to
invest. It can easily come to obsess your mind and distract you
from what you're supposed to be doing, such as making a living.
Instead of always second guessing yourself about how to invest,
Hevner will teach you how to keep it simple, letting you know
exactly when to be in for the major trends...and out during the
major downturns. Hevner thus makes it much easier to manage your
portfolio and follow clear rules of the road in just minutes a
day, or even minutes a week if you prefer. This frees you to
exhale, forget stocks for long stretches, and invest your mental
capital on the more important areas of your life and career.

These are the reasons I love this book and find myself rereading
it every chance I get, to make sure the lessons stick with me for
as long as I live. It truly has changed my whole approach to
investing and has proven exceedingly profitable already. Best of
all, I know I'll never again be mauled by savage 30%-50% or worse
losses. Thanks to Hevner, I am never again going to allow that to
happen to me.

As he suggests, you can try his approach for yourself for a
portion of your portfolio and see for yourself how well it works
before you commit more money. That's what I did and am delighted
with the results, not only in much higher profits but especially
the infinitely greater peace of mind that comes from ever-present
protection against devastating losses.

I should also tell you that this is the first review I've ever
posted on Amazon. Until reading this book, I didn't know Hevner
even existed, so it's not like I'm writing this for a friend,
business colleague or for any motive other than gratitude for
someone who took away so much of what I hated about investing and
replaced it with this simple strategy that I love. I suspect that
for you, as for me, this book will easily be one of the most
profitable investments you will ever make.

--Gary MacNeil, Mineola, NY

I had high expectations for The Perfect Portfolio: A Revolutionary Approach to Personal Investing by Leland Hevner because a book which claims to have the 'perfect' anything should meet a high standard. However, overall I was disappointed with the book.

The book had some positive attributes. The author encourages investors to take control of their own portfolios through a two step process involving just 9 asset classes/ETFs (or mutual funds). First, he recommends allocating a portion of the portfolio to a basic buy and hold core segment of a single position each in US Stocks, Foreign Stocks, and US Bonds. The second step is an allocation to a single position in 'target markets', or, Gold, Energy, Agriculture, Real Estate, and Emerging Markets. His preferred investment vehicles are ETFs but he also reviews mutual funds as an alternative. Generally I am a fan of alternative assets in portfolios so I had no problems with the selection of the asset classes as well as the author's encouragement to take charge of one's portfolio. Also, the author suggests using trailing stops with the target market investments to limit portfolio drawdowns.

There were several drawbacks, however, to the presentation of the strategy. First, I found no reference to historical data, performance reports, correlation among selected asset classes, etc. that would justify the selection of the 9 asset classes. While generally I think the asset allocations probably make sense, the book had very little academic vigor. In other words, nowhere in the book did the author make a strong intellectual case for his portfolio. His reasoning for the portfolio selection was his own "observations".

Secondly, and perhaps the most disappointing aspect of the book, was the author's timing strategy for the target market section of the portfolio. He encourages readers to trade the 5 target market investments. Regular readers of my blog know that while generally I am a fan of timing or momentum strategies, the author does a very poor job of teaching readers how to time their investments. His primary suggestions are to look at charts to see where the trend is but nowhere--other then a brief mention of RSI-- does he mention tools for identifying trends such as moving averages, trend lines, etc. A novice investor could get just enough encouragement to try market timing with this book but would be grossly ill-equipped if their only source of knowledge was The Perfect Portfolio: A Revolutionary Approach to Personal Investing.

Another suggestion for making buy/sell decisions on the target market investments is to base it on one's overall view of the economy. Very little is presented in how to gauge the 'overall economy' and I think this suggestion is pointless. If economists or analysts cannot come to consensus on things like GDP or unemployment, it is unreasonable and even potentially dangerous to suggest individual investors use their own economic knowledge to make investment decisions when the author does not give them specific benchmarks or indicators to use.

In short, the author does a good job of presenting 9 alternative asset classes for individual portfolios and also makes good use of stop loss strategies for limiting losses. However, his timing strategies are inadequate/poorly presented and the book lacks academic vigor. For a much better version of some of the same strategies I recommend Mebane Faber's Ivy Portfolio.