So, What to Do?

The very first video located on the right hand side of this page is about the importance of calculating one’s DTR (Desired Target Return).  As my personal DTR has increased from 4% to 8%, due to the excessive and irrational gains pointed out in the “Then and Now” posting 1/9/2020 and  Figure 3 from the subsequent March 9th posting. As a result, my current equity allocation is 66%.

The Theory supporting this action is called: Portfolio Navigation” and is described in the second video.  How I arrived at this was explained under “Archives”, as the posting for March, 2013.  An empirical investigation for DB plans was posted March 2015.  Finally, Kal Salama, Chief Investment Officer of The Headlands Group, and I showed how this methodology could be applied to individual accounts, like IRA’s in the June 2017 post. To my knowledge, nobody has written a paper explaining why Portfolio Navigation is not better than the old buy and hold strategy and is not better than the rebalancing strategy that always maintains a constant mix.

So, I will play Devil’s advocate.  Portfolio Navigation ignores human emotions and forces humans to sell equities as returns exceed their DTR and buy equities as returns fall below their DTR.  Investors want to do the opposite.  Advisors must therefore, force clients to do what they do not want to do at highs and lows in the market. That will no doubt result in losing clients as clients look for the advisor who made the most money at the top and the one who lost the least at the bottom. Clients are their own worst enemy.

I am my only client and I do not want to ever have to be required to tell clients what they do not want to hear just to keep their business.  I would not want that responsibility even if they gave me carte blanch authority to make decisions in their behalf.  I will be 88 this month and will not accept that awesome responsibility. I limit my thoughts to the few who watch this blog, to do with it as they think best.


About Frank Sortino

Frank Sortino is finance professor emeritus from San Francisco State University and Director of the Pension Research Institute which he founded in 1981. For 10 years he wrote a quarterly analysis of mutual funds for Pensions and Investments Magazine and he has written two books on the subject of Post Modern Portfolio Theory. He has been a featured speaker at many conferences in the U.S., Europe, South Africa, and the Pacific Basin. Dr. Sortino received his Ph.D in Finance from the University of Oregon and has carried out research projects with many institutions like Shell Oil, Netherlands and The City and County of San Francisco Retirement System.
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