A Timing and Selection Culture (And the Corleone family)

A Timing and Selection Culture (And the Corleone family)

October 26, 2021

The Godfather. If you recall, there is a scene in the garden when Vito is talking to Michael and says, “Now listen, whoever comes to you with this meeting, he’s the traitor, don’t forget that.”  Fast forward to all the organized crime families attending the funeral of the The Don, Vito Corleone, to pay their respects, and Michael, now head of the family, is surveying the landscape. Tom, the consigliere, leans over to Michael and says, “You know how they’re going to come at you?”  So, as your financial consigliere, I ask you—the average investor— “You know how they’re going to come at you?”  If you have been paying attention to the media, your response will probably be, “Timing and Selection.” Let’s explore why that answer is so prevalent and why it’s wrong.

We live in a time of instant news, texting, and gratification. The American investor wants to feel as though they have all the available resources at their fingertips instantaneously. Armed with all this information, investors believe that the solution to “superior investment performance” is timing and selection—as fed to them by the financial media and those businesses in that industry. Spoiler alert - they are the ones asking for the meeting.

In fairness, they are businesses and need to generate a profit—whether it be the mutual fund companies, rating services, or the media outlets. Although they have not come outright and said it, they have implied that the primary determinant of the investor’s success is timing (when to be in or out of the markets) and selection (what specific investment you need to own now), which couldn’t be further from reality.

Unfortunately, I have yet to recall any conversation—even for a moment—about the following study: The Brinson study*.  This famous study of large pension plans, which was published in 1991, showed that asset allocation accounted for 91.5% of an investment program’s eventual outcome.  By comparison, investment selection and market timing - factors that many investors (and unfortunately some advisors) believe to be important - accounted for just 4.6% and 2.2% respectively.

How about this countercultural idea from your financial consigliere: Over the lifetime of the average investor – made up of some 40 years in the accumulation phase (growing your investments) and another 30 years in the distribution phase (living on those investments) - the success or failure of the average investor depends on how much they save and spend. And the dominant determinant of real-life returns that real people get is the behavior of the investor themselves.

So, the next time you’re approached at a funeral (social media/news) by the financial mafia pretending to be your friend with good advice, you are armed with the facts of how long-term real-life wealth is created - and destroyed.


Important Information

Advisory services are offered through Melone Private Wealth, LLC (“Melone Private Wealth”). Advisory services are only offered to clients or prospective clients where Melone Private Wealth and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at https://www.meloneprivatewealth.com/.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

All investments include a risk of loss that clients should be prepared to bear. The principal risks of Melone Private Wealth strategies are disclosed in the publicly available Form ADV Part 2A.

*Source: Brinson, Singer and Beebower, Financial Analyst Journal, May/June 1991.  Asset allocation/investment timing cannot eliminate the risk of fluctuating prices and uncertain returns.  Past performance is not guarantee of future results.