Some old-school types will not finish reading this article. They'll throw it down in disgust, declaring it a piece of heresy for questioning the theory they've based their life's work on.
On the other hand, a different but still small group of retirement fiduciaries will read this and say, "Been there, done that."
Finally, the bulk of today's professionals and 401(k) plan sponsors alike will want to know how they can tweak their current models and menus to better integrate some of the features laid out here.
From both a conceptual and a mathematical standpoint, fiduciaries can no longer use volatility to measure risk.
If you're one of the few who continue to knowingly advocate the use of volatility to measure risk, now is the time to read this. If that doesn't convince, then now's your cue to toss the device you're reading this on … unless of course you're tempted to see how the rest of the world operates.
Despite the common-sense argument against using volatility and the growing consensus to not use volatility, it's almost impossible to avoid using it. It's built into the fabric of nearly every investment presentation, nearly every portfolio optimizer, heck, almost any asset allocation tool. Asset allocation itself would fail if we removed volatility as a measure of risk from the equation.
And therein lies the solution to the problem. Most of these asset allocators start with the premise that the investment markets derive the action.
This is exactly the opposite from the way a new breed of investment advisors are approaching things (see "Has the 401k Fiduciary Unknowingly Put Employees in Peril?" FiduciaryNews.com, June 10).
Now, before you get on your haunches, I know there are more than a few grizzled veterans who remember the way things were done before Modern Portfolio Theory spread like a virus in the 1980s. I have no doubt these folks will recognize some of what is being said here as "the way we used to do things."
It all begins with The Great Heresy: Risk Doesn't Matter.
That's right. Risk doesn't matter. Go ahead. Say it out loud. "Risk doesn't matter."
Still not convinced? How about this example (based on a favorite trick question of mine from the days I taught young trust officers)? For those who don't know, a trust officer is the ultimate fiduciary. In fact, everything we know about fiduciary duty comes from centuries of trust law.
