How to devise a long-term investment plan?

coming, etc..

I don't think that you need a long term plan. Just save and invest. Add up your assets and liabilities every year to see if you're making progress.

investment

investment

Education and home ownership should have high priorities, but eventually as your savings grow, the stock market will be the place to invest. Having your own business is a good alternative.

considers

Unless you have a long term plan, with a schedule of planned investments and expenditures (for example $80 K of college tuition in

10 years, $50K/year of income in retirement in 30 years, both in today's dollars) and realistic expectations about investment returns, how do you know if you are making progress towards your goals? Your portfolio may have grown from one year to the next, but the net present value of your liabilities may have grown even more, especially if long term interest rates have fallen.

I admit to not having a long term plan myself -- but I ought to. First I will work on defending Markowitz :).

present

There is Maslow's heierarchy of needs, but I think that this group is concerned about financial needs and that can best be represented by the amount of assets one has (financial, home, education, etc.) This can be boiled down to total dollar amount by valuing those things at their replacement costs. Of course, to be able to compare years, inflation needs to be factored in.

I tried to Google Markowitz, but found so many, I'm not sure which one you're referring to.

returns,

I don't understand the relevance of the first sentence of your paragraph to what I wrote, and the rest seems to be largely a restatement of what I wrote.

Every investor ought to be familiar with the ideas of Harry Markowitz, who won a Nobel Prize in 1990 (together with Harry Markowitz and Merton Miller) for his work on portfolio selection -- see

.His ideas are briefly described at . Continuing on the subject of Nobel Prizes relevant to investors, in

2003 Robert Engle shared the Nobel Prize in economics with Clive Granger for his work on GARCH models, which can be used model time-varying volatility and correlations of asset returns. His work is described at .

William Sharpe was also a co-recipient of the Nobel Prize with Markowitz that year. Sharpe has since expressed relief that the Prize cannot be rescinded as the CAPM has largely been discredited.

Will Trice wrote:

Markowitz,

.> > His ideas are briefly described at> > .>

Markowitz

Thanks -- that's what I meant to say.

Could you please provide a link or reference?

An interesting paper, cited below and available at

$1484 , says thatactively managed mutual funds are responsible for the "death of beta".Maybe investors should overweight low-beta stocks if there is norisk-premium for high-beta ones. Returns-Chasing Behavior, Mutual Funds and Beta's Death JASON J. KARCESKI University of Florida - Department of Finance, Insurance and Real Estate February 24, 2000 AFA 2001 New Orleans; EFA 0412; University of Florida Working Paper Abstract: I develop an agency model where returns-chasing behavior by mutual fund investors causes beta not to be priced to the degree predicted by the standard CAPM. Mutual fund investors chase returns through time, precipitating unusually large aggregate cash inflows into mutual funds just after dramatic market runups. Mutual fund investors also chase returns cross-sectionally across funds. Each period, mutual funds compete in tournaments where the highest-performing funds capture the largest fraction of the aggregate inflows into the mutual fund sector. The interaction between these two flow-performance relationships induces an asymmetry in payoffs to mutual funds such that equity fund managers care most about outperforming peers during bull markets. Since high-beta stocks tend to outperform low-beta stocks in up markets, active fund managers tilt their portfolios toward high-beta stocks, reducing the expected return to these securities in equilibrium. Thus, the presence of actively-managed mutual funds causes beta risk to be priced to a lesser degree than otherwise. Interestingly, the literature suggests that beta died in the early 1980s, coinciding with the spectacular growth of the mutual fund industry in the U.S. To support the model's time-series flow-performance assumption, I show empirically that market returns have a large economic impact on subsequent aggregate mutual fund flows. In addition, data on mutual fund holdings support the model's prediction that the aggregate stock portfolio held by equity mutual funds is over-weighted in high-beta stocks relative to the overall market. JEL Classifications: G11, G12

Sharpe is quoted in Frank Armstrong's 2002 article, "Capital Pricing Model" that can be found at:

-Will

B- Would you agree that the Fama-French work suggests that size & value factors are significant - not just beta?

-Tad

Not all of our goals are financial. You seemed to be splitting up the financial goals and I was trying to point out that it suffices to have the one goal of increasing one's effective equity.

Markowitz,

That makes sense to me now. Do you think that Markowitz's results can be applied to the individual investor? Or do you think that the individual investor should invest in a mutual fund that applies his principles? Are there any mutual funds that apply his principles?

FWIW, the 1990 Nobel Prize in Economics was shared by Harry Markowitz, William Sharpe and Merton Miller. William Sharpe won for the capital asset pricing model. Harry Markowitz won for his work on reducing portfolio risk by constructing a portfolio of non-correlated asstes.

I think his results can be applied by individual investors if proper software (perhaps Web-based) is available. Markowitz is associated with the GuidedChoice company , which claims at

to deliver "a level of service and expertise otherwise unaffordable to ordinary

401(k) participants. Using the investment options already in your plan, it creates asset allocations aligned with Modern Portfolio Theory's Efficient Frontier. A portfolio managed in this way has the potential for yielding greater returns over the long run than a portfolio featuring a similar degree of risk, but which is not aligned along the Efficient Frontier."

I don't know how well the system works, but I'd guess that individual investors using it will make better portfolio allocations than unaided investors, who often make poor choices, such as investing in company stock or putting retirement money in a money-market account.

Financial Engines

, founded by WilliamSharpe, appears to provide similar services.

Markowitz,

Assets returns do not need to be "non-correlated" for diversification to substantially reduce risk, they just need to have correlations substantially less than one. Almost all the pairwise correlations of returns of U.S. stocks are positive, but the Wilshire 5000 portfolio is much less risky than the average stock in it.

Poor choice of words on my part.

The last sentence is a little ambiguous, but I know what your mean.

It would be difficult for an individual investor to match the Wilshire

5000 portfolio in his own stock holdings (without using mutual funds), but can't an investor come close with about 30 stocks? I have heard arguments claiming that 10-20 stocks would be good, since the companies could be well researched.

diversification

portfolio

Wilshire

funds),

companies

I discussed a similar question in a 2002 message, which can be found by searching this newsgroup for "diversification cfa level III". A lower average pairwise corrrelation of stocks increases the benefits of diversification.