YOUR BUSINESS AUTHORITY
Springfield, MO
by Jay Courtney
for the Business Journal
Over the past few years, we've seen a major shift in investment philosophy, one that was long overdue. The old approach dictated that we preserve principal at all costs. As a result, the only way a professional manager could get in trouble was to make risky investments.
Now, things are changing. The focus is on how to obtain the best risk-adjusted performance via asset allocation. Some believe that with this change, investors will move away from portfolios of individual securities, and instead have accounts filled with various mutual funds.
While this works well for accounts of less than $100,000, this article will explain why larger accounts should stay with individual securities.
In 1995, Missouri law was changed and the "prudent man rule" gave way to the "prudent investor rule." Under the new law, a professional manager is required to invest for overall return, not just safety. In the right circumstances, a professional manager can now be sued for investing 100 percent of an account in fixed assets such as bonds, CDs and cash.
Why? Because a prudent investor will invest part of an account in stocks, which will dramatically increase wealth accumulation over the long term. A manager could be sued for being too conservative and missing out on what a prudent investor would have achieved.
This new philosophy embodies the modern portfolio theory, which emphasizes the importance of allocating an account amongst stocks, bonds and other investments to achieve the best overall return, relative to the client's specific risk tolerance.
There are two main arguments for using mutual funds: 1. you gain great diversification and optimal asset allocation[[In-content Ad]]
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