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| Barry G. Dolgin, Author |
Author: Great to be here.
Interviewer: First things first: Why did you write this book?
Author: The book introduces my proprietary mutual fund portfolio construction process, which I call F.S.I. I really do think F.S.I. has something of value to offer mutual fund investors, and I just wanted to spread the word as widely as possible. I decided a book was the most effective way to do this. By the way, F.S.I. stands for Fund Screen Investigation.
Interviewer: How does F.S.I. work?
Author: As I discuss in the book, the foundational assumption of F.S.I. is that the only thing we can reasonably control as investors, is our exposure to risk. Using specialized software, F.S.I. is designed to construct discrete mutual fund portfolios that are characterized by varying levels of historical risk and return. Currently, I have 3 growth portfolios and 2 income portfolios. Obviously, the reader can construct his or her own, using similar software available from various sources. The basic unit of investment is the portfolio. By variably weighting all or a subset of these portfolios with investment dollars, the investor can create a structured suite of portfolios that expresses his or her acceptable risk exposure and return expectations. By shifting dollars between portfolios, F.S.I. offers an investor significant flexibility as needs and circumstances change.
Interviewer: Do you share any thoughts in the book on more general investment topics?
Author: Indeed I do. I have an extensive discussion of risk, central to the book,and its measurement via a statistic known as standard deviation. I devote a chapter to a discussion of correlation, which is a measure of diversification, a fundamental investment concept. I devote a chapter each to the concept of allocation and the subject of index investing, which has become a very popular investment topic in the financial press.
Interviewer: The title of your book contains the word 'new' twice. What's so new? Author: I thought you'd never ask. It really comes down to the emphasis on the acknowledgment, measurement, and incorporation of risk level into portfolio construction. As I just mentioned, F.S.I. uses standard deviation as its risk measure. This replaces the traditional conservative, moderate and aggressive nomenclature, or the simplistic "on a scale of 1 to 10, where 1 is extremely conservative and 10 extremely aggressive, where do you fall?" Well, your 5 might be my 8 and my 5 might be your 3, etc., etc. What does it all really mean? And this point is really worth stressing. Let's say you and your advisor determine that your risk tolerance is 5, let's call it moderate (whatever that means). He or she suggests the traditional allocation: 60% stocks and 40% bonds. But think about it. 60% stocks. Large companies, medium, small? And in what proportions? Growth stocks and value stocks? In what proportions? International stocks? And how about emerging market stocks as part of the international allocation? And in what proportions? 40% bonds. OK. What kinds of bonds? Treasuries, agencies, investment-grade corporates, junk bonds, international bonds? And with regard to the latter, will they include sovereign bonds of developed and emerging markets? Corporates? And, of course, in what proportions? And by the way, let's not forget another variable that applies to bonds: maturity. How will they be weighted by maturity? Bottom line: we can create a huge number of different portfolios that contain 60% stocks and 40% bonds, and each portfolio will have a different historical risk profile! By using a specific number such as standard deviation as a measure of historical risk level, we are all on the same page. And let me tell you, when you're investing your hard-earned dollars, you really want to be on the same page with your financial advisor. Also, new perspective-wise, mutual funds have been traditionally selected by past performance, with little or no attention given to how much risk a fund manager has taken to achieve those outsized returns. I'll let you in on a little secret which lies at the heart of F.S.I., and nicely sums up how risk works here on planet Earth: if you prosper by taking large amounts of risk, sooner or later you are very likely to de-prosper. Another element that represents a somewhat different paradigm of investing is my concept of allocation by objective as opposed to the traditional allocation by asset class or investment category.
Interviewer: Speaking of planet Earth, you also discuss something you refer to as "the astronomy of risk'. Can you elaborate on what you're referring to?
Author: Of course. In our solar system, as presently constituted, the Earth and its fellow planets revolve around the star known as the Sun. Each planet maintains its own individualized orbit around, and distance from, the Sun. In the solar system as conceptualized by F.S.I., my portfolios revolve around the star known as Risk. Each portfolio maintains its own historically determined distance from this star. I also issued the following caveat which an investor must never forget: As you navigate your journey toward wealth accumulation, be aware that the star known as Risk exerts a powerful gravitational attraction.
Interviewer: Before we board the next starship, could you sum up your book in 100 words or less?
Author: Actually I can do it in 2 words: risk matters!
Interviewer: Thanks for your time, Barry. Interested readers can find "A Handbook of Mutual Fund Investing: A New Perspective, A New Paradigm", by Barry Dolgin on Google books, Amazon, Barnes and Noble,or just about anywhere else on the web.
Author: Thanks for your time. Really appreciate it!
A computer can be programmed to choose mutual funds by past performance. And investors have been programmed to regard the results as predictive of future investment success. If it were that easy, we'd all be rich and retired. We need to open our eyes and focus on the truly significant variables that might better define rewarding long-term investment outcomes, like risk, diversification, and objective, as well as return.
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