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| Risk & Reward: Strategy |
The Holistic Approach
John Ferry
10/01/2005
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These
days, this level of detailed technical analysis is where many advisors are
heading. “If you think about it, people used to optimize based on risk and
return. Now we are optimizing based on risk and return and, on another plane,
tolerance for illiquidity,” Tekler adds.
It should be remembered, however,
that these models are by no means perfect; assumptions still have to be made,
and proxies are used to fill in data gaps. As JPMorgan’s Wurth warns, “There are
a lot of dynamics that happen that a model can’t really account for.”
Ultimately, qualitative, as well as quantitative, judgments must still
figure into the equation. Different wealth advisors will rely more on one than
the other. No one yet knows what the correct balance should be, and ultimately
the uncertainties involved could make any quantitative approach flawed. However,
any competent wealth advisor should at least understand the problems associated
with integrating illiquid assets into a portfolio and, at the minimum, should
set a cap on exposure to alternatives. As time goes on, the models will improve,
but for now, investors should remember that the asset allocation process is as
much an art as science.
John Ferry is an Edinburgh, UK–based journalist who specializes in writing
about financial markets and investments. Additional Information
 Valuing Values
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