Book Review: Tailored Wealth Management


Niall J. Gannon, of the Gannon Group at Morgan Stanley, is a financial advisor for high net worth and ultra high net worth individuals and families. And yet Tailored Wealth Management: Exploring the Cause and Effect of Financial Success (Palgrave Macmillan) is applicable to all investors, at any stage of their lives. It addresses three pillars of wealth: identifying and building it, managing it, and deploying it. As such, the book can be read as a wealth life plan.

Among the most original parts of the book is an updated version of a paper Gannon co-authored with Scott Seibert in 2006. It has been re-titled “Forecasting Long-Term Portfolio Returns: The Efficient Valuation Hypothesis.” The paper’s hypothesis is that “much of the long-term (20-year rolling periods) variability in stocks can be explained by the beginning-of-period earnings yield (the inverse of the starting P/E ratio).” For the 42 rolling 20-year periods beginning on January 1, 1957, with the inception of the S&P 500, the paper shows that the earnings yield accurately predicted the minimum expected return 95% of the time. In the two instances in which the hypothesis failed (1958-1977 and 1989-2008), the disparity was less than 1%. It is noteworthy that the highest observed earnings yield of 13.7%, in 1975, produced a 14.33% annualized return and the lowest earnings yield of 4.54%, in 1998, produced a 7.1% annualized return. Gannon concludes that “the use of earnings yield as a minimum expected return produces a more informed comparison of the future return potential of equities versus fixed income than the application of the theory of mean reversion or the Efficient Market Hypothesis.”

Gannon looks at the effect of taxes on equity returns and tries to compare stock and bond returns on a net basis. He contends that “the notion that stocks outperform fixed income over time … is false when examining net returns over specific periods.”

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