“Normal distribution curves – if I would submit to you – do not exist in financial markets. It’s not that they are fat tails – they do not exist. I keep hearing about fat tails, and Jesus, it’s only supposed to occur every 100 years, and it appears every 10 years!”
Source: Shiller (2009), Butler|Philbrick & AssociatesOf course, this is not news to clients of Butler|Philbrick & Associates and readers of this blog. We have posted often about the fallacy of MPT and the normal distribution, and how this fallacy affects investors (see here, here, here, here, here…). However, Mr. Volcker’s statement should inspire substantial anxiety among the ‘Thundering Herd’ of Advisors and Consultants to the world’s wealthy, who allocate billions of dollars of pension and wealthy investor capital to funds, managers and strategies which depend entirely on the veracity of MPT.
If you have observed a gap between the actual growth experienced by your portfolio, and the growth you expected to see in your portfolio, we may have discovered the culprit. Here’s a ‘back-of-the-napkin’ theory: