Is there a tradeoff between security and retirement independence? Why do the Pittinos advisers emphasize this tradeoff with clients?

How does the tradeoff between risk and return relate to the issue of market efficiency?

Christopher Pittinos was a third-generation Italian immigrant who still lived in the mostly Italian south Philadelphia neighborhood in which he was raised. An area made famous as the setting for the 1976 hit movie Rocky, in 2011 it was still a place to find quaint row houses on narrow streets with an abundance of locally owned shops, restaurants, and businesses. It was also the home of Pittinos Financial Advisers, LLC, the firm Pittinos had started over a decade earlier after leaving his job as a financial adviser for a major bank. His firm's primary focus was providing advice to the many individuals and families that alternatively struggled and flourished in his neighborhood. Pittinos Financial offered a traditional set of financial services, including financial planning, investment management, insurance, and estate planning. Its clients were often the owners of small family businesses. A key to the firm's success and expanding client base (by 2011, the firm had five full-time advisers) was a philosophy of providing its clients with a comprehensive plan developed from transparent and easily understood alternatives. He often observed of his clients: The friends and neighbors who are our clients are not simple people-their love of simplicity arises from their appreciation of the true nature of things. As with their food, where quality ingredients and simple recipes are revered, our clients look to us for the highest-quality investment alternatives and financial plans they can understand and appreciate. The vast majority of investment vehicles the firm recommended were mutual funds that Pittinos himself selected. It was the one part of his business that he believed he could not delegate and was central to his success. It was with his clients' interests firmly in mind that Pittinos sat down to consider whether to add new funds to the list from which Pittinos Financial constructed its client recommendations. Pittinos had carefully crafted his firm's business philosophy to address the two central concerns of the south Philadelphia community Pittinos Financial served. The first was security: the ability to provide for oneself and one's family no matter the circumstances. Needless to say, given the recent market volatility, security was on everyone's mind, and many financial plans were being put to the test. While only a few of the firm's clients had been so unfortunate as to lose their jobs, many had significant portfolio losses due to the market decline in 2008 that they had not yet recovered from. The second was retirement independence: to be able to live without being a burden on others and, moreover, to be able to relax and enjoy a simple life after a lifetime of hard work. For those clients who were retired or close to retirement, the exact nature of their retirement lives was often a subject of lengthy discussion and debate. The firm's clients, of course, were often the first to point out that these two concerns were largely in conflict - that security in the short run was typically obtained at the expense of wealth in the long run. If the client did not see this, it was the first thing the firm's advisers would explain. In fact, the purpose of sound financial advice, in Pittinos's opinion, and therefore embodied in the philosophy of the business, was helping clients strike an informed balance between competing needs in a manner that was as emotionally agreeable as it was financially defensible. The philosophy of Pittinos Financial was abundantly clear from its website, an abbreviated version of which is included in Exhibit 1. As a practical matter, the website was more of a personal statement on the part of Pittinos than a viable mechanism for recruiting clients; the vast majority of business arose from personal recommendations and family connections. In fact, the website functioned much as an internal guiding document, and some staff joked that the website was the "final word" when it came to resolving debates. This opinion was supported by the fact that Pittinos himself often tinkered with the wording and organization of the site. Mutual Fund Alternatives Pittinos was considering adding one or more of four possible funds to the set of funds Pittinos financial offered to clients. At this stage of his review, he was mostly concerned with establishing his view on the performance of each fund. How the funds might fit in with the Pittinos Financial organization as a whole was a subject for another time. For this reason, the funds under consideration spanned a wide variety of types. Exhibit 2 provides a description of the funds. That exhibit and all subsequent exhibits also include the Vanguard 500 Index fund, which tracked the S\&P 500 Index that Pittinos believed many of his clients used as a benchmark. Pittinos was well educated. His evaluation of any investment vehicle was bound to be informed, therefore, by his understanding of market efficiency. This is not to say he had a strong opinion on how efficient markets were at any point in time. Referring to the historically patrician 3 and wealthy suburb of Philadelphia immortalized in another classic film, The Philadelphia Story, he would often observe that "somebody is buying mansions on the Main Line!" In Pittinos's mind, market efficiency was more a way to think about performance than a conclusion about the state of markets. It was the lens through which he viewed past performance and contemplated the prospects for future performance. 1 Given his views on market efficiency, Pittinos's evaluation of a prospective fund tended to focus on expenses and benchmarked performance. Exhibit 3 presents information on the size of each prospective fund, its expenses, asset turnover, and stated fund benchmark (from the fund prospectus). Exhibit 4 presents information on the average asset allocation of each fund by year across broad asset classes. Finally, Exhibit 5 presents information on each prospective fund's returns, including the average return, the standard deviation of returns, and the results of a regression of prospective fund returns on the returns of the S\&P 500 Index. This exhibit also includes summary statistics on various benchmarks. The Task Ahead As always, Pittinos knew that the analysis he would perform was going to raise more questions than it would answer. It was always that way. Even when the analysis identified an exceptional fund, he knew that his analysis was always limited to past data and that, as every prospectus of every fund was bound to point out, past performance was not a guarantee of future performance. Nevertheless, in the end, Pittinos would have to look his clients in the eye and put his reputation behind one or more of these funds