Investment Management
Monkeys & Darts…
In his now-classic 1973 book A Random Walk Down Wall Street, Princeton University professor Burton Malkiel wrote that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” And guess what? According to a publication from Research Affiliates, with 100 monkeys throwing darts at the stock pages in a newspaper, the average monkey outperformed the index by an average of 1.7% per year since 1964.
Is it time to tune out the noise?
As an investor, it is really important to create a plan and stick to it when things go off course. Don’t be distracted by everything you hear on the news, as most have become nothing more than financial entertainment.
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The difference is in the investment philosophy…
Conventional Management
Attempts to identify mispricing in securities
Relies on forecasting to select “undervalued” securities or time the markets
Generates higher expenses, trading costs, and risks
Passive Indexing
Allows commercial index to determine strategy
Attempts to match index performance, restricting which securities to hold and when to trade
Prioritizes low tracking error over higher expected returns
Factor Investing
Gains insights about markets and returns from academic research
Structures portfolios along the factors of expected returns
Adds value by integrating research, portfolio management, and trading
*There is no guarantee strategies will be successful.
The Noise
The Research & Science
Returns based on financial science, not speculation
American economist Harry Markowitz pioneered this theory in his paper "Portfolio Selection," which was published in the Journal of Finance in 1952. He was later awarded a Nobel Prize for his work on modern portfolio theory.
A key component of the MPT theory is diversification. Most investments are either high risk and high return or low risk and low return. Markowitz argued that investors could achieve their best results by choosing an optimal mix of the two based on an assessment of their individual tolerance to risk.
