Diversification, supported by academic evidence, is the most highly recommended investment strategy for managing risk and leveraging higher expected returns over the long term. Though not guaranteed, the probability is much higher for a well-diversified portfolio to grow over the long term, while helping reduce risk. Although a small fraction of investors occasionally “get lucky” by picking the home run stock, country or industry at the right time, the odds of that happening are less than what one would expect by pure random chance. Thus, it’s strongly advisable to those who are looking to preserve and grow their assets over time to invest in a beautifully diversified portfolio of low-cost, broadly diversified institutional asset class funds, or index funds. By doing so, diversification eliminates the lucky chance of making a killing, but most importantly you won’t get killed.
When looking at emerging industries, investors should be cautious of the hype. Identifying winning sectors in emerging industries is a crap shoot, especially for those who are looking to sustain a long-term portfolio. The best way to approach investments is to diversify broadly across industries, as well as throughout the global markets.
In this edition of our video blog, we review new findings that indicate poor investment decisions are often made when a person is stressed. Investors have emotional and physiological triggers that can make them prone to take more risk than they should, and in this study, key indicators suggest that in stressful situations, hormone levels increase (particularly cortisol and testosterone), and the result was an inflated sense of optimism about riskier stocks. The role of an experienced, level-headed advisor, can be invaluable during emotional and stressful times.
Time and again, the evidence shows that only a small fraction of actively managed funds succeed in beating the market with any degree of consistency. And, that’s without taking into account “Survivorship Bias.” Survivorship Bias is the tendency for mutual funds with poor performance to be closed, or merged into other funds by mutual fund companies. A widespread phenomenon in the industry, Survivorship Bias, results in an overestimation of the past returns of mutual funds and means that many actively managed funds are doing even worse than reported if Survivorship Bias is taken into account.
Style Drift is a divergence of a fund's holdings from the original investment philosophy of the fund, subject to what is outlined in the prospectus. Unfortunately, many funds use comparison benchmarks that may not hold many of the same securities. It’s paramount that you look under the hood of any funds that you own to help determine what is, and is not, the appropriate risk adjusted benchmark for comparison. One of the many advantages of low-cost, passively managed asset class and index funds can be their minimal style drift.
When it comes to finances you don't want anyone gambling with your life savings. Unfortunately, traders and investors exhibit characteristics that are similar to gambling behavior when they are actively managing their portfolios.
The sheer number of active fund managers coupled with the shared technologies that they all utilize for analysis and decisions results in most of them coming to similar conclusions about how securities and commodities are going to perform. Only a small fraction of actively managed funds succeed in meeting their benchmarks yet they still charge high fees compared to their passively managed counterparts.
With the ongoing situation in Greece, I wanted to share with you the following brief video from Weston Wellington, V.P. at Dimensional Fund Advisors.In this video Weston helps put in proper perspective the events taking place in Greece, and most importantly what we as investors can, and should remember, when events like this inevitably take place throughout the world.