| Ain't Easy Being Green, But It's Worth It
In 1952, 25-year-old graduate student Harry Markowitz wrote a research paper that turned the investment world on its head. His insight ultimately changed the way pension and endowment portfolios are managed by investment professionals.
Until that time, the investment world focused on "Securities Analysis" as coined by Benjamin Graham in his book of the same name published in 1929. Graham's explanation of how to pick the best companies came to be known as "The Stock Pickers Bible."
The predominant thought, which remains pervasive among media and the financial industry at large, is that technical data can reveal which stocks will outperform in the future. In effect: you can consistently beat market returns by picking the right stocks at the right time.
Markowitz proved this notion incorrect. His research showed that targeting a variety of asset classes (not individual stocks) in proportion with their correlation is likely to achieve the best risk adjusted return over time.
His findings later won the Nobel Prize in Economics and have become the foundation for what is known as Modern Portfolio Theory (MPT).
MPT statistically explains how portfolio volatility (risk) and expected return can be controlled through diversification, a systematized method broadening exposure to securities. This is opposite of narrowing portfolio holdings as securities selection encourages, which tends to increase volatility and cost without proving to consistently increase returns.
MPT shows each portfolio component's risk is not as important as how all the components work together. In fact, volatility can be decreased by holding assets carrying high risk when combined with others that tend to have dissimilar price movement (low correlation).
In English: you don't necessarily have to take more risk to get more return.
Prudent investors utilize the concepts of MPT to construct a globally diversified portfolio. This approach helps capture the greatest potential return given the level of risk investors are willing to take.
Keeping in mind that superior risk adjusted returns won't show up every year regardless of investing strategy, this type of diversification has proven to better mitigate the downside and provide higher historical returns than nearly every stock picker in the history of investing.
And I thought winning a Nobel would be hard…
But be forewarned…if you follow this methodology your portfolio will not look like your neighbor's, friend's or colleague's. Most investors in the U.S. overweight toward blue chip company stocks whether meaning to or not.
Familiarity breeds attraction.
Those adhering to MPT will not be heavily allocated to known blue chips and will own numerous globally diversified assets in small percentages. This will pay handsomely at times, such as this year when conservative MPT allocations outperformed more volatile blue chip stocks.
Familiarity also breeds contempt.
So it might not be easy being green, but I'll take it over red any day.
I welcome your questions and comments. becker@wiserfinancial.com
Marc Becker, AIF
Managing Partner, Wiser Financial Coaching
Columnist, The Advisor Sherpa
To read past articles and view past videos, visit: www.marcbecker.tv
Golf Tip of the Week
Learn All Your Can About Backspin
The better you understand the role of backspin in golf, the more you'll know about why your shots behave the way they do. Backspin-- when the ball rotates clockwise on the vertical axis from the player's perspective-- is an essential element in ball flight. In large part, it determines trajectory: Every shot that becomes airborne has backspin. The more backspin, the more it rises, and the higher the shot. The high-lofted clubs, such as the wedges, generate the most backspin. Their shorter shafts produce a steeper swing into the ball, along with a more glancing hit, and, therefore, greater backspin. The result is a high shot that stops quickly. The less-lofted clubs, such as the woods and long-irons, produce the least backspin, as the longer shafts produce a shallower approach, a squarer hit, and, therefore, a lower ball flight. You sometimes hear of a golfer deliberately applying "topspin" or "overspin" on a shot. That's simply a misstatement. A ball with overspin quickly dives back to the ground, if it gets into the air at all. Understanding backspin will help you predict what the ball will do in the air and on the ground. And controlling the ball is what golf is all about. Source: http://www.nicklaus.com/nicklaus_golftips/
Trivia Time
This week's question: Which horse holds the record for the fastest time at the Kentucky Derby?
Do you know? E-mail your answer wendy@wiserfinancial.com and if you are correct, receive a free "Way to Go!", "You Rock!", or other congratulatory phrase. Then brag to all your friends about how smart you are.
The answers will be in next week's newsletter!
Last week's question: Who said "The hardest thing in the world to understand is the income tax"?
Answer: Albert Einstein
Congratulations to Cory A., Brett B., and David R. for getting the correct answer! What smart people.
Source: www.quoteinvestigator.com
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