Gurus Rethinking Investing Theories

August 30, 2012 § Leave a comment

I want to know the answers to all of life’s pesky questions. In doing so I try to take the unknown, the risk, some of the unexpected out of life so that it feels less tumultuous, more level and calm.

In pursuit of some ‘the answers,’ I studied finance in college. I learned, that like me, investing experts are always searching for the best way to manage the risks of life. In this case searching for the elusive mathematical equation that permits investing with no risk and a high return.

Modern Portfolio Theory (MPT) has been the Nobel Prize winning answer to date. Though it doesn’t promise gains with no loss it states that a an investor who takes a higher risk will be compensated with a higher rate of return.

But a new study, recently published, surveyed stock returns from 1990 – 2011 and found that less volatile stocks produced greater returns than stocks with more volatility.

Let me say this again: less volatile stock investments outperformed volatile stocks by an average of 17 percent. Less volatility in this study produced BETTER results for investors. This finding is a sea change from the highly regarded investment theory which states that risk is rewarded with a greater return.

You should know that just because many financial professionals learned MPT doesn’t mean we have invested using only that philosophy. It has been fairly clear, especially since 2008, that higher risk investments have not produced the commensurate greater returns.

The researcher, quoted in a professional journal,  reported that in every world market this math – that stocks of less volatility produced greater returns- proved true. Less vacillating resulted in higher stock returns for investors than choosing investments with a more sporadic nature. Changeability is not a characteristic that, according to these findings, is a benefit in your stock research.

Investments in the least volatile 10% of stocks produced better returns than the AVERAGE stock return and much better than the most volatile 10% of stock investments.

What does this mean for you/ There is no math theory that will only make money for your investments. No equation for only good news and not bad. And every time we think we have the magic answer, we find another glitch or a better way.

You discover YOUR risk tolerance, YOUR goals and objectives, YOUR time horizon, and do what’s best for YOU.


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