I’ve long adhered to the opinion how that you invest is just as important as where you invest when developing a comprehensive wealth management plan. Our investment philosophy is based on diversification across a broad range of asset classes—groups of securities that offer similar risk and return characteristics. We refer to this philosophy as “passive investing” since our clients are positioned to benefit from the inherent efficiencies of the markets as a whole.
Our approach is based on Modern Portfolio Theory (MPT), the pioneering concepts developed by Markowitz, Miller and Sharpe. MPT provides a framework for analyzing and constructing a portfolio as a unified whole, mixing a variety of asset classes and alternative investments to achieve true diversification. The objective is to limit exposure to market volatility and balance risk, which tends to secure consistent returns over the long term.
An article from Saturday’s NY Times titled, “Before Leaping, Listen to a Giant“, references Mr. Markowitz who is known as the father of modern portfolio theory. In 1990 he was named the Nobel Laureate in economics based on a paper he published in 1952 proving diversification and asset allocation is what determines the success of an investment portfolio and stock selection is meaningless.
I am continually puzzled at why so many investors fail to follow the most effective and consistent way to grow wealth in the stock market which is through asset allocation and diversification. Instead many investors are led to believe they can pick the next biggest stock or find the hot investment manager.
As the article points out:
“At its simplest level, Mr. Markowitz said last week, his theory translates into this advice for unskilled investors without inside knowledge of the market: Forget about individual stocks like Facebook and buy broad low-cost stock and bond index funds instead. Allocate them in a proportion that gives you a level of volatility with which you are comfortable.”
I’m fortunate very early on to follow the theories of such well respected men like Mr. Markowitz when developing a wealth management strategy for my clients instead of those so called experts at firms such as Goldman or JP Morgan that have investors believing they are able to pick the hot stocks or have the hot manager. Instead more and more investors are finally coming to the realization these firms care more about money in their own pockets, and if their clients happen to make some also, well that’s purely coincidental.