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Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA

Associate Portfolio Manager
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The perfect investment strategy

January 6, 2017 - 0 comments

PWL Capital - Blog: The perfect investment strategy

Academia points to some ways of investing that are likely to have better outcomes than others. The idea that value stocks will outperform growth stocks over the long-term is generally accepted by researchers and practitioners. The same is true for small stocks outperforming large stocks.

In an academic sense, capturing this outperformance is best achieved by going long small value stocks and short large growth stocks; an approach that might seem very reasonable to an academic who understands the research. In real world applications, though, investors are not usually comfortable with the concept of shorting, or the potential volatility that can accompany a long-short portfolio. Regardless of what academia says, the perfect investment strategy ends up being as much about the investor as it is about the research.

Dimensional Fund Advisors is currently one of the world’s leading investment firms with $585 billion in assets under management. All of their products are constructed based on academic research. As close as they are to academia, you will not find any long-short strategies in Dimensional’s product lineup. They are instead focused on building funds that take enough from the academic research to be beneficial, while remaining comfortable for investors.

But Dimensional takes another cautionary step: they only distribute their products through financial advisors who have shown a commitment to understanding the research. Finding the right investors is just as important as the quality of their products.

If an investor does not understand the reason that they are invested in something, it becomes extremely difficult for them to stay invested through any market turbulence. This is evident in the volatility of mutual fund flows. Nobody really knows what their actively managed mutual fund manager is doing, so they tend to pull their money out when markets are down.

Plenty of DIY investors are having success with the straight forward strategy of owning low-cost index funds and ETFs. When there is no active manager making decisions on your behalf, there is a lot less to second guess. Passively owning the market is an easy strategy to understand. For some, maybe this is the perfect investment strategy.

I tend to lean toward a research-based approach when I am giving advice, tilting market portfolios toward small cap and value stocks. Understanding the current academic research and how its implementation in portfolios impacts the expected outcome for clients makes it obvious advice to give. But whether or not this is the perfect investment strategy is harder to say. In the end, it depends on the client.

By: Ben Felix with 0 comments.
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