Investors are always looking for answers. How do I earn stock market returns with Treasury bill risk?
is a saying the greater the risk the greater the return. There is of course a
point of diminishing returns. In that, at some point adding risk will not
increase return. This has been proven by Nobel prize winning research.
Wall Street bullies have continually come up with exotic strategies to avoid
risk and increase return. NOT!!
fact, Modern Portfolio Theory tells us at a specific level of risk there is an
appropriate mix of assets. That is proper diversification will lead, long-term,
to your desired return.
One of today’s leading financial thinkers, Bruce I. Jacobs, examined recent financial crises ….including the 1987 stock market crash, the 1998 collapse of the hedge fund Long-Term Capital Management, the 2007-2008 credit crisis, and the European debt crisis….and reveals the common threads that explain these market disruptions. In each case, investors in search of safety were drawn to novel strategies that were intended to reduce risk but actually magnified it…. And blew it up. Until we manage risk in responsible ways, major crises will always be just around the bend.
So, believing you can earn a great return with little or no risk will lead to disaster, in the long-term.
There is a way to responsibly manage risk and therefore return.
Modern Portfolio Theory and Efficiency hypothesis have both won the Nobel prize in economics. While the three-factor model was written by a Nobel Prize winner.
When we combine all three, we develop a portfolio that will earn market rates of return, while responsibly managing risk…over the long-term.
The implementation is the easy part. Remaining disciplined during market extremes is the hard part. This will require the guidance of an investor coach/fiduciary advisor.