What Does A Prudent Portfolio Look Like or Is Now the Time To Panic?

So far we have discussed the Efficient Market Hypothesis also called Free Markets Work. We learned that all the knowable information is already in the price of securities. This led us to the fact that you are gambling and speculating with your money when you:

English: Eugene Fama receiving the inaugural M...
English: Eugene Fama receiving the inaugural Morgan Stanley-American Finance Association Award from Rick Green (Photo credit: Wikipedia)
  • Stock Picking.
  • Market Timing.
  • Track Record Investing.

Next we learned about Nobel Prize winning Dr. Harry Markowitz and Modern Portfolio Theory. This allows us to allocate our assets efficiently and to systematically rebalance.

Now let’s discuss the Three Factor Model. This model was discovered by Kenneth French of Yale and Eugene Fama of the University of Chicago. Without becoming too technical the three factors are:

  • Equities have a return premium over fixed income.
  • Small stocks have a return premium over the S&P 500.
  • Value or distressed stocks have a return premium over the S&P 500.

All these premiums are valid over the long term. Therefore there will be times when these premiums will not be apparent. However, investors will be rewarded by including these factors in their portfolio over the long term.

This brings up a great point, many times utilizing these concepts or any other concept will underperform. Like anything else when you have a proven process and remain disciplined to that process success will be yours. Any attempt to change strategies based on a forecast will lead to disappointing results. I believe this is true not only in investing but in any goal we set for ourselves.

Many brokers/agents will use current circumstances to sell the current popular product.

These brokers/agents will say this is the right solution for now. Whenever you hear ‘for now’ you are market timing which has been proven does not consistently work.  These brokers/agents are using your emotions to sell you more product.

This is the main reason having an investor coach will help you reach your long term financial goals. Your investor coach will help you control your emotions during volatile times.

In summary when we combine the following

  • Free Markets Work
  • Modern Portfolio Theory
  • Three Factor Model

we can build a prudent portfolio designed for us. A portfolio that will fight inflation

When we use these concepts we can be confident that our investments are efficiently working for us.

We can be confident that equities are the greatest wealth creation tool on the planet.

During our current budget crisis many investors will sell out of their equity positions because their emotions are guiding their investment decisions. With the help of an investor coach you will follow your investment policy statement and stay the course. In the long run you will succeed.

The Wall Street bullies want you to believe that they can tell you what investments work best at any particular time.

Stop being a victim to these bullies.

As a side note Eugene Fama PhD authored two of our concepts Efficient Market Hypothesis and the Three Factor Model. Dr Fama and two other economists have won the Nobel Prize in Economics for 2013. Their award winning work was  “for their empirical analysis on asset prices.”

There is a scientific approach to investing that works.

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