Westin Wellington Visits FJY
On April 24 Westin Wellington,Vice President of Dimensional Fund Advisors (DFA), spoke to a group of FJYclients and friends. His presentation, "Redefining Investment Advice,"introduced the audience to an approach not typically emphasized in today's investmentmedia. The passive investment portfoliotheory he advocates is centered on diluting the risks associated withinvesting. Risk factors that influenceinvestments include the effect of a particular company, a certain industry, oran entire market.
Weston provided an overview ofrecent economic history by sharing the wisdom of several economists whose workhas led to the passive investment strategy adopted by DFA. He cited the works of Harry M.Markowitz, who recommended shifting focus away from individual companies tofocus on overall portfolios, and discussed William F. Sharpe's teaching that portfoliodiversification further reduces the risk of investing. By combining these ideas, Westonconcluded that the optimal portfolio includes holdings in the entire market.Owning a market portfolio allows the investor to participate in the growth ofthe companies held, without having to monitor the day-to-day ups and downs oftheir performance. In addition,Weston stressed the importance of worldwide diversification thereby minimizingthe potential short-term impact of any one company, asset class or country.
Weston continued by discussingthe work of Eugene Fama, whose efficient market hypothesis proposed that stockprices are "fair" and all the pertinent information about a company isreflected in its stock price. Thatbeing said, it is impossible to accurately identify superior-performing stocksin advance - he said that orangutans consistently select investments that havea higher rate of return than the best and brightest professionalinvestors. Investors who try tobeat the market by predicting the next hot stock will most often fail. His conclusion: investing is atrade-off of risk and return. Passive investing, while not as exciting as otherroutes, provides a disciplined approach that maximizes returns for given levelsof risk while enhancing portfolio stability.