On April 24 Westin Wellington,Vice President of Dimensional Fund Advisors (DFA), spoke to a group of FJY clients and friends. His presentation, “Redefining Investment Advice,”introduced the audience to an approach not typically emphasized in today’s investment media. The passive investment portfolio theory he advocates is centered on diluting the risks associated with investing. Risk factors that influence investments include the effect of a particular company, a certain industry, or an entire market.
Weston provided an overview of recent economic history by sharing the wisdom of several economists whose work has 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 to focus on overall portfolios, and discussed William F. Sharpe’s teaching that portfolio diversification further reduces the risk of investing. By combining these ideas, Weston concluded that the optimal portfolio includes holdings in the entire market. Owning a market portfolio allows the investor to participate in the growth of the companies held, without having to monitor the day-to-day ups and downs of their performance. In addition,Weston stressed the importance of worldwide diversification thereby minimizing the potential short-term impact of any one company, asset class or country.
Weston continued by discussing the work of Eugene Fama, whose efficient market hypothesis proposed that stock prices are “fair” and all the pertinent information about a company is reflected in its stock price. That being said, it is impossible to accurately identify superior-performing stocks in advance – he said that orangutans consistently select investments that have a higher rate of return than the best and brightest professional investors. Investors who try to beat the market by predicting the next hot stock will most often fail. His conclusion: investing is a trade-off of risk and return. Passive investing, while not as exciting as other routes, provides a disciplined approach that maximizes returns for given levels of risk while enhancing portfolio stability.
Westin Wellington Visits FJY
December 12, 2008
On April 24 Westin Wellington,Vice President of Dimensional Fund Advisors (DFA), spoke to a group of FJY clients and friends. His presentation, “Redefining Investment Advice,”introduced the audience to an approach not typically emphasized in today’s investment media. The passive investment portfolio theory he advocates is centered on diluting the risks associated with investing. Risk factors that influence investments include the effect of a particular company, a certain industry, or an entire market.
Weston provided an overview of recent economic history by sharing the wisdom of several economists whose work has 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 to focus on overall portfolios, and discussed William F. Sharpe’s teaching that portfolio diversification further reduces the risk of investing. By combining these ideas, Weston concluded that the optimal portfolio includes holdings in the entire market. Owning a market portfolio allows the investor to participate in the growth of the companies held, without having to monitor the day-to-day ups and downs of their performance. In addition,Weston stressed the importance of worldwide diversification thereby minimizing the potential short-term impact of any one company, asset class or country.
Weston continued by discussing the work of Eugene Fama, whose efficient market hypothesis proposed that stock prices are “fair” and all the pertinent information about a company is reflected in its stock price. That being said, it is impossible to accurately identify superior-performing stocks in advance – he said that orangutans consistently select investments that have a higher rate of return than the best and brightest professional investors. Investors who try to beat the market by predicting the next hot stock will most often fail. His conclusion: investing is a trade-off of risk and return. Passive investing, while not as exciting as other routes, provides a disciplined approach that maximizes returns for given levels of risk while enhancing portfolio stability.