A key plank of our investment philosophy is basing our portfolios on academic research. One of the great minds behind such research in the last half of the 20th century was William Sharpe. Sharpe was awarded the 1990 Nobel Prize for his work on the Capital Asset Pricing Model (CAPM).
We think it is essential to listen to such experts and take note of their research. William Sharpe has been recently interviewed for the Stanford Graduate School of Business - Stanford magazine published in November 2007. In the article the author highlights Sharpe's 4 basic principles when considering investments for and in retirement:
- Diversify. For many investors a few highly diversified low-cost index funds may suffice,"
- Economise. If an index fund is right for you, as it is for many investors, why spend a lot of money on management fees in a likely vain attempt to beat the market?
- Personalise. As an example, Sharpe talks about an investor who works and owns a home in Silicon Valley. Personalizing her portfolio might well mean underweighting technology stocks, since a downturn in the Valley could cost her job and knock a big percentage off the value of her home. So why risk having the retirement portfolio going down as much with the other ships?
- Contextualise. "Asset prices are not set in a vacuum. . It is impossible to choose an appropriate portfolio without a coherent view of the determinants of asset prices." In other words, consider the underlying factors, whether it be CAPM or other theories, that move markets.
I think these are pretty sound principles and ones which we incorporate in our work for our clients.
Regards,
Scott Keefer
This blog was based on an article published by the Stanford Graduate School of Business and can be found at www.gsb.stanford.edu/news/bmag/sbsm0711/feature-sharpe.html
