O Reminds Us That Most Money Managers Lack The Discipline To Consistently Execute Strategies

Category: Finance, Financial Planning.

Want to structure your mutual fund portfolio to achieve optimal returns for the next twenty years?

There was a great article in the June CFA Institute publication Expected Rates of Return: Back to the Future by Jim O Shaughnessy. Read on or just skip to the last paragraph. Mr. This unusual combination of talents first came to my attention when I read What Works on Wall Street: A Guide to the Best- Performing Investment Strategies of All Time. O conducts solid research, and makes recommendations, writes clearly. Although the book discusses stocks, Mr.

The article published in by the CFA Institute is a synopsis of his work. O s research and conclusions are applicable to mutual funds. Mr. That s true for us investors- we tend to change our strategies, following the hot idea in the market- as it is for professional money mangers. O reminds us that most money managers lack the discipline to consistently execute strategies. Note to self: make sure your fund manger follows their stated investment strategy.

Even Warren Buffett doesn t. The corollary to disciplined investing is not to expect to outperform the market every quarter. Adhering to these principles alone will make us better investors. Mr. Chasing quarterly results and/ or changing investment strategies only guarantees one result in a bad performance. O uses rolling 20 year periods( i. e. , 1945 to 1965, 1946 to 1966) , and went back fifty years to measure performance and draw his conclusions. Investors can find many strategies predicted by historical data but it s far less frequent to be able to test actual recommendations. (Correlations can change over time and sometimes extrapolations from past data don t hold up. ) One of his more interesting observations is how many times over twenty year periods investors lost money owning long term corporate bonds.

He first published his work in 199Ten years later( as discussed in the article and the newest edition of his book) he looked at the performance of the strategies recommended in 199They worked! Rising interest rates( falling bond prices) from the 1950s into the 1980s had something to do with this, but Mr. How should we invest for the next twenty years? O says that the twenty year bond rally( starting in the 1980s) is over and I agree with him. Drum role, please. Your fixed income component should be invested in intermediate term bond funds.

Your equity portfolio should be 40% big cap value, 25% big cap growth and 35% small and mid- cap funds. Sounds like good advice( don t forget to invest some of your equity money in foreign funds) for any investor with a reasonable time horizon.