Investing Strategies That Will Outlive Us All

Computer Simulation Suggests That The Best Investment Strategy Is A Random One

The Standard & Poors 500 index is up nearly 20% year-to-date over 25% over the last 12 months and the Dow Jones Industrial Average is up that much this year too. While those are the headline numbers for most investors, the truth is that the domestic indexes have all been climbing the proverbial wall of worry. The Russell 2000 is up nearly 24%, the S&P Midcap 400 is up over 20% this year, and 14 of the 16 broad-market domestic indexes created by Morningstar are up over 18%. While it is possible to find a few pockets of the world doing better most notably funds focused on Japan or Asia it is an area where investors intuitively feel they are taking on more risk. Click to Play How to achieve the American dream Chuck Jaffe looks at how and why the American dream looks different now than it did for past generations. Portfolios and mutual funds built around asset allocation meaning they are diversified across asset classes must hold some assets that cant keep up. That is why of Morningstars 44 target-risk and target-date indexes, none are within five percentage points of the big domestic indexes. Even the categories of investment that have been generating the most buzz for the way they help smooth out performance funds pursuing alternative investment strategies are badly lagging the domestic market, according to Morningstar.

The First Investing Strategy You Should Learn

Stereotypes aside, however, your first investing strategy should reflect a mix of your financial goals and personal preferences. Here are some guidelines: If you're nervous about stocks, get your feet wet with a conservative strategy like value or dividend investing. The margin of safety in value stocks and the steady income of dividend stocks both absorb some of the shocks of market downturns. The younger you are, the more risk you can afford to take. Those in their 20s, for instance, might want to maximize their potential returns with growth or small-cap investing.

Rather, the authors of a new study suggest, the best way to invest is to invest randomly . This doesnt come from nowhere. The authors of the study have been probing the strength of random decisions over planned ones in dealing with a variety of leadership situations. Theyre inspired, they write in the paper, by the fact that [i]n physics, both at the classical and quantum level, many real systems work fine and more efficiently due to the useful role of a random weak noise. The basic idea behind their hypothesis is the fact that knowledge of markets no matter how much of an expert you are is going to be pretty limited. That, they think, will cause people to start to see patterns that arent there. Which leads to misleading strategies and poor investment decisions. So they wanted know if a trader assumes the lack of complete informationthrough all the marketwould an ex-ante randomtrading strategy perform, on average, as good aswell-known trading strategies? To determine the best trading strategy, they looked at data from four different stockindices: the UK FTSE, the MIB FTSE (Italian stocks), the DAX (German) and the S&P 500. They used about 10 years of data from the two FTSEs and about 15 years of DAX and S&P Data. They then compared their random investment strategy to four different traditional investment strategies: momentum investing, where stocks are bought and sold based on past performance; investment based on the relative strength indicator of stocks; up and downpersistency, where investment one day is the opposite of market direciton the day prior; and investing based on themoving average convergence/divergence of the stocks.