That said, an historical study such as this only provides some understanding of the possibilities and expectations of the future. Investors are generally better served by understanding their investment goals and risk tolerance and investing accordingly rather than simply following the highest expected return strategy, particularly one based on historical analysis. Any thoughtful investment plan involves rebalancing one’s account back towards risk-appropriate allocations whenever one asset class has appreciated too much relative to another. Often, risk targets change as the investor’s circumstances change, which can make a direct comparison to any historical results difficult. Nonetheless, our look back shows that investors shouldn’t necessarily shy away from investing at market highs. Our study reveals that as investment adages go, “don’t try to time the markets” is a better guiding principle than “buy low sell high.” As a corollary, we would add this specific recommendation: stay fully invested even at market highs.
Robert Michaud is the Chief Investment Officer at New Frontier and is the co-holder of four U.S. patents in portfolio optimization and asset management. He holds a Masters in Mathematics from Boston University and pursued a Ph.D. in finance from the Anderson School of Management at the University of California, Los Angeles before joining New Frontier. His research interests include portfolio theory, risk models, empirical asset pricing, and international finance. He is co-author of Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation, (2nd ed. Oxford University Press, 2008) and research articles in refereed journals.
New Frontier Advisors is a research and investment advisory firm. We do not subscribe to any one method of investing; rather we focus on defining strategies that reduce risk and deliver solid returns across uncertain future market conditions.
[i]http://us.spindices.com/indices/equity/dow-jones-industrial-average