The Science and Art of Investing
There is a lot that goes into managing an investment portfolio .
Art of Investing
Structure Determines Performance
Over 96% of the variation in returns is due to the structure of a portfolio, or, how much you choose to invest in:
Stocks versus bonds
Small stocks versus large stocks
Growth stocks versus value stocks
Highly profitable companies
Meanwhile, only a small percentage is due to the actual mutual fund that you select.
1) Art of Investing. 1. Diversification does not eliminate the risk of market loss. 1. Relative price as measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. 2.Profitability is a measure of current profitability, based on information from individual companies’ income statements.
2) Structure determines performance.Source: Dimensional Fund Advisors study (2002) of 44 institutional equity pension plans with $452 billion total assets.Factor analysis run over various time periods, averaging nine years. Total assets based on total plan dollar amounts as of year end 2001.Average explanatory power (R2) is for the Fama/French equity benchmark universe.