Our investment philosophy is rooted in rigorous academic research and Nobel Prize-winning insights, particularly the Efficient Market Hypothesis. This hypothesis, championed by renowned economists, including Eugene Fama, posits that the future movement of market prices is inherently unpredictable, driven by unknowable and random events.
Considering this uncertainty, our approach centers on global diversification as the most prudent strategy. As a client with a Matson Money portfolio, your investments are thoughtfully distributed across over 45 different countries, providing exposure to more than 18,000 unique security holdings. This level of diversification ensures that your portfolio can harness opportunities worldwide, regardless of its size.
The 45 countries where your portfolio is invested may include:
– Australia – Austria- Belgium- Bermuda- Canada- Denmark- Finland- France
– Germany- Greece- Hong Kong- Ireland- Brazil- Chile- China- Colombia
– Czech Republic- Egypt- Hungary- India- Indonesia- Israel- Malaysia- Italy- Japan-
Netherlands- New Zealand- Norway- Portugal- Singapore- Spain- Sweden-
Switzerland- United Kingdom- United States- Mexico- Peru- Philippines-
Poland- Russia- South Africa- South Korea- Taiwan- Thailand- Turkey
This exceptional diversification allows your portfolio to capitalize on global market opportunities. Maintaining a diversified and structured strategy over the long term can significantly enhance your financial well-being. Conversely, attempting to chase performance by frequently buying and selling can erode your real returns over time.
It’s crucial to understand your portfolio and the associated risks. Factors such as your investment horizon, financial goals, and risk tolerance shape the balance between equities and bonds in your portfolio. If you need to review this mix, please schedule a meeting with us.
Your investments are regularly rebalanced on a quarterly basis to ensure alignment with your portfolio’s objectives. This practice involves reducing positions in asset classes that have surged and acquiring those that haven’t performed well. This approach helps your portfolio buy low and sell high, preserving its integrity.
Academic studies emphasize that over 90% of portfolio returns stem from asset allocation, with only about 4% attributed to stock selection, underscoring the importance of diversification over market predictions. *1
Summary of Academic Principles Underlying Our Portfolios:
- Free Markets Work
– This concept, introduced by Eugene Fama in 1965, asserts that in efficient markets, the actual price of a security approximates its intrinsic value.
- Modern Portfolio Theory
– Developed by luminaries like Markowitz, Sharpe, and Miller, this theory examines portfolio performance based on risk and return. It underscores the Nobel Prize-winning idea that diversification, driven by correlation analysis, can yield higher returns with reduced volatility.
- The Three-Factor Model
– Created in 1990 by Kenneth R. French and Eugene Fama, this model identifies three sources of risk that the market systematically rewards with higher returns:
– The Market Factor: Compensation for the added volatility of the market.
– The Size Factor: Historic additional return generated by smaller companies compared to larger ones.
– The “Value” Factor: Returns based on the spread between high book-to-market value and low book-to-market value companies, highlighting the advantages of value investing over the long term.
In conclusion, our investment philosophy is firmly grounded in these academic principles, emphasizing diversification, asset allocation, and a long-term perspective to maximize your financial success. Rather than fretting over individual stock picks, focus on understanding the composition of your portfolio and how its components interact to achieve your investment objectives.
Psychology and Its Impact on Investment Performance
While our investment philosophy is deeply rooted in sound academic principles, it’s crucial to recognize that human behavior can play a significant role in either bolstering or eroding the performance of your portfolio. Understanding how psychological factors can influence investment decisions is essential for achieving long-term financial success.
Investor behavior extends beyond merely buying and selling assets at the wrong times; it encompasses a complex web of psychological traps, triggers, and misconceptions that can lead to irrational actions. These irrational behaviors, in turn, can result in suboptimal performance.
There are nine distinct behaviors that commonly affect investors, often shaped by their personal experiences and unique personalities:
- Loss Aversion: The tendency to fear losses more than value gains, often leading to overly cautious decisions.
- Expecting to find high returns with low risk: Unrealistic expectations about the relationship between risk and reward can lead to taking on excessive risk.
- Narrow Framing: Making decisions without considering the broader implications and context, leading to shortsighted choices.
- Mental Accounting: Allocating undue risk to one area of an investment portfolio while avoiding rational risk in another, creating an unbalanced strategy.
- Diversification: Seeking to reduce risk by using different sources but failing to achieve true diversification.
- Anchoring: Holding onto familiar experiences and reference points, even when they are not appropriate for the current market conditions.
- Optimism: A belief that favorable outcomes are more likely to occur to oneself, leading to overconfidence and excessive risk-taking.
- Media Response: Reacting to news and market events without conducting a reasonable examination, often succumbing to emotional impulses.
- Regret: Treating errors of commission (taking action that leads to losses) more seriously than errors of omission (inaction that leads to missed opportunities).
- Herding: Copying the behavior of others, even in the face of unfavorable outcomes, due to a fear of missing out or the desire to conform.
Understanding and managing these behavioral biases is an integral part of our investment strategy. By recognizing these tendencies within yourself and actively working to mitigate their influence, you can enhance your ability to make rational, evidence-based investment decisions that align with your long-term financial goals.
In essence, while academic principles provide a robust foundation for investment strategy, it is the mastery of investor psychology that ultimately allows you to navigate the unpredictable waters of financial markets with prudence and discipline.
Sources
*1 Brinson,Gary P., L. Randolf Hood, and Gilbert L. Beebower. ‘Determinants of Portfolio Performance.’ Financial Analysts Journal. January-February 1995.
*https://blogs.cfainstitute.org/investor/2012/02/16/setting-the-record-straight-on-asset-allocation/
“RANDOMWALKSIN STOCK MARKET PRICES,” FINANCIAL ANALYSTS JOURNAL, SEPTEMBER/OCTOBER1965
Fama, Eugene F. and Kenneth R. French. “A Five-Factor Asset Pricing Model”. Booth School of Business, University of Chicago (Fama) and Amos Tuck School of Business Dartmouth College (French). March 2014. Print. [Expansion of the 3 factor model]
“Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal
2022 Dalbar QUAIB Report