Many people find it difficult to make effective investment decisions. Investors face significant obstacles:
- Complexity—informed financial decisions require insight into abstruse financial, economic, and mathematical relationships, and serious introspection to define objectives;
- Uncertainty—decisions must be made without knowledge of future consequences. Good decisions do not guarantee successful outcomes; bad decisions may result in successful but lucky outcomes;
- Conflicting Objectives—an investment decision may facilitate progress towards one objective while, simultaneously, impeding progress towards an equally important objective;
- Lack of Perspective—issues may be difficult to resolve because different investor perspectives can lead from the same data to different conclusions. An investor who remembers the Great Depression may review the same stock market returns as an investor who started accumulating wealth in the 1980s and reach an entirely different conclusion;
- Information Overload—investors are deluged by an ever-deepening torrent of financial, economic and legal information. Deciding which data really matter is a practical impossibility.
To succeed, investors must surmount these obstacles. A general understanding of the fundamental nature of capital markets and investments is a necessary starting point. Recent advances in the scientific understanding of markets make it possible to deal with each of these obstacles systematically.
Our monograph, Portfolio Management [1]: Theory & Practice provides an overview of relevant academic developments pertaining to financial economics and portfolio [2] structure. We first address the basic investment concepts that must be considered in formulating any successful investment program, such as investment prudence, market efficiency [3], risk, diversification [4], and asset allocation [5]. We then proceed to a more detailed discussion of the mechanics of portfolio construction:
- Characteristics of asset classes [6] that may be included in a portfolio;
- Primary determinants of return [7]:
- Defining portfolio structure;
- Selecting appropriate investment vehicles; and
- An overview of alternative portfolio management styles.
View Portfolio Management: Theory and Practice, pdf, 102pp [8]