A Blended Investments Style Can Lead to High Returns With Low Risk

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A client directed me recently to and article by Vanessa Sumo about Tobias Moskowitz’s recent research paper. The article was titled A Better Bet A blended investment style for all markets can lead to high returns with low risk. The opening paragraph sets the stage:

One of the principal lessons of portfolio theory is to combine assets that do not move perfectly together or even move in opposite directions so that the combination pays positive returns on average while reducing risk or uncertainty as much as possible. The risks in this portfolio tend to partially cancel each other out because the value of one stock is likely to be up when the other is down. Instead of picking a single security, an investor can reap the benefits of diversification by choosing the right combination of assets.

What would happen, then, if investors combined investment strategies and different asset classes rather than just individual stocks?

I’ve written extensively on the benefits of rebalancing asset classes and subcategories, but Moskowtiz’s article is a nice formal analysis of taking just two strategies and measuring the long term rebalancing bonus gained by this rebalancing.

Here is a graph from Moskowitz’s research paper entitled “Value and Momentum Everywhere” which sums it up in one simple graph:

Value and Momentum

Recently I spoke in Florida for the American Association of Independent Investors (AAII) on the subject of boosting returns through blended investment styles.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.