The Investment Answer

The (Investment) Answer is an asset-management guide written by Gordon Murray and Dan Goldie.

Murray is in the final stages of terminal brain cancer, and feeling in the mood to contribute positively to humanity in his last hours. He previously worked for a variety of big Wall Street institutions, where active management is favoured, but came to the realization that passive management is a more profitable strategy over the long run, after coming into contact with Dan Goldie. Goldie, an advocate of passive management, was working for Dimensional Fund Advisors at the time, and acted as investment advisor to Murray.

A recent NY Times article outlines their core recommendations, which are summarised below:

1. Chose between managing your own money, and paying an investment advisor.

Hire an adviser who earns fees only from you and not from mutual funds or insurance companies. That way your 'advisor' is rationally incentivised to make YOU money, and not the predatory financial hulks which KICK him BACK a percentage of whichever of THEIR products he sells to you. This way he's your partner, as opposed to a parasite.

2. Divide your portfolio into a couple of mini funds. Your primary division is between stocks and bonds. Then, within your equity category, subdivide further into large and small caps, and between value and growth.

""A less volatile portfolio may earn more over time than one with higher volatility and identical average returns. “If you don’t have big drops, the portfolio can compound at a greater rate,” Mr. Goldie said.""

3. Further subdivide between foreign and domestic holdings

Buying only domestic bonds and equities is also a bet on your local territory's fortunes, if you have the opportunity, consider diversifying to include foreign securities.

4. Decide if you want to manage your holdings actively or passively.

Remember that emotions are tricky to control, and often one's worst enemy. Very few active fund manager's succeed in beating (or even matching) the passive benchmarks over the long term. [If you are going to manage more actively, then formulate and stick to a written strategy, algorithm or rule set.]

5. Rebalance - pare-back the winners and feed the losers

Buy low and sell high.