Random Post #4 – Theory time!

While I am just some crackpot on the Internet, I’d like to think that all this passive investment stuff isn’t just some pie in the sky scheme served up by my own confirmation bias. After all it’s not a very exiting scheme if all it can do is return the average!

William F Sharpe however won a Nobel prize for his work in this area. Do you want to argue with him? Have you won a Nobel prize? I didn’t think so.

http://web.stanford.edu/~wfsharpe/art/active/active.htm

“Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs.”

I also like this one about Rebalancing your portfolio. This is one of the emotionally toughest things to do for many as it may go against your natural instinct, but if you can manage it properly it will help reduce your risk and will provide you with a positive upside in the long run (as long as markets keep going up over the long run!).

http://efficientfrontier.com/ef/996/rebal.htm

If you managed to understand the theory in both of those essays, congratulations.

As for me, I feel like I got the gist of it and that’s good enough for me.

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