Last Wednesday’s sell-off produced a dichotomy of responses from my local population of market participants. Some were happy to see a pullback in anticipation of entering the market at a reduced price, but most were fearful that this was the beginning of some secular/cyclical change. (Thanks mama for the call.) The fear part confuses me. If MPT holds true, then markets should expect at least a greater than 1% change in the market price 1 out of every 3 days. Perhaps there’s not as much faith in MPT as I had thought. After all, it is only a theory based on a set of assumptions that are very difficult to replicate in practice. Substituting any theory for the empirical data lends itself to surprising outcomes. Columbus and a flat world come quickly to mind. But the opposite is also true especially if we fail to guard against many of the pitfalls that come with lots of data.
DATA OVERLOAD IS FRONT AND CENTER
Recently, I read of an experiment involving bookkeepers and horse racing. The researchers found as the information sets (data) available to the bookkeepers grew in volume, they became more confident in their predictions but not in their ability to accurately predict winners. More isn’t always better so it seems. But it does seem we need both.
Philosopher Immanuel Kant once said:
“Experience without theory is blind, but theory without experience is mere intellectual play.”
Keeping a proper balance between theory and data will help buffer any doubts you may encounter with the discipline of your investment philosophy and also help bring clarity to your decisions.
Now my turn to do a little data mining and report that on Wednesday the S & P closed off over 1.8%. SCI (all models collectively) was off just over 64 bps. Don’t be surprised. Our asset allocation models, by design, have the ballast of fixed income along with exposure to some currently strong foreign markets. Our hurdle to recapture lost gains is now lower and if volatility is back in play (benefiting our rebalancing strategy) then the path to fulfilling your client’s objectives will be much clearer and manageable.
Our success at SCI is due to a disciplined and structured selection process. Thank you to our partner, Sortino Investment Analytics which provides SCI with rigorous data analysis, and thank you to all the LSIA advisors who have shown confidence in our ability to deliver a quality asset allocation platform. We thank you all for your ongoing support.