In a recent experiment conducted by the Observer, an English newspaper, three groups were asked to pick the most profitable stocks over the past year. Pitted against each other were professional investment advisers, a group of students, and an orange tabby cat named Orlando. Orlando chose his selections by moving a toy mouse across a grid allocated to different companies. After the experiment was over the last “man” standing was Orlando. He beat the closest group, the professional advisers, by almost £500.
So what does this say about choosing stocks and making investments in today’s market? In a recent interview with Bankrate.com’s Sheyna Steiner, I discussed just that. “It illustrates the vagaries of statistical probabilities in individual selections. If an individual says, ‘I’m going to analyze all of the earnings data, the company data, all of the management profiles and pick the best company,’ they still have a 50-50 chance of being right.”
As much as we all love our pets, we should probably leave the management of our hard-earned money to professionals. As I told Steiner, I recommend picking an asset allocation model based on the client’s goals and risk tolerance. From there, investors can build their portfolio with passively managed investment choices representative of each sector of the asset allocation plan. With that foundation, investors can go on to use actively managed investments to fill in holes.
At Fragasso Financial Advisors, we bracket passively managed investments in each of the sectors with an active manager. Those active managers will have a certain bent in the way they approach things that give them a business-like advantage. Of course you can always ask your pets what they think, but you may end up with a portfolio over-weighted in kibble.