Wall Street Gurus: How to Invest in a Volatile Market

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Throughout the pandemic, the stock market has soared against all odds. Now the Party May Be Over: The Russian-Ukrainian War and Rising Inflation Recently guest the Federal Reserve to order the largest interest rate hike in more than 20 years. Stock prices started to lead Consequently.

How can investors navigate this erratic landscape? At an MIT Sloan event in New York on April 14, Professordirector of MIT Financial Engineering Laboratorysought advice from a list of finance experts featured in his book, “In pursuit of the perfect wallet: The stories, voices and key ideas of the pioneers who shaped the way we invest. »

The panel included the Nobel laureatedoctorate ’70; Jeremy Siegel, professor of finance at Wharton, PhD ’71; and investment consultant Charles Ellis. The conference was moderated by Kathryn Kaminski SB ’01, PhD ’07 and Mila Getmansky Sherman, SB ’98.

Here are their candid thoughts for investing in a volatile market.

Beware of target date funds

Set and forget is good for a slow cooker; less for a perfect portfolio. Ellis and Merton warned against them.

“The basic proposition that target dates tend to follow is awfully close to ‘put your age in bonds and the rest will work out pretty much’ – and that’s hogwash,” said former managing partner Ellis. of Greenwich Associates and author of “Win the loser’s game.”

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“This is an investment strategy that never updates. … It never uses new information about you or the markets,” said Merton, a distinguished finance professor at MIT Sloan. “If that was enough to provide you with a good retirement in 10, 20, 30 or 40 years, those of us who work in the financial services industry should really look for another profession,” he joked.

Look for opportunities in times of crisis

“It’s those specific times when having a diligent approach, decoupling your emotion from your action, where you can really find interesting portfolio opportunities,” said Kaminski, chief research strategist at AlphaSimplexa quantitative investment company.

She coined the term “Crisis Alphato describe investment strategies that generate positive returns in times of market stress. Essentially, crisis alpha is the profit made by exploiting persistent trends that occur in markets during times of crisis.

“When things are really tough, like they are right now, it’s actually important to have strategies in your portfolio that are ready to let go of the past and move into the future,” she said. declared.

Insurance is important

“There are three ways to manage risk: diversification, hedging — that’s the risk-free asset — and insurance,” Merton said.

“In both the institutional space and the retail space, the first two are mostly used. Very little is done in insurance. It’s crazy,” Merton said. “Insurance is going to be an important area – helped by technology, helped by markets and [helped by] the fact that it’s damn hard to get the alpha.

Don’t overlook value stocks

Siegel is a fan of index funds; it also favors value stocks, that is, stocks whose prices seem low relative to the company’s performance.

“If you tilted your portfolio in that direction, you would have a slightly better risk-reward trade-off. … I own a lot of capitalization-weighted assets [funds], but I still believe in a tilt,” he said. “It’s really because I don’t believe the economy is efficient. You must have active investors. You cannot have a perfectly efficient market. Nobody would do any analysis, and you wouldn’t have [value] price. »

Speaker on CNBC the previous month, Siegel said, “I think we have a rotation into value stocks because they have a shorter duration; they will not be affected as much by these interest rate increases.

Think more holistically about your total portfolio

Ellis also urged the public to think more broadly about what constitutes a portfolio.

Investors tend to “ignore an extremely important set of consequential factors and focus everything on a small fraction: the securities portion of their portfolio. They have no idea what their social security is worth in net present value,” he said. “It’s not very difficult to understand.”

Additionally, young people often neglect to consider future income and potential intellectual property, or forget to consider their home as part of their value.

On the other hand, Ellis is not a fan of bonds.

“Everyone in this room, and almost every investor you’ll meet, is vastly overinvested in fixed income,” he said.

Watch: Video interviews with 10 investment luminaries

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