ANDREW LO: Don't Waste Your Time Picking Stocks
In an interview on Consuelo Mack's "Wealth Track" (via ValueWalk), Lo says market volatility has become so extreme that investors must spend far more of their energy focused on managing risk than gaming returns:
In the old days, when volatility was relatively steady, when the risk of investing in the stock market was relatively well known and stable over time, then active versus passive was a sensible dichotomy. The problem is that over the last few years, because of the changing macro landscape, volatility itself has shifted so dramatically, I think there's a third category of investing: to be passive on the alpha side, meaning you're not trying to look for great stocks, not going to try do do stock picking, you're going to be passive about investing in asset classes; but at the same time, you can also be active in risk management.
Lo uses last year's S&P 500 movement to make his case. For the year, it was up 14.5 percent. But through July, the year-to-date return was zero, he notes. "If you had taken money out, then you would have missed that 12 percent or 16 percent gain."
"Now, owning the S&P is like owning one big asset that's exposed to [macro] factors."Lo says the best way execute his plan is to use managed futures that invest across the widest variety of assets, in addition to stocks.
Macro risks are now too great, and can have such a disproportionate impact, that trying to time the market is close to impossible.
"There's a difference between market-timing and risk-timing, and individual investors should not be trying to market-time at home," Lo says.
Watch the whole interview at ValueWalk.