- Financial Planning,
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“A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”- Burton Malkiel, A Random Walk Down Wall Street
This was a quote I came across whilst doing my dissertation on the efficient market hypothesis a few years ago. Malkiel’s monkey was put to the test in an article published by Research Affiliates, in the Journal of Portfolio Management.
Although it would have been amusing to watch a monkey throw darts, it was too costly and time consuming to arrange, let alone the logistical nightmare trying to find original prints of financial newspapers. In the experiment, Research Affiliates, simulated the dart throwing monkey by annually picking 30 random stocks from a list of the 1,000 of the largest US Stocks by market capitalisation. These 30 stocks were then equally weighted to form the portfolio. This process was repeated every year from 1964 to 2010 and the results tracked.
The conclusion …
Malkiel was too modest!!!
The “monkey” did better than most experts and beat the market by an average of 1.6% per year!!
Investment professionals love complexity. That, combined with a lack of investor education, is how they make their profits.
At Index we don’t pretend to be an investment guru because frankly we have no idea what the next investment trend is or what tomorrows news will be. The monkey can do a much better job at that than most investment specialists can.
Don’t employ advisers that charge for a job that monkeys could do better. Understand that the true value that an adviser can provide is in the financial planning and behavioural coaching. Choosing an adviser that focuses on this can add 2%1 per annum to your return.
1 Vanguard Whitepaper: Quantifying Vanguard Adviser’s Alpha in the UK.