It’s called “Low Variance Investing” and it starts with Modern Portfolio Theory, the 1990 Nobel Prize-winning concept developed by William Sharpe and Harry Markowitz. This theory identifies risk as “variability” – the periodic and often wide swings in returns that occur from time-to-time in all at-risk assets.
The basic idea is simple: Given a choice, most investors prefer assets or strategies that are likely to produce more predictable returns over time, also known as “Low Variance Investing.” This makes perfect sense. The problem today is that most investment securities and many strategies consistently demonstrate HIGHLY variable returns. Securities and strategies boom, then they bust, then they might boom again for a time.
But one fact is clear: highly variable returns can be disruptive to most investors, especially those with limited time horizons (such as investors approaching retirement) or those currently disbursing assets (such as retirees, pension funds, endowment accounts, college and other charitable foundations, etc.).
Despite winning the Nobel Prize, Modern Portfolio Theory isn’t without controversy, and is often misunderstood and misapplied. Many assume that it only applies to the expected return and risk characteristics of individual securities or to individual asset classes – it does not. In fact, Modern Portfolio Theory applies equally well to entire investment strategies too.
Used in this way, the variability of outcomes for passive strategies (such as indexing or “buy & hold” investing) can be compared to “risk-aware” strategies (like clearTREND) in an effort to improve the predictability of returns for investors across the globe.