In his famous book, A Random Walk Down Wall Street, Burton Malkiel said, “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.” In 2012, Research Affiliates of Newport Beach, CA, actually tested this theory and found that the monkeys beat the index by an average of 1.7% for every year since 1964. How, then, can any investor hope to figure out how to sensibly choose an investment strategy?
The reason that a random approach to picking stocks was more successful than a deliberate one was that monkeys don’t care about market capitalization. Its darts were not aimed at or hitting only the largest companies. They also hit smaller companies whose share prices experienced higher growth over time than many of the larger ones.
A well-balanced portfolio may allocate a portion of the total investment to each of the above asset classes in different proportions. In general, we expect greater returns for stocks over bonds, small companies over large companies, and value companies over growth companies. The challenge for your investment advisor is to use this knowledge to optimize your investments.