From Automation To The Death Of the Efficient Frontier, This Isn’t Your Dad’s Investing World
Recently CNBC reported that giant social media platform Tik-Tok, which streams videos uploaded by its users, had updated its community guidelines and content policies to be more stringent. This update triggered backlash from block-chain content creators, whose videos were now being flagged and removed on Tik-Tok due to the policy changes.
This backlash in-turn hurt Tik-Tok’s social currency, as well as affecting where would-be investors went to learn about Bitcoin and other block chain cryptocurrencies. Some analysts speculated that as content creators moved from Tik-Tok to other platforms to publish their videos, the worth of those other platforms would rise, as well as the prevalence of investing in cryptocurrencies.
This one story highlights a simple reality: benefitting from cryptocurrencies and the upheavals of social media giants are just two trends amongst many that investors are newly contending with in today’s modern trading world. Trends that did not exist even 15 years ago.
Because the world of investing continues to evolve at a rapid rate, investors must learn to evolve quickly too.
And for many, the first step in that evolution is access.
ACCESS TO THE INVESTING WORLD
There really has never been a more opportune time to enter the investing foray. Accessibility is off the charts, and a plethora of trading, data, market, and analytics knowledge is at your fingertips. Investing is no longer only reserved for traders in dark suits making complicated deals on Wall Street.
Now anyone with a smartphone can do it. And that makes it seem easy.
The issue is that with all this new-found accessibility comes a truckload of present-day market complexity and mountains of data that must be understood accurately to get the most out of investments, whether short or long term. It’s not enough to have the information at your fingertips, you must be able to decipher it as well.
Endless access to trading makes it seem like now anyone can invest like a pro. And that’s partially true. But how do we solve for the issues of data literacy, analytics, and strategy? The harder parts?
We’re going to share a handful of reminders that we think can help. These three postures or conclusions can give new investors a fighting chance at staying afloat. Here they are:
- Keep An Open Mind
- Don’t Be Afraid Of Technology
- Ask for help.
Let’s start by expanding those horizons.
KEEP AN OPEN MIND
If there’s one thing investors and advisors are far too guilty of, it’s their dependence on what has come before and their hesitancy to try new things. Much of this is of course attributable to risk, which is always a fair concern.
But keeping an open mind is about allowing curiosity to drive the conversation, rather than allowing certainty to suck out all the air in the room. As an example:
For the past seventy years, one of the principal strategies for investing has been called The Efficient Frontier. In a nutshell, TEF helped to find portfolios that could yield the best returns weighed against the risks involved. It is the bedrock of Modern Portfolio Theory and many advisors swear by it.
The issue is that TEF relies heavily on past market data to find its averages. While the past has always been a good indicator of the future, it’s nowhere near as good of an indicator as the present.
Being able to analyze the past and the present market data gives investors a more complete and accurate way of building and managing portfolios and renders TEF and MPT obsolete in the process.
So why aren’t most advisors moving on from The Efficient Frontier? Because change is hard, and when something works good enough, there’s little reason to innovate.
But that’s not how we see it.
Because we encourage the keeping of an open mind, innovation and growth are always right around the corner – especially as technology continues to give us insight and adaptability with investments. More on that in a second, but here’s the major takeaway:
Keeping an open mind, especially when dipping that first toe into the investing world, allows you to try all kinds of new things that seasoned investors may balk at simply because they’re new.
And while The Efficient Frontier screams don’t try anything new, what Google, Apple, Facebook, Tesla, and Bitcoin have taught us is that there is always greater opportunity in the future than in the past. And technology is building that future.
DON’T BE AFRAID OF TECHNOLOGY
Going back to our example about The Efficient Frontier above, let’s talk tech.
One of the reasons TEF used previous market data to build or manage investments, was that the past could be counted easily. You could look at the data from ten years ago, clearly see how it evolved, and draw conclusions.
Real-time data (data generated in the present moment) was far harder to track. There was simply too much of it, and you needed too many people to make sense of it.
How much data are we talking about?
In 2013, Forbes published an article about the inundating of databases at the New York Stock Exchange. In the piece, they explained that the NYSE received 4 to 6 terabytes of trading data every day, which they then had to do analytics on.
For context: 1 terabyte equals roughly 75 million pieces of paper. So the NYSE was having to catalogue and analyze data that translated to somewhere around 450 million pages every single day.
And that was ten years ago.
To get analytics that could positively affect the creation and management of portfolios out of that amount of data, required something we didn’t have when Harry Markowitz created The Efficient Frontier.
Today there is AI in nearly every facet of our lives from cars to phones to air travel to space exploration. But it’s also in the world of investing.
- AI tools can analyze mountains of market data and help portfolios adapt in nearly real-time to the changing conditions, so investors don’t lose out on important returns and can stay competitive even in volatile markets.
- AI means that investors can move past Modern Portfolio Theory and The Efficient Frontier – no longer crossing their fingers and hoping it all just works out in the end. They can be proactive, decisive, and most importantly, informed.
- AI technology allows for greater control of investments in both short and long-term timeframes, by automatically tweaking portfolios based on how markets are changing and the risk profile of an individual investor.
When compared to the power of AI, The Efficient Frontier looks less like efficiency and more like laziness.
Still, knowing what the right technology is or what strategies align with your goals the best, often come down to just being willing to ask.
ASK FOR HELP
When it comes to investing, technology, data, and so forth – the truth is that there is still little substitute for finding the right person and simply asking them for help.
At McDowell, we love talking to people about investing. The big questions, the little questions, questions about risk, questions about trading, questions that sound dumb but aren’t, questions about portfolios and platforms and performance, questions about Tik-Tok, and yes…questions about cryptocurrency.
Most of all we like helping people make sense of the investing world, and how they can get the more out of it in today’s accessible but complex world.
Reach out to us with any questions you might have. We’d love to hear from you.