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In the book A Random Walk Down Wall Street, an amusing comparison is made between the performance of professional money managers and that of monkeys selecting stocks by throwing darts at the listings of the financial pages of the newspaper.


In fact, there is a well-researched reason why the monkeys might actually do quite well in this scenario: they accidentally tap into some drivers of expected returns that professional money managers may not take into consideration.


Consider the graphic titled “US Stocks Sized By Market Capitalization” which represents components of a proxy for the US stock market (the Russell 3000 Index). Categories of stocks are represented by surface area on the target based on market capitalizations (share price multiplied by shares outstanding). Investors holding an overweight position in a stock (relative to its market cap weighting) are balanced by those who are underweight in that same stock. Therefore, in aggregate, the average dollar invested holds a portfolio that looks like the overall market, where large value and large growth stocks dominate. In contrast, the following graphic “US Stocks Sized Equally” sizes all stocks equally, as they would be in a printed listing of stocks in the financial pages. If our monkeys were to use this version as their dart board, you can see that the majority of their darts would probably end up in the aqua area, which covers most of the chart. Therefore, small-cap value stocks would dominate the monkeys’ portfolio.


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For illustrative purposes only. Illustration includes constituents of the Russell 3000 Index as of December 31, 2016, on a market-cap weighted basis segmented into Large Value (blue), Large Growth (green), Small Value (grey), and Small Growth (yellow). Source: Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Please see Appendix for additional information.


Historical research is on the monkeys’ side, because over time, small company stocks have had excess returns relative to large company stocks. Also, value (or low relative price) stocks have had excess returns relative to growth (or high relative price) stocks. Their randomly selected stocks therefore have a better chance of having higher returns when compared to the market.

That said, we are certainly not advocating this haphazard approach to investing. Even a straightforward strategy like holding every stock in the Russell 3000 at an equal weight would require frequent (costly) rebalancing to maintain the equal weighting as stock prices change.

Fortunately, academic research has uncovered some drivers of higher expected returns and lays the groundwork for strategies to take advantage of the complexities of the market, without having to outguess market prices. A properly constructed portfolio takes into account a sufficient level of diversification, how to appropriately rebalance, and how to manage the costs associated with implementing your strategy. Most of all, it is constructed to meet your needs over the long term and ride out the inevitable rough periods in the markets.


Large cap is defined as the top 90% of market cap (small cap is the bottom 10%), while value is defined as the 50% of market cap of the lowest relative price stocks (growth is the 50% of market cap of the highest relative price stocks). For educational and informational purposes only and does not constitute a recommendation of any security. The determinations of Large Value, Large Growth, Small Value, and Small Growth do not represent any determinations Dimensional Canada may make in assessing any of the securities shown.

Jason Sirman is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. The information mentioned in this article is for general information only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus and consult your Assante Advisor before investing. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.