Book Review

Reviewed by Jurgen Vandenbroucke

Active management for passive investors

Improve the conversion of your sales process AND expand your reach by marrying technology with applied academic content. One and one make more than two! Make it happen with everyoneINVESTED.

In a nutshell

This book contains many valuable insights for when you want to boost the effectiveness of your digital investment process. Andrew Lo is an expert in financial engineering, and he particularly masters behavioral finance. He is also principal investigator at MIT’s lab on artificial intelligence. In his book, he’s demonstrating his expertise by showing us how a marriage of financial content with technology look like, and why it does make a difference.

What’s going on here?

Passive investment has long been associated with a buy-and-hold position in a static portfolio. The portfolio is said to hold asset classes such as shares, bonds, and cash in a fixed proportion that aligns with the investor’s long term balance of risk and reward. Once the portfolio’s composition is defined, the investor is invited to face the future. Rebalances are expected only to correct for asset class performance differences and restore initial portfolio weights.

Why you should care

Well, for one thing: changing market conditions might make the investor re-consider.

Lo states:

“In the long run we are indeed all dead,
but make sure the short term doesn’t kill your client first”

The long term view might motivate the initial decision to invest, but investors need to reconfirm every day. Keeping the investor on board might require active management rather than a static, emotionless allocation.

What does this mean?

Behavioral finance allows to model an investor’s emotionality, and technology enables to implement it instantly and frictionless. If market conditions change, you should not expect the investor to adapt. The investor rightfully expects her portfolio to adapt!
The active management is automatic and model-based, moulded to the investor’s personality.

“Active management is required to grow passive investors”

Adaptive Markets