Don't Leave Your Savings to Chance

Economics is a social science. Unlike researchers in the natural sciences, economists generally do not have the luxury of conducting controlled experiments. Instead research is based on data observed in actual markets as it is generated. Among the challenges this poses is the ability to distinguish meaningful outcomes rom those that occur simply due to chance. This is a vexing problem in particular for investors who are inundated by money managers claiming to have
the skills necessary to beat the market.

The "infinite monkey theorem" is often cited as an extreme example to make the point. If enough monkeys were to type randomly on typewriters for an adequate amount of time, one would eventually type the Old Testament in its entirety, strictly by chance. But having identified the monkey that accomplished this, it would hardly be prudent to bet that the same monkey would then go on to reproduce the New Testament! There are thousands of mutual funds, hedge funds, pension funds, brokers and others employing their skills every day in the hope of providing above-average returns. Many successfully exceed the returns of the overall stock market, even for extended periods of time. But it would be folly to conclude without further analysis that any of these outcomes were a result of skill.

In this article we describe how statistical reasoning can help cast a light on the performance of money managers in a world of chance outcomes, and also to help investors follow an alternative approach to portfolio management based on a rational assessment of risk and return rather than chasing performance.

IN THIS ISSUE
Gold and Deflation: What Investors Need to Know
The High-Yield Dow Investment Strategy
Recent Market Statristics
The DJIA Ranked by Yield
Recommended Investment Vehicles