WealthBT: More Bite to Tech Stocks than Just FAANGs
Dimensional Head of Investment Research Wei Dai was the featured guest on a recent episode of WealthBT, a podcast by The Business Times in Singapore.
Dimensional Head of Investment Research Wei Dai was the featured guest on a recent episode of WealthBT, a podcast by The Business Times in Singapore. During the interview, Dai and podcast host Genevieve Cua discussed a variety of topics, including the tech sector, interest rates, and the importance of a scientific approach to investing.
Q: How should individuals approach investing in tech?
A: Big Tech has been a prominent theme, not just over the past few months but for over a decade now. Some of these companies have changed how we live, work, and organize as a society, and their success as a result is reflected in their stock prices. Should people be chasing these stocks? That fear-of-missing-out (FOMO) feeling is very tempting, but FOMO can get people to focus on the wrong thing, on the shiny objects, and forget about fundamental investing principles.
Looking at US stocks going back almost 100 years, if you look at those stocks that became the top 10 stocks in the market, on their way there, they had phenomenal returns. That’s how they got there in the first place. But once they got there, their subsequent returns were pretty close to the market or, if anything, underperforming the market slightly. It’s a good reminder for investors to not extrapolate past performance into the future. The best way to avoid FOMO is simply to diversify. If you own everything, you cannot miss out.
Q: How does the Federal Reserve’s recent interest rate reduction impact portfolios?
A:These events are so closely watched and so widely anticipated that the probabilities of different scenarios and the expected outcomes are continuously priced into security prices, stocks and bonds. If you plot stock returns against, say, interest rate changes, whether it’s the federal-funds rate, or the level of interest rates, or the slope of yield curves, you really see just a big cloud of points. There’s really not a discernable pattern. That means even with perfect foresight of where rates are going, it’s still not going to help you with stock investment. When it comes to bonds, it’s natural to think that they should be more closely related to the Fed’s actions, but often the short end has already moved before the Fed announcement. Also, the Fed doesn’t control the entire yield curve, and there’s not just one yield curve. There are multiple yield curves from different currencies, different corporate, different credit qualities.
It’s good to also remember that there will be many more rate adjustments and other events throughout a multidecade retirement journey. You need to be able to set up an asset allocation that’s suitable for your time horizon, for your risk tolerance, so you are able to plan for what can happen instead of based on predicting what will happen. This will allow you to stay disciplined, stay invested, and tune out some of the noise.
Q: Dimensional is very big on science and evidence-based investing. What does this mean?
A: People probably don’t think of buying stocks or bonds as a scientific endeavor per se, but I don’t think it’s an overstatement that financial science has changed the entire investing landscape. The evolution of investing is quite naturally happening. That’s starting from stock picking to indexing, then to systematic active factor-based strategies, which in our mind offers the best of both worlds of active and passive. We pioneered evidence-based factor investing in 1981, and we have close ties with the brightest minds in financial science, including five Nobel laureates. We’re not investing based on subjective views. Our approach is backed by rigorous research, which then translates into multifactor portfolios that pursue higher expected returns in a broadly diversified, risk-controlled, cost-effective manner.
We are seeing an ongoing shift in the landscape of the financial industry that investors are increasingly aware of and understand the difference between short-term speculation and long-term, disciplined investment. As a result, we are seeing more investors embracing this systematic active way of investing, and we’re proud to be part of that transition.
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