It’s the perpetual balancing act for investors — achieving greater investment returns versus not wanting to take risks.
In an effort to help investor’s overcome this, Natixis Global Asset Management will fund a three-year, $1 million research project with the intentions of creating automated, customized processes to help investors make better investment decisions at the Massachusetts Institute of Technology, it announced Monday.
“The research we’re funding at MIT will lay the foundation necessary to revolutionize traditional investment strategies designed to help investors build better portfolios and increase their chances of long-term success,” said John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia, in a statement.
Hailer is hoping the research project will bring “added focus on helping investors develop a personal, outcome-based approach to achieve success. It’s time to introduce a new paradigm for investing,” he said in a statement.
According to a Natixis survey released in May, 70% of investors globally face an ongoing psychological battle between the hunt for investment returns and the preservation of capital [67% in 2013], and tied to this, 86% of investors seek to balance risk and return [84% in 2013].
The 2014 Global Survey of Individual Investors, which surveyed 1,050 investors across the U.S. as part of a survey of nearly 6,000 investors in 14 countries, also reported that only 56% were willing to take just minimal risk to achieve high yields.
The survey stated, “the modern day investor is conflicted, wanting to move forward in pursuit of asset growth, yet not at a velocity that creates exposure to additional risk and the potential polar opposite effect on portfolios – decreasing rather than increasing value.”
The research project, led by Andrew W. Lo, professor at the MIT Sloan School of Management and director of the Laboratory for Financial Engineering (LFE), will focus on investor behavior and personal benchmarks and will utilize data from Natixis global Investor Insights surveys of individuals, financial advisors and institutions.
“Many companies and experts have been talking about the need for change for years now,” said Lo, in a statement.
“The Holy Grail of developing automated, customized processes for making better investment decisions is not unique to our times or the financial industry,” said Lo, who is also the founder, chairman and chief investment strategist of AlphaSimplex, in a statement. “But what is unique is the confluence of breakthroughs in financial technology, computer technology and institutional infrastructure that, for the first time in the history of modern civilization, makes automated personalized investment management a practical possibility.”
Lo and his research team will study the industry practice of using an index as a benchmark to develop a more modern approach to benchmarking based on an individual’s unique circumstances as well as current market dynamics. In order to examine the mistakes often made by investors, researchers will develop algorithms that mimic common, irrational investor behavior — like buying high, selling low and moving to cash for extended periods of time.
This will help them to then create new customizable benchmarks and indexes that adapt to changing market conditions and behavioral challenges.
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