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Basic Investment Theory Explained

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Author Info
Kevin E. Cahill () (Center for Retirement Research at Boston College)
Mauricio Soto
Abstract

The S&P 500 Index dropped more than 40 percent between March 2000 and March 2003, and almost anyone who entrusted their retirement savings to the bull market of the late 1990s saw their portfolio shrink, often in dramatic fashion. Now that the stock market is regaining some of its lost value, should people return to their bull market strategies for double-digit annual returns on their retirement savings? In spite of the large fluctuations in the market, most investment advisors still offer the same guidance: consider both risk and return, determine oneís tolerance for risk and reassess this tolerance periodically, and diversify the share of funds allocated to risky investments. These rules of thumb are effective because they are based on widely-accepted results of economic and financial theory. In fact, theory emphasizes that the typical investor should focus primarily on one decision: how much to invest in risky assets. This brief explains why.

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Paper provided by Center for Retirement Research in its series Just the Facts with number jtf_9.

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Date of creation: 10 Mar 2004
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Handle: RePEc:crr:jusfac:jtf_9

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Keywords: investment; theory; retirement; 401(k);

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  1. Markowitz, Harry M, 1991. " Foundations of Portfolio Theory," Journal of Finance, American Finance Association, vol. 46(2), pages 469-77, June. [Downloadable!] (restricted)
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This page was last updated on 2009-11-21.

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