Ted Lucas of Lattice Strategies produces many worthwhile reads (conveniently, they’re all archived on Lattice’s website). The man is so well-read I wonder when he finds time to sleep. In this article, he references Antti Ilmanen’s new book Expected Returns, producing a wonderfully succinct piece highlighting the dangers of “conventional price history-based risk measures,” such as risk models that use historical volatility and historical correlation.
The chaos of 2008 was a fantastic example of the aftermath when investors are lulled into a sense of false comfort by relatively tame levels of historical volatility and low correlation from 2003-2007.
As Lucas eloquently writes:
“If you want to manage portfolio risk one must focus efforts on understanding the implied future expected returns built into how an asset is being valued at any point in time and avoid being lulled into complacency that might be suggested by standard risk models focusing solely on the asset’s recent price history.”
For additional thoughts on forward-looking expected returns investing, be sure to check out a previous article on Jim Leitner.