The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Fear Not Black Swans

Since the credit crisis of 2007, black swanning investment portfolios has become a cottage industry as Wall Street firms have sought ways to reconnect with frightened investors. Firms have created black-swan funds that may simply buy defensive index puts, or use stop-loss limit orders, to ensure investors never lose more than 5 percent or 15 percent of their money. PIMCO, one of the world’s largest money management firms, is at the forefront of black swanning investment portfolios. The firm introduced the Global Multi-Asset mutual fund in 2008, during the worst of the financial crisis. The fund personifies the good investor rule of focusing first on risk, then reward. The fund’s methods are so innovative that it might one day change the way everyone handles their investments.

Rather than relying on historical returns as the basis of investment decisions—which is the traditional approach—PIMCO deconstructs asset classes—stocks, bonds, and so forth—into risk factors. PIMCO uses those risks to make a map of the least risky ways to make money. Sometimes the fund might invest in bonds, rather than stocks, commodities, or derivatives. At all times, the fund buys financial instruments that will increase in value if the fund’s holdings, or the broad market, decline. The goal is to protect investors against losing 15 percent or more of their money, while making long-term returns of 8 to 12 percent each year.

Thinking about investing in terms of risk, rather than investment ...