Wharton@Work

October 2020 | Finance

Investing When Conventional Wisdom No Longer Applies

2020’s news about the stock market has been studded with dramatic headlines — and if you’re an investment manager or analyst, dramatic headlines are the last thing you want to see. “Dow plunges 1,191 points, its biggest one-day point drop, as coronavirus fears escalate,” wrote USA Today on February 27. On March 11, the Washington Post tried to parse “What the Crash of 2020 Means.” In mid-June, the Wall Street Journal announced “‘Volatility is Everywhere’: The Market Tactic That’s Driving Stocks Haywire.” And in early September, Business Insider reported that Goldman Sachs “says Wall Street’s fear gauge is flashing a warning sign unseen since the dot-com crash in 2000.”

Now a new Wharton Executive Education program helps financial professionals go beyond the news and chart a steady course through turbulent seas. Investment Strategies and Portfolio Management tackles the real-world challenges and opportunities facing today’s investors. According to academic director and Wharton finance professor Jules van Binsbergen, the program helps portfolio managers, analysts, retirement planners, and individual investors create optimal portfolios that suit their needs and solidly accommodate risk. This includes the kind of small-probability or “tail” risk represented by COVID-19, a once-in-a-generation event.

Van Binsbergen explains that standard measures of risk, often termed volatility, are limited in terms of capturing the total market picture. “Looking at standard volatility measures where you see how much prices have recently moved…when you only use those risk measures, you’re going to underestimate infrequent bad events [like COVID] that could very well happen.”

He says it was a commonly held belief in the financial world during the late 1990s that events like the Great Depression could never happen again. But then came the 2008–2009 financial crisis, and now a global pandemic. In the program, van Binsbergen focuses on how investment professionals can pick up early indicators of such unusual occurrences and better manage their portfolios during those times. A related topic covered will be behavioral finance — understanding how people respond to unexpected, disaster-type events — which can help investors manage sudden peaks or valleys in stock prices.

The program also helps participants critically evaluate investment management options using new principles and techniques that van Binsbergen helped develop. Participants will explore the interactions among how investment managers are rated, the variables used to assess their skills, and the fees they charge. He illustrates how important effective evaluation is: “It is possible that you have an extremely talented investment manager who knows what they're doing, but the fees that they charge are so high that they get all the compensation for their own talent. And the investor pays the fees…and essentially goes home with nothing.” Being savvy about evaluating advisors is key both for investors and for management firms looking to hire.

The macroeconomic outlook, including an international perspective, forms an important pillar of the program, says van Binsbergen. “Where do we go from here? What regions are going to be suffering more or less from this whole COVID disaster? And — of course relevant from an investment perspective — where do you put your money in a world where COVID is differentially affecting different regions in the world?” Countries’ monetary policies and central bank activity in response to the crisis will be investigated as well.

Van Binsbergen has assembled an impressive team of Wharton experts to teach in the program. They include some of the world’s top minds in portfolio theory, behavioral finance, bond management, stock markets versus bond markets, advanced asset allocation, risk management, private equity, international markets, the macroeconomic outlook, hedge funds, and real estate. The program will be delivered via Wharton LIVE, an exclusive, interactive virtual platform that features real-time access to faculty as well as peer networking.

Investment Strategies and Portfolio Management is a unique offering for unusual times, helping investment managers expand their horizons, learn new strategies, and take better control of their portfolios no matter what the market is doing.