By Michael Tarsala
There's a link between high IQs and successful investing. At least, that's the upshot of an academic study by economists at the University of Chicago, UCLA and Aalto University that's gaining attention around the blogosphere.
It offers a detailed look at the relation between IQ and the contributors to portfolio risk and return. The study involved more than 160,000 Finnish males in a 20-year age range. Why Finland? Military service is required there, and an IQ test is mandatory upon entry. So is handing over your mutual fund and stock registry data! That's why Finland was a great source of study data.
Regardless of income and education, the study suggests that investors with higher IQs:
-- Participate more in the market
-- Are more diversified
-- Favor small-cap stocks, which have historically beaten the market
-- Experience lower risk
-- Earn higher Sharpe ratios (an important measure of risk-reward)
What the study DOESN'T say
The conclusion here is NOT that you need to be some kind of genius to pick stocks. Rather, it's that more intelligent people are more likely to follow the rules of successful investing.
There may be something else at work in the findings, notes the famed economist Robert Shiller in a New York Times Op/Ed: A lack of trust in the markets, as well as financial professionals. That may be partly why more people are dropping their advisers and going it alone.
But self-service is not for everyone (after all, not everyone is a genius).
Check this out: It's a nice infographic from my colleague Mick that lays out the range of choices for today's investor, from do-it-yourself online brokers all the way to full-service wealth management. As you'll see, "selective management" is a middle ground, but closer to self-service. It lets you select the managed funds and/or models that fit your portfolio – or perhaps just a portion of it.
Covestor falls within the selective management category. It's a service where you can find proven model managers, choose the ones that match your strategy. Then, you can follow their moves, trade for trade.
With Covestor, you are a step away from truly going it alone, with the advantage of a network of investment experts that share your goals.