Rethinking the Theory Behind Investments

RSF Social Finance just published a white paper by Leslie Christian of Portfolio21 titled A New Foundation for Portfolio Management. Their rethinking Modern Portfolio Theory and how we think about investing. Here's a quote from just one section of the paper, which explores a variety of themes of investing, not just about these kinds of questions:

It is generally assumed that investors seek to maximize financial returns to themselves and/or their beneficiaries within certain risk parameters and timeframes. Returns may be derived from dividends, interest, earned income, or capital appreciation, or a combination of these. There is no stated utility, positive or negative, assigned to the societal (universal) effects of the form or characteristics of return generation. This single-minded focus on returns to the investing entity is problematic when it fails to consider the end beneficiaries. For example, a pension fund may derive financial returns from an investment in a real estate project that has uprooted and destabilized the retired employees who receive financial benefits from the fund. Does the financial return to the fund offset not only the financial, but also the personal costs to the beneficiaries? (pp 12)


This isn't intended to be the be all end all of investment theory, but to stimulate a discussion around the basis for making investment decisions. I for one think that this is a very important discussion to be having. Why do we invest money. Long-term institutional investors especially need to be thinking about how they make investment decisions and what other methods could me the needs of the investor and of society to be successful.

Interested in the theory behind investing? Take a look.

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