Guide to Investment Strategy

How to understand markets, risk, rewards and behaviour


By Peter Stanyer

Formats and Prices




$57.00 CAD




ebook $13.99 $57.00 CAD

This item is a preorder. Your payment method will be charged immediately, and the product is expected to ship on or around May 8, 2018. This date is subject to change due to shipping delays beyond our control.

The 4th Edition of this benchmark book updated to help both professional and casual investor achieve their goals.

Supported by numerous charts and detailed analysis, The Economist Guide to Investment Strategy outlines how to construct investment strategies appropriate for individual investors.

It looks at the risks and opportunities of uncomplicated strategies and it comes with wealth-warnings for those who wish to explore more sophisticated and fashionable investment approaches. It emphasizes the importance of taking into account insights from behavioral analysis as well as the principles of traditional finance. It highlights how habitual patterns of decision-making can lead any of us into costly mistakes, and it stresses how markets are most dangerous when they appear to be most rewarding.



Guide to Analysing Companies

Guide to Cash Management

Guide to Commodities

Guide to Country Risk

Guide to Decision Making

Guide to Emerging Markets

Guide to Financial Management

Guide to Financial Markets

Guide to Intellectual Property

Guide to Management Ideas and Gurus

Guide to Managing Growth

Guide to Organisation Design

Guide to Project Management

Guide to Supply Chain Management

Numbers Guide

Style Guide

Economics: an A-Z Guide

Negotiation: an A-Z Guide

Pocket World in Figures

Book of Business Quotations

Book of Isms

Book of Obituaries

Brands and Branding

Business Consulting

Business Strategy

Buying Professional Services

The Chief Financial Officer


The Economist Cover Story

The Fate of the West

Frugal Innovation

Game Query

Go Figure

The Great Disruption

Growing a Business

Managing Talent

Managing Uncertainty


Marketing for Growth

Megachange–the world in 2050

Megatech–technology in 2050

Modern Warfare, Intelligence and Deterrence

Organisation Culture

Successful Strategy Execution

Treasure Palaces

Unhappy Union

Why Deals Fail

The World in Conflict


1.1 If it looks too good to be true, it probably is
1.2 Risk tolerance scores and equity market returns
4.1 Income yield from 10-year US Treasury notes and 3-month Treasury bills
4.2 Income yield from 10-year UK gilts and 6-month Treasury bills
4.3 Income yield from 10-year Euro Treasury bonds and 3-month Treasury bills
4.4 US Treasury conventional and real yield curves
4.5 UK Treasury conventional and real yield curves
4.6 Euro zone AAA rated Treasury, conventional yield curve
4.7 US 20-year yields
4.8 US 20-year “break-even” inflation (difference between 20-year Treasury and TIPS yields)
4.9 UK 20-year gilt yields
4.10 UK 20-year “break-even” inflation
4.11 US cash, government bonds and stockmarket cumulative performance
4.12 UK cash, government bonds and stockmarket cumulative performance
4.13 Cumulative performance of equities relative to long-dated government bonds
4.14 20-year equity risk premium over Treasury bills
4.15 20-year equity risk premium over government bonds
5.1 VIX indicator of US stockmarket volatility
5.2 S&P 500 “Shiller” price/earnings ratio
5.3 Spread between single A credit indices and highest-rated government bond indices
5.4 US Treasury 10-year constant maturity yields
5.5 10-year real interest rates in Germany, UK and USA
8.1 Cumulative return of US small cap and large cap stocks
8.2 10-year rolling geometric returns for US small cap and large cap stocks
8.3 Ethical investing, cumulative returns
8.4 Cumulative total return performance of US growth and value equity indices
8.5 Volatility of US growth and value equity indices, 36-month standard deviations of return
8.6 US value and growth indices, 5-year rolling returns
8.7 US and international equities, 5-year rolling performance
8.8 UK and international equities, 5-year rolling performance
8.9 Volatility of equity investments from a US, Chinese and Indian perspective
8.10 Correlations between US equity market, international equities and emerging-market equities
8.11 Correlations between UK equity market, international equities and emerging-market equities
8.12 US perspective on impact of hedging international equities, 36-month rolling standard deviation of returns
8.13 UK perspective on impact of hedging international equities, 36-month rolling standard deviation of returns
8.14 Volatility of world and emerging-market equities, 5-year rolling annualised standard deviation of returns
8.15 Performance of emerging-market equities in best up months for world equities
8.16 Performance of emerging-market equities in worst down months for world equities
8.17 5-year rolling beta between MSCI Emerging Market Index and MSCI World Equity Index
8.18 10-year rolling returns from developed and emerging- market equities
8.19 World, emerging and frontier markets, 36-month rolling correlations
9.1 Default rate of Fitch-rated issuers of bonds 173
9.2 US corporate bond spreads
9.3 Cumulative performance of US under-10-year Treasury and corporate bonds
9.4 Stockmarket volatility and corporate bond spreads
9.5 Yields on US mortgage securities
9.6 Cumulative performance of agency mortgage-backed securities and commercial mortgages
10.1 Volatility of private and public equity, proxied by 3i share price and FTSE 100 index
10.2 Volatility of private and public equity, proxied by 60-day volatility of 3i relative to UK stockmarket
10.3 Cumulative performance of global listed private equity companies and global equities
10.4 Cumulative performance of hedge fund index and equities
10.5 Hedge fund industry assets under management
10.6 Hedge fund assets under management by type of strategy
10.7 Monthly performance of Credit Suisse arbitrage and multi-strategy hedge fund indices
10.8 The four quadrants of real estate investing
10.9 Is it cheaper to buy real estate on Wall Street or Main Street?
10.10 Cumulative performance of US equities and REITS
10.11 Volatility of US equity REITS and US stockmarket, rolling 36-month standard deviations of return
11.1 Returns from fine art, stamps, violins, gold and financial assets
11.2 Worldwide fine art auction house sales
11.3 Calendar-year performance of world equities and classic cars
11.4 Monthly performance of world equities and classic cars
11.5 British Rail Pension Fund realised rates of return for 2,505 individual works of art acquired between 1974 and 1980


3.1 Twice as many elderly now live beyond age 84 as a generation ago
3.2 How long might my retirement last?
3.3 Lifetime nursing home use in USA from age 57
3.4 Lifetime out-of-pocket nursing home costs in US$ in the USA from age 57
3.5 The corrosive impact of modest inflation on fixed pensions
4.1 Long-run market performance and risk
4.2 Longest periods ending December 2016 of equities underperforming long-dated government bonds
4.3 Does time diversify away risk of disappointing equity market performance?
5.1 Bond diversification in months of equity market crisis
5.2 Bond diversification in years of extreme equity market performance
5.3 Indicators of global investable assets since 2002
5.4 Pattern of asset allocation by global investors, 2002 and 2016
6.1 Stylised model long-term strategies, with only stocks, bonds and cash
6.2 Model short-term investment strategies, with only stocks, bonds and cash
9.1 Government bond and equity markets in 2008–09
9.2 Long-term rating bands of leading credit-rating agencies
9.2 Long-term rating bands of leading credit-rating agencies
9.3 Corporate bond average cumulative default rates
9.4 US Corporate bond yields, spreads and performance
9.5 Performance of selected debt markets in months of extreme US equity performance
9.6 Performance and volatility of components of Bloomberg Barclays Aggregate Bond Index
9.7 Hedging significantly reduces bond volatility but not stock volatility
10.1 Geographical spread of Standard & Poor’s Listed Private Equity Index
10.2 Hedge fund performance during calendar quarters of equity market crisis
10.3 Hedge fund industry: assets under management
10.4 Selected hedge fund strategies: correlations with global equity market
10.5 Managed futures fund (CTA) and commodity index performance during calendar quarters of equity market crisis
10.6 MSCI data on direct real estate investments by type of property
10.7 Income yield from REITs, quoted equities and bonds
10.8 Direct real estate investment by type of property
10.9 US, UK and euro zone real estate market indices: volatility, and correlations with stocks and bonds

Introduction: Back to basics, again

THE FINANCIAL CRISIS OF 2007–09 has had enormous consequences, but it has not led to major changes in the investment policies followed by institutional and private investors. One trend that has been accelerated by the crisis, and its aftermath of ultra-low interest rates, is the rapid move in various countries towards complete closure of company-sponsored salary-related pension schemes. Millions are now confronted with the challenge of building up their own pension pot to fund their retirement. Many of these, who, it is reasonable to suppose, have no particular interest in investment markets, need to be conscious of whether their savings are sufficient and “on track”, and sensibly invested. This new edition is deliberately tilted to address these kinds of concerns of the private investor (see Chapter 3 on personal pensions, in particular).

Many of these concerns parallel those facing institutional funds. Since the crisis, earlier investment trends have been extended, rather than new trends emerging. There has been a growing recognition by all types of investors of the importance of globally diversified equity portfolios (Chapter 8), and although investment management fees have been squeezed by the rapid rise of inexpensive market-matching passive equity and bond funds, investment managers have been kept in the lifestyle to which they have been accustomed by continued growing allocations to high-fee “alternative” investments, such as hedge funds (Chapters 5 and 10).

Twenty-five years ago, both authors would have been confident that investment manager fees would have been under relentless pressure in the decades ahead. Time has so far shown such a prediction to have been only half-right. However, even the most modest investor can now find easy access to reputable low-fee strategies of equity and bond investments that might suit their needs and which are comparable to those discussed in the first part of the book. Norway’s oil fund (formally known as the Government Pension Fund (Global)), which is reported to be the largest fund in the world, has essentially followed such a strategy, since 1997. Warren Buffet, who has a reputation as one of the most successful professional investors, suggested in 2017 that American investors who are saving for retirement should “consistently buy an S&P500 low-cost index fund… I think it’s the thing that makes the most sense practically all of the time.”

As very low interest rates have persisted, stockmarkets have seemingly become more expensive. Bond markets automatically translate low interest rates, which are expected to persist, into much higher bond prices and it is widely believed that this helps to explain the buoyancy of prices for a wide range of collectibles, from works of art to classic cars (see Chapter 11). There is though, no agreement on whether the same process has left stockmarkets dangerously overvalued, or simply as having adjusted to a new reality of prolonged low interest rates. Most investors have responded as if they are not sure how to read signs that markets may be expensive (see Chapter 5).

The stockmarket will always be intrinsically volatile, but at the time of writing, stockmarket volatility was as low as it has been in recent decades. Chapter 9 explores the close relationship between the higher yield offered on corporate bonds compared to that on government bonds (the spread). In late 2017 this spread was as low as it has been since 2007. This seems to be explained in part by (what were at the time) tranquil stockmarkets. The message is to expect bond yields to adjust if and when stockmarket volatility increases.

The suggestion that markets might be expensive sounds like a good reason to delay investing. The difficult subject of market timing when markets seem expensive or cheap is discussed in Chapters 5 and 6. When markets seem expensive, and also when they are volatile, the best strategy is normally to continue with a long-term strategy of making regular contributions to a pension savings accounts or to maintain balance in whatever strategy is being followed. Chapter 6 (Are you in it for the long term?) emphasises that some declines in prices are good news for investors. If bond prices (or the stockmarket) do decline from their current levels, that is unambiguously positive news for anyone saving for a pension, as they can now buy more pension with each monthly contribution. For those enrolled in company-sponsored DC pension plans, inertia is most likely (as in 2008) to keep regular contributions flowing unimpeded by all the noise and commentary from TV pundits. Those who already have a fund of investments, the best protection against ill-considered responses to news is a diversified investment strategy whose rationale has been thought through and agreed in advance with an adviser.

As with the previous editions of this book, the first part of the book describes the design of such “keep-it-simple” strategies of stocks, bonds and cash. Chapter 1 starts with the distinction between risk (which can reasonably be measured) and uncertainty (which cannot reasonably be measured and so is not captured by risk models, but is still important). It emphasises the importance of thinking how vulnerable our investments and savings are to bad times (because they do happen every now and again, and most probably will arise at some stage during your retirement).

The book is divided into two sections: Part 1 provides a framework for thinking about the different aspects of risk and how savings and investments might be allocated to meet investors’ reasonable expectations. While keep-it-simple is a theme of this book, Part 2 provides more detail on equity and bond markets, giving an introduction to more complicated hedge fund and private equity investments, and more widely held real estate investments, including housing (Chapter 10), and ending with a focus on collections (however modest) of art and other investments of passion (Chapter 11).

The authors would welcome any feedback and can be contacted at the following email addresses:

Peter Stanyer:

Stephen Satchell:

Peter Stanyer

Stephen Satchell

December 2017


The big picture


Setting the scene: What is risk for a personal investor?

Think about risk before it hits you

Risk is about bad outcomes, and a bad outcome that might arrive at a bad time is especially damaging and requires particularly attractive rewards to compensate for facing that risk. Investors and their advisers have typically judged the riskiness of an investment by its volatility, but in the words of Antti Ilmanen, author of Expected Returns: An Investor’s Guide to Harvesting Market Rewards, not all volatilities are equal, and the timing of bad outcomes matters for risk as much as the scale of those bad outcomes. A theme throughout this book is that investors should think about how investments might perform in bad times as the key to understanding how much risk they are taking. There is little discussion of what constitutes a bad time, which will vary from investor to investor, but it is best captured by Ilmanen, who defines it as a time when an extra dollar of ready cash feels especially valuable.

What constitutes a bad outcome is far from simple. It is typically specific to each investor. Thus, a bad outcome can vary from one investor to another and from investment to investment. If an investor is saving for a pension, or to pay off a mortgage, or to fund a child’s education, the bad outcome that matters is the risk of a shortfall from the investment objective. This is different from the risk of a negative return. In Chapter 6, the distinction is drawn between threats to future income (which is of concern to a pensioner) and threats to the value of investments (which matter to a cautious short-term investor). This indicates that the short-term risk of losing money is inadequate as a general measure of risk.

As mentioned earlier, there is a temporal dimension to risk. In practical terms, this means that a multi-period strategy gives multiple opportunities to review the strategy as time passes. Thus risk is also about the chance of anything happening before the investment matures, which undermines an investor’s confidence in the future objective of the investment being met.

To complicate matters, there is a distinction between risk and uncertainty. Gambling on tossing a fair coin constitutes risk as the outcomes and their probabilities are fully known, even though the actual result of the coin toss is not. Being hit by meteorites, abducted by aliens, and other such phenomena, while tossing the coin, brings a different dimension to the situation as we cannot fully describe the outcomes or their probabilities. The latter concept is referred to as uncertainty.

Financial decisions are a mix of risk and uncertainty. In 2017, we were in a world of low financial risk and high political uncertainty. It is clear that this uncertainty will also vary among individuals. Since those working in the investment business are uncertain about market relationships, it is reasonable for investors to be at least as uncertain. It is also reasonable for their confidence to be shaken by disappointing developments along the way, even if those developments are not surprising to a quantitative analyst.

Investors’ expectations are naturally updated as time evolves and as their own experience (and everyone else’s) grows. As far as the investor is concerned, the perceived risk of a bad outcome will be increased by disappointments before the target date is reached, undermining confidence in the investment strategy.

The pattern of investment returns along the way matters to investors, not just the final return at some target date in the future. This focus on the risk of suffering unacceptable losses at any stage before an investor’s target date has highlighted the dangers of mismeasuring risk. An investor might accept some low probability of a particular bad outcome occurring after, say, three years. However, the likelihood of that poor threshold being breached at some stage before the end of the three years will be much higher than the investor might expect. The danger is that the investor’s attention and judgment are initially drawn only to the complete three-year period. As the period is extended, the risk of experiencing particularly poor interim results, at some time, can increase dramatically.

The insights from behavioural finance (see Chapter 2) on investor loss aversion are particularly important here. Disappointing performance disproportionately undermines investor confidence. The risk of this, and its repercussions for the likelihood of achieving longer-term objectives, represents issues that investors need to discuss regularly with their advisers, especially when they are considering moving to a higher-risk strategy.

Research findings from behavioural finance emphasise that investors often attach different importance to achieving different goals. The risk of bad outcomes should be reduced, as far as possible, for objectives that the investor regards as most critical to achieve, and, ideally, any high risk of missing objectives should be focused on the nice-to-have but dispensable targets. Investors may then be less likely to react adversely to the disappointments that inevitably accompany risk-based strategies. They will know that such targets are less critical objectives.

Risk is about the chance of disappointing outcomes. Risk can be managed, but disappointing outcomes cannot, and surprising things sometimes do happen. However, measuring the volatility of investment performance, as a check on what the statistical models say is likely, can be helpful in coming to an independent assessment of risk. But it will always be based on a small sample of data. Thus we can attempt to measure the risks we perceive. Uncertainties that exist but that we neither have the imagination nor the data to measure will always escape our metrics. There are no easy solutions to the problem of measuring uncertainty. This led Glynn Holton to write in the Financial Analysts Journal in 2004: “It is meaningless to ask if a risk metric captures risk. Instead, ask if it is useful.” It is worth commenting that the availability of more and better data, which is a strong feature of modern finance, does mean that some of yesterday’s uncertainties may become tomorrow’s risks.

More often than not, the real problem is that unusual risk-taking is rewarded rather than penalised. There are numerous investment strategies with names like Low Volatility, or Low Beta, that appear to have lower-than-market risk but higher-than-market returns (see Chapter 7). Two points can be made about this. First, we may not be measuring risk correctly. Second, we need to avoid drawing the wrong conclusions about the good times as well as the bad times. This theme is captured by a photograph at the front of Frank Sortino and Stephen Satchell’s book Managing Downside Risk in Financial Markets. It shows Karen Sortino on safari in Africa, petting an intimidating rhino. The caption underneath reads: “Just because you got away with it, doesn’t mean you didn’t take any risk.”

Fraud and betrayal


  • "Successfully translates sophisticated academic thinking into simple, intuitive principles that can be used by both individual and institutional investors. These principles are all the more valuable as Stanyer applies them to the full range of asset classes and investment strategies available today." -John Campbell, Morton L. and Carole S. Olshan Professor of Economics, Harvard University

    "Over the years I've had the privilege of reviewing many investment books, but this is unquestionably one of the best. Every financial planner, wealth manager, broker, investment adviser and serious individual investor owes it to themselves to carefully read this extraordinary book." -Harold Evensky, President, Evensky & Katz LLC

    "Peter Stanyer stands out as an extraordinarily clear thinker and he carries that clarity through to his writing in this book on, for example, hedge funds. In addition he is tremendously good at explaining what works best in establishing and adapting an investment strategy. This is a book every Chief Investment Officer should read." -Roger Urwin, Global Head of Investment Content, Towers Watson

On Sale
May 8, 2018
Page Count
384 pages
The Economist

Peter Stanyer

About the Author

Peter Stanyer is an independent investment economist, and advises a UK private wealth manager. He was previously chief investment officer of a US-based wealth management firm, a managing director at Merrill Lynch and investment director of the UK’s Railways Pension Fund. He has also worked as an economist for the Bank of England and the IMF, and when at Cambridge University he won the Adam Smith prize for economics.

Stephen Satchell is Economics Fellow at Trinity College Cambridge, and is a Professor at the University of Sydney. He is The Reader in Financial Econometrics (Emeritus) at Cambridge University, and is an Honorary Member of the Institute of Actuaries. He is an academic advisor to numerous financial institutions.

Learn more about this author