New research suggests a higher IQ may mean a higher risk/return ratio.
The way the markets have been performing lately, it can seem as though investors would be better off relying on psychic abilities than on genuine financial know-how.
But as much as the money game can seem like one of luck, economist Robert Shiller writes in the New York Times that intelligent investors do consistently outperform their peers. The result comes from a paper researched by economists in the U.S. and in Finland, which found that investors with high IQs tend to build solid financial portfolios and experience good returns on their risk.
These smarties haven’t discovered some brilliant new strategy to beat the market. Instead, they simply follow the time-honored tenets of investing: diversify your assets, skewing towards the stock market, and take advantage of the humble small-cap stocks that tend to outperform the market as a whole.
Apparently, the majority of us manage to muddle these basic rules, partly because we just don’t trust them -- trust being an element of intelligence itself. We don’t trust anyone, in fact, and that’s our downfall. A different economic study in 2008 showed that knowing who to trust -- and how -- freed investors to follow good advice, put their money in the stock market, and enjoy the fruits of their labor (Or, more aptly, the fruits of their faith).
Investors who believe either in the fundamental soundness of investment instruments or in the capable hands of a financial planner tend to participate in the markets in a way that enriches themselves and stimulates the economy. Perhaps as our country rebuilds and reinforces a financial system that has betrayed so many, it will implement the type of safeguards necessary to foster a wider and deeper sense of trust among investors.