For decades, your investment portfolio has turned around a key academic idea that has not resisted very well: effective markets. There is a direct line of Eugene Fama’s effective market theory in the 1960s at the theory of modern portfolio. It paved the way for index funds, a strategy that has not only resisted market cycles but also become the default to manage pensions and retirement accounts.
While we are entering a new era of digital financing, tokenized assets can offer a way to expand our investment horizons in a way that traditional models have neglected.
The genesis of modern portfolio theory
The investment of index funds did not survive by chance. In the early 1970s, in the midst of vigorous debates on the efficiency of the market, the founding work of Burton Malkiel recommending index funds in 1973 (in his book “A Random Walk Down Wall Street”) was embodied in the launch of John Bogle from Vanguard S&P 500 Fund in 1975.
This has cemented a large diversification and minimum exchange strategy. Surprisingly, the passive investment of the index has triumphed in the world, even if the theory underlies it, that investors are always rational, does not resist well.
Behavioral psychologists like Daniel Kahneman and Amos Tversky have illuminated the faults of our decision -making processes. This is highlighted in the award -winning book by Daniel Kahneman, “Thinking Fast and Slow”.
During the decades that followed, economists have reconciled effective markets and irrational behavior in the concept of “very good”. The aggregated wisdom in the form of the price of trends to the right one, over time, although from day to day and in case, there are significant gaps that investors can exploit. Index funds have resisted well, because the exploitation of these opportunities is difficult to do in a coherent or lower cost.
At the same time, the regulatory framework governing institutional investment strengthens this dependence on proven strategies. Fund managers operate under strict fiduciary obligations which oblige them to prioritize customer interests and mitigate risks. Consequently, they distribute most of their portfolios to assets with long established history, generally state obligations and passive action funds.
In short, the “acceptable” investment criteria are not only motivated by potential yields; They are fundamentally linked to data history, reliability and transparency. In case you ask yourself the question, it means index funds.
In this environment, venturing into an unexplored territory is not taken lightly. New asset classes, as promising, are initially sidelined because they do not have the long -term daily data which makes them viable for inclusion in a fiduciary portfolio. So far, almost all the portfolio theory has been based on American stocks and state obligations. Although this universe has extended over time to include index funds and obligations of other major economies, it still represents only a relatively small part of global assets. Portfolios are limited to the intersection of regulations and data. And everything will change.
Tokenization: expand the world of investable assets
Tokenization and chain transactions do not only offer a scalable way to pack all types of assets. They also offer a path to transparent and comparable data on the values of assets. By representing active workers of the real world, whether Thai real estate, Nigerian oil leases or New York taxi medallions as digital tokens on a blockchain, we can start generating the daily and derived data type that has been traditionally reserved for a narrow set of active.
Consider a simple question: how much Thai real estate should appear in a diversified retirement portfolio? As part of current models, the answer is masked by a lack of reliable and continuous pricing data. But if Thai real estate was tokenized, establishing a chain market with daily fence prices, it could possibly be measured in relation to the same measures used for American actions. Over time, this would require a review of the static approach based on the index that has dominated the investment strategy for so long.
Implications for global finance
Currently, alternative strategies – such as retirement fund managers refer to everything that is not a share or bond index – does not represent more than 15 to 20% of most funds. The modification of academic data on investment options would put the remaining 80% to win.
Imagine a future where a truly diversified portfolio is not limited by the limits of traditional actions and debt markets. With tokenization, investors of the major institutional funds with individual savers could be exposed to the asset classes and geographic regions previously ignored due to the scarcity of data or illiquidity. The principles underlying the theory of modern portfolio would not be rejected. They would rather be extended to include a wider range of risk and return profiles.
While tokenized assets build history, trustee, which today promote the predictability of bonds and index funds, could find themselves obliged to recalibrate their strategies. It is not that the very good market hypothesis will be made obsolete. Instead, the parameters of what constitutes “effective” can widen considerably. A richer set of data could lead to better informed risk assessments and, in the end, to portfolios that capture a more precise image of the overall value.
A measured but inevitable change
This will not happen overnight. The fastest that we will probably see changes emerging is about a decade, assuming that the time to build a large portfolio of tokenized assets and 5 to 7 years to build a daily information report. Once the data is present, however, the change could happen quickly, thanks to a generalized use of artificial intelligence.
One thing that often slows down the spread of change is the lack of intellectual bandwidth on the part of fund managers and consumers to adapt to new data. It took approximately 40 years to move retirement fund investors from a 95% + bond model in the 1950s to a majority capital index fund model in the 1990s. It took approximately 30 years to the index funds to become the dominant investment vehicle after the evidence showed that they were the best option.
In a world of automated AI automated investment tools, the transition could occur much faster. And with hundreds of billions of dollars in assets under management, each change of percentage of the allowance strategy is a small tsunami of change by itself. We will also organize a free session on digital space assets will have portfolios during the next Summit EY Global Blockchain, April 1-3.
