Now THIS is an investment expert worth listening to... but why bother?

Updated: Oct 15, 2020

Some time ago, I wrote a blog post critical of Warren Buffett's investment advice.

However, today's post deals with a person who actually does know how to give investment advice. Harry Markowitz, recepient of the Nobel Prize in Economics for Modern Portfolio Theory had this to say:

“Diversify,” Nobel-Prize winner Harry Markowitz once responded when asked how investors should approach the stock market. “And if I had to offer a second piece of advice, it would be: Remember that the future will not necessarily be like the past. Therefore we should diversify.

Marketwatch: The 'greatest investor of all time has one and only one word of advice'

And for traditional investors, that advice is on point. You diversify to do two things:

  1. You diversify to 'hedge your bets' against a 'one-stock' or 'one industry' portfolio. This is called correlation. If you invest in oil, you can "diversify" into airlines, but if oil goes down, so would airline stocks. They move together. This is called 'positive correlation'.

  2. A great portfolio would have aspects of 'negative correlation' where one aspect of the portfolio rises... and others decrease... which all 'even out' and lessen potential returns, but helps to mitigate risks. However, this is also why most mutual funds never "beat" the index - because of the style of investing in such funds to help manage volatility (and fear) in such portfolios.

In a way, it reminds me a lot of gambling on a roulette wheel.

In roulette, there are many ways to win (and lose) your money.

  • You could pick the number the ball lands on (highest payout).

  • You could place a bet that the ball would land on a number between 1st 12, 2nd 12, and 3rd 12 sets of numbers (a lower payout)

  • You could place a bet that the ball would land on a number between the 1st 18 numbers or the 2nd 18 numbers (a lower payout)

  • You could bet on even or odd numbers

  • You could bet on red or black

  • And I'm sure there are other strategies for the '0' and '00' that I don't know about. (I'm not a gambler, but I can understand the basics of the game.)

Now, if you place everything on "red 25"... you could lose it all... but you could win big.

  • Or you could "diversify" your bet by putting half on red and half on black. You'd lose half your money, but would you earn enough to double your money on the other one to offset that risk?

There are obviously other ways to play the game, but they all take a risk and you might earn enough to offset that risk... or not.

But today, it might not even make sense to do that.

Today there are insurance products that can give you a decent "market-based" return while having principal guarantees (that means you wouldn't lose money due to market forces).

Truthfully, this isn't investing, per se. Investing really involves market risk. These strategies aren't about taking a market risk, but you CAN have a decent (but not 'maximum') upside return for your hard earned savings.

Here is my own presentation (about 45 minutes):

If you would like to discuss how these strategies might work for you, please contact me.

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