The Power of Modern Portfolio Theory: From Risk To Reward
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- Опубликовано: 10 июл 2024
- Risk is as important as return when investing, and it’s wise to learn this lesson before a market crash happens. But how can we determine the benefit of diversifying our investments and how does this help us? This has been Harry Markowitz's life work and in this video, we celebrate his Modern Portfolio Theory. Dig into what it means and also look at the practicalities of investing and selecting assets based on his theory.
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Trading212 is absolute noddy shite - avoid..
It seems that most of the world's multimillionaires and billionaires initially built their wealth through concentration, with diversity becoming a strategy to preserve their wealth later on. Sam Walton, Bill Gates and even Warren Buffet initially built their fortunes by narrowly concentrating their finances on one thing. Once they achieved a certain level of wealth, they then switched to a strategy of diversification in order to preserve their wealth. Obviously, the level of risk that they assumed was much higher, but so were the rewards.
The potential rewards were achieved by these lucky winners. You rarely hear of the many unlucky losers who failed.
I've observed that all the people who won a million in the lottery have bought at least one ticket. Therefore i'm going to put all my life savings into lottery tickets, its a sure-fire winner.
To be able to allocate you need to have something to allocate in the first place😅
Good observation. Always raises the axiom, at least in my mind - No Pain no Gain. And I think that Gates and Buffet may be flawed examples (Gates - for example, was handed his wealth making machine through nefarious means if you study the real history of this globalist criminal).
Look at people like Mohnish Pabrai is doing exactly this, his PF is 80% in Micron, was 100% recently..
Thank you for your clear and slow speaking. 👍
I am Italian and can understand clearly your interesting contents.
Have a nice w.e.
Thank you! 😃@rob412
Volatility is mostly a problem if you are a short-term lump sum trader, for whatever reason. If you drip feed it can be a massive boon where you can potentially make money even in generally sideways markets just by buying those occassional small dips.
Great lesson Ramin, thank you.
My pleasure! @freewind1977
I’m a big fan of Harry too. Using his theory you can find out what’s the best allocation in a portfolio which maximises returns for the lowest volatility.
Really interesting. Thanks for the video!!
Glad you liked it! @Tim_gaylor
I think the biggest problem is trusting correlations, that can break down or reverse.
Love your content Ramin
Thanks @pathologicaldoubt
Awesome 🎉
Thanks 🤗 @tomotto3208
Would love to see your current portfolio allocations. Do you publish this anywhere? Thank you.
What is a recommended site with tools to plot our holdings or potential holdings?
Thank you excellent video as usual, i so appreciate the way you present information. According to Investopedia "The post-modern portfolio theory (PMPT) attempts to improve modern portfolio theory by minimizing downside risk instead of variance". Ramin can you do a video discussing this evolution, and your thoughts on it. Also are there tools online we can use to see how our portfolio correlates with our current portfolios. Practically how does one go about considering there risk tolerance and constructing an efficient frontier portfolio +/- PMPT (maybe example low 40/60, med 60/40, "higher risk" 80/20 portfolios). Also how to consider this theory when looking at the short, medium and long term investment timeline of a portfolio.
I try to do this with my portfolio but I did't have a calculation method to determine correlation between funds. However I've found some fund correlation tools on the internet which I will have a play with. In an age of rampant money printing I've felt they were all correlated. But this video has got me thinking about it.
What tools have you found @stevo? I struggled to find free corelation tools.
Ray Dalio All Weather worth a look? Although for UK investors very difficult to replicate and returns are similar to a 60:40 fund
how do you calculate the correlation of these assets please?
How do we identify the correlation of funds?
What do you think the best emerging markets fund or ETF is to balance my mainly US/UK equities portfolio?
I'd like an EM fund that excludes Chinese geopolitical risk and Indian expensive valuation risk but I don't think it exists.
Shouldn’t one hold 15% in energy sector stocks to improve diversification?
Problem with using bonds to lower the standard deviation for the value of your portfolio is that government bonds have in recent years not been significantly less volatile than stocks. Compounding the problem is the negative returns on many government bond funds in recent years (eg UK gilt funds). At the end of the day your UK gilts have not lowered the volatility in the value of your investment portfolio and have also returned you rather large losses since 2021.
Which alludes to the issue of portfolio construction using historical returns. Up to 2021, a large chunk of historical bond returns would have been based off a declining interest rate environment, so of course the historical risk-adjusted return at that time would have looked decent. Anyone who tried to build a Markowitz portfolio based off this in 2021 would have been destroyed.
Bonds and stocks are uncorrelated, not negatively correlated.
@@tspmh9127 standard deviation is not the correlation coefficient.
Fractional shares are raising issues with FCA!
If you are in your 20's, do you really need to diversify to reduce risk in your SIPP?
Hi @helixvonsmelix to some extent I'd argue "yes" i.e. putting your entire life savings into Tesla, even if you're 20, is probably a bad idea. That's because most stocks underperform the broad market even over their entire lifetime from IPO to merger/bankruptcy so you could come a cropper if the single horse you've backed goes bankrupt or just underperforms long-term. Thanks, Ramin.
Commission free trading? What is the catch? It must be on the spread!!!
Unless something like the Gilt crash happens…
I'd like to know how the 'Efficient Frontier' is calculated?
Hi Mike, for a given return you construct a portfolio such that it minimizes the volatility subject to constraints like the portfolio is long-only (no short positions so the weights are positive) and there's no leverage. This is usually done with a quadratic optimizer. Thanks, Ramin.
@@Pensioncraft Is that facilitated by a 3rd party provider once given a specific portfolio. (I'm looking at short duration corp bonds and money market funds.).
I've always had this question regarding MPT; like, why would Texas Instruments be more or less efficient than Intel or Taiwan Semiconductor. I guess it's easier using funds or ETFs. The volatility idea helps also.
Nothing is commission free, you have told us that many times 😅. Great content nevertheless!!
Wdym
I cant say i really get the term "risk" on a long enough timeframe, 10+ years there is no risk... if you want the return that equities offer then just invest and wait, if you're unlucky with timing and you hit a drawdown then just wait some more its really no big deal. All diversifcation does is cost you upside...
Also, it isn't really fair to still call something from the 1950's "modern" very misleading
There have been times in history when stocks were flat for 20 or even 30 years. "Just wait" doesn't always work.
@@chrisf1600 not true im afraid, no matter what day you pick as a starting date there has never been a period longer than 10 years to see a positive return. At least in the US stocks over the past 150 years.
@@goober-ll1wx I'm referring to real (inflation-adjusted) total returns from the S&P 500 since 1872. I can't post the link, but please search for the page "The Latest Look At The Total Return Roller Coaster". There are three separate 15 year periods with a negative real total return. There's one 20 year period with a negative real return. The worst 30 year period in history only returned 1.91% annualized. OK, it's better than nothing, but it's a far cry from the long-run average of 6-8%. My point is that, depending on how old you are, you might not live long enough to see a real return on your investment.
Honestly, I don't think you needed to calculate the sharpe ratio to know that Madoff was a scam. Common sense would have worked just fine 😂
Except he went on for many years and with no one spotting 'the common sense'. 20/20 hindsight is very easy.
Aint no theorists driving lambos.
In my opinion, I don't rate MPT at all. It is a great theory with some practical application but, in reality, it just falls short. Diversification according to Warren Buffet and Charlie Munger is "great for people who don't have a clue what they are doing."
Diversification via index tracking equity ETFs is excellent, and recomended btw by Buffet himself, but at the end of the day timing the market is critical to achieve decent returns over time. Money invested in equity ETFs when the market is red hot will yield meagre returns for many years into the future. Those who invested in the S&P 500 in the year 2000 for example endured losses for a decade or so.
@@radam2818Your theory has been disproved over and over.
@@johnristheanswer i don't think so. Valuations still matter. You have to make sense of when it is reasonable to buy and, above all, when it is better to stay quiet. It is in this sense that I used the expression "timing the market".
@radam2818 Thanks for making that clear to others. Timing the market is impossible as no one knows the bottom of course.
Good educational video.
This theory is the premise for the leveraged stocks+bonds etfs portfolio strategy (arXiv:2103.10157). However, in 2022 the historically unlikely event happened where both asset types (stocks and long duration bonds) went down (positive rather than negative correlation), making the strategy perform poorly. What do you think, how will this strategy continue to perform throughout the decade?
If all risks can be diversified away with 100% certainty in a portfolio an individual should only expect to receive the risk free rate because the difference would be quickly arbitraged away