Without a blueprint – you can’t create a house! Without a focal investment strategy most investors (and their financial advisors) make psychological, illogical, and frequently irrational investment decisions to their own financial detriment. In 1990 Harry M. Markowitz, a professor at Baruch College of the populous city School of New York, received a Nobel Prize in Economic Sciences.
His lifelong studies in the fields of investment risk, investment return, security relationship, and portfolio diversification will be the basis of what we realize today as “Modern Portfolio Theory”, or “MPT”. Modern Portfolio Theory is well-known in the investment community as a logical basis for sound portfolio management concepts. Modern Portfolio Theory should provide as a foundation for your investment planning “blueprint” as well. The crux of Modern Portfolio Theory (MPT) is the partnership between investment risk, return, and relationship.
Those factors are charted on what’s called the “efficient frontier” graph. The effective frontier graph illustrates securities expected coming back and the chance associated with achieving that expected investment return. On the left of the efficient frontier graph (the Y-axis) is the expected investment return plotted vertically. The horizontal footing (the X axis) is a dimension of the security’s expected risk (as illustrated by its standard deviation). The efficient frontier is a carefully upwards sloping arch stretching out, starting in the lower left corner and fading into the upper right part. That lightly sloping line signifies portfolio opportunities providing the utmost long-term expectation of profile return, with the least risk (volatility or … Read the rest