Contact

News & Insights

Successful Wealth Management in 2019

Modern Portfolio Theory

Modern Portfolio Theory (MPT) was developed by the economist Harry Markowitz and the paper from which the theory came, Portfolio Selection*, won him the Nobel Prize in Economics in 1952. It outlines two fundamental ideas:

  • All investors will seek the maximum level of returns possible for their level of risk tolerance
  • A well-diversified portfolio can significantly mitigate risk.

The theory broke new ground in the way it postulated that individual investments should be considered within the wider context of an overarching investment portfolio and its overall level of risk and return.

Markowitz theorised that within the context of a carefully diversified portfolio, if some assets performed poorly, others would perform well in compensation. As such, your portfolio should be considered as a whole, rather than examining the volatility of its constituent parts.

In a nutshell, MPT theorised what we all know instinctively: don’t put all your eggs in one basket.

MPT in the 21st century

MPT and its relevance to portfolio diversification continues well into the 21st century. Whether an investor has an active or a passive approach, and whatever their risk tolerance, the overarching advice given today is that diversification by percentage in different instruments and sectors will serve them best – and that’s MPT at its most basic level.

MPT has led to the use of quantifying statistics such as the beta coefficient which is a measure of volatility (also known as systematic risk i.e. interest rate fluctuations, recessions, wars, etc.) which is used as a comparison to the unsystematic risk (risk relating to a particular company or industry sector) across the market as a whole. Beta expresses the returns of a particular security in relation to movements in the market. Beta is used in CAPM (capital asset pricing model) for pricing securities with a higher than average risk profile.

So, theory begets modelling and while MPT has been fundamental in providing a foundation for wealth management and investing strategies for decades, it is only one economic theory and has limitations in the practical sphere. In the end, successful investing depends on the individual approach and knowledge of the investor and/or their investment manager.

Blacktower Financial Management

Blacktower Financial Management is committed to helping you define and then reach your financial goals, from education fee planning to savings, pension planning and investment management. We offer a range of actively managed portfolios, the Nexus Portfolio Range, which provide a variety of opportunities for both the protection and growth of your wealth.

We are a fully regulated wealth manager with offices throughout Europe and we can help you choose the right products and services for your circumstances and goals.

As international financial advisers our consultants speak fluent English as well as the language of the country they operate in and all are well-versed with the regulations, issues and interests of the local communities in which they live and work.

* https://www.math.hkust.edu.hk/~maykwok/courses/ma362/07F/markowitz_JF.pdf Accessed 17-09-19

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

Other News

Taking a preventative approach to common expat stress factors

Man sitting in windowMoving overseas is exciting. The idea of making a fresh start in an exotic location is generally a cause for optimism and joyfulness, and for many becoming an expat will bring a positive outlook for the future.

But expatriates have a lot to consider before saying goodbye to their home countries: sorting out a new home, finding a school for any children who will be moving as well, and figuring out what’s best for future finances (an international financial adviser can help you with this) are all sure to be top priorities.

Read More

Portugal’s Algarve every golfer’s dream

Golf ballIt’s not hard to see why Portugal is such a desirable destination for people wishing to move overseas in their retirement. The warm climate, reasonable living costs, and tax benefits for retirees mean it’s regularly voted as a top global place in which to live out one’s later years.

It is often said that retirement is the best time to pick up a hobby, and different destinations offer different opportunities for leisure. When it comes to sport, Portugal has a very specific reputation – it’s a golfer’s paradise!

Read More

Select your country

Please select your country of residence so we can provide you with the most relevant information: