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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.ust.hk/~maykwok/courses/ma362/07F/markowitz_JF.pdf Accessed 17-09-19

Other News

Spain Axes Expat Mortgage Tax

Euro coinsSpanish property ownership is a fairly common part of many expat wealth management strategies. However, Spanish taxes have been known to present obstacles to some expats in this regard and the uptake of both home ownership and property investment in Spain has suffered as a result.

Previously, the law held that expat buyers must pay mortgage tax out of their own pockets, which, as well as being an administrative annoyance also left many expats feeling a little like second-class citizens; however, with changes recently introduced by parliament, the tax will instead be paid by the bank financing the mortgage, with the new rules taking effect immediately.

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Defined benefit schemes – a ‘ticking time bomb’?

Following the news that no new buyer was interested in BHS and its £571 million pension deficit, a number of our clients with a working history in BHS got in touch with us to find out their position and options with regards to their future pensions. Unfortunately, it was too late as the window had closed. The BHS scheme got into the Pension Protection Fund, a statutory fund in the U.K., intended to protect pensioners if their pension fund becomes insolvent. What this means is that they are now locked in without any possibility of looking at alternatives and transferring out. For deferred members, this means a potential reduction in pension income as the PPF only compensates 90% of the income up to a certain cap.

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