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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

End to 15-year-rule for expats

Great news for the clients of expat financial services: the government has announced proposals to abolish the 15-year time limit on the right of expats to participate in UK general elections.

The policy statement, which was published as part of document entitled “A democracy that works for everyone: British citizens overseas”, details the government’s idea of ensuring rigorous checks on the identities of expats so that they can register to vote without suspicion of fraud.

Furthermore, cost analysis performed by the government predicts that ending the 15-year rule and implementing an expat voting registration scheme will actually cost only a six-figure sum; far less than the millions of pounds some experts have previously claimed it would require.

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Is joint-sovereignty on the cards for Gibraltar?

GibraltarThere have been new developments regarding Gibraltar in recent Brexit negotiations and they should give Gibraltarians hope that Spain will refrain from making any unnecessary demands to make things difficult for Britain.

Spain’s foreign minister, Alfonso Dastis, has confirmed that Spain will not “jeopardise” any Brexit agreement in a bid to reclaim the Rock. “I won’t make an agreement between the EU and the United Kingdom conditional on recovering sovereignty over Gibraltar,” Dastis said, speaking to the Spanish newspaper ABC.

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