Glamor Economics

Chapter 174

Chapter 22 Section 3 Eggs Cannot Be Put in One Basket - Investment Portfolio

American economist Markowitz first proposed the portfolio theory in 1952, and conducted systematic, in-depth and effective research.The theory contains two important contents: mean-variance analysis method and effective frontier model of investment portfolio.Markowitz's insight is that risk is the focus of the entire investment process. If there is no risk in an investment plan, there will be no difficulties, but the profits will be correspondingly low.Risk means that more may happen than expected.We don't expect a fire in the building we live in, but a fire may happen. In order to avoid this possible loss, we can only buy insurance; in the same way, we don't want the stock we hold to fall in price, but it may fall, so we don't use all our funds. Come buy a stock, even if it looks so promising.Markowitz uses the capital asset pricing model to answer how investors make trade-offs between risk and return, that is, how to build a risk-return balanced investment portfolio.The so-called rational investor means that the investor can maximize the expected return under a given expected risk level, or minimize the expected risk under a given expected return level.

When people invest, they essentially choose between uncertain returns and risks.Portfolio theory uses mean and variance to describe these two key factors.The so-called mean value refers to the expected rate of return of the investment portfolio, which is the weighted average of the expected rate of return of a single security, and the weight is the corresponding investment ratio.Use the mean to measure the general return of a portfolio.The so-called variance refers to the variance of the return rate of the investment portfolio.We call the standard deviation of returns volatility, which characterizes the risk of a portfolio.

Due to the different types of investors and investment objectives, we can choose the following three basic modes when choosing a reasonable investment portfolio:

1. The risk-taking fast-forward portfolio

This investment portfolio model is suitable for those individual investors who have a lot of income, strong financial strength and no worries.It is characterized by high levels of risk and return, and relatively heavy speculative elements.

This combination model presents an inverted pyramid-shaped structure, and the ratio of funds allocated to various investments is about 50% for investments such as savings, foreign exchange, and real estate.

Investors should carefully adopt this model. Before making an investment decision, they must first correctly estimate their ability to bear risks (whether it is economic ability or psychological endurance).For the high-income class, the family wealth is relatively good, and the monthly income is much higher than the expenditure. It is more effective to use the idle funds in the hands of high-risk and high-yield investment portfolios.This type of investor has a higher income, and even if there is an occasional loss, it is easy to make up for it.

2. Stable and Progressive Investment Portfolio

This type of investment portfolio model is suitable for investors with above-middle income, greater risk tolerance, and not satisfied with just obtaining average returns. Compared with conservative and safe investors, they hope that their personal wealth can grow rapidly.

This portfolio model presents a hammer-shaped organizational structure.The allocation ratio of funds for various investments is about 40% for savings and insurance investment, about 20% for bond investment, about 20% for funds and stocks, and about 20% for other investments.

This investment model is suitable for people in the following two age groups: from marriage to 35 years old, people in this age group are full of energy, their income grows fast, even if they fall, they are easy to get up, so this investment portfolio model is very suitable; 45-50 years old, people in this age group, their children have grown up, the family burden is reduced and the family has a little savings, they can also adopt this model.

3. Conservative and safe portfolio

This type of investment portfolio model is suitable for investors with low income and pursuit of financial security.

The market risk of the conservative and safe investment portfolio is low, and the investment income is very stable.

The conservative and safe investment portfolio model presents a positive pyramid structure.The distribution ratio of funds for various investments is about 70% for savings and insurance investment (60% for savings and 10% for insurance), about 20% for bond investment, and about 10% for other investments.Insurance and savings, two investment tools with stable income and minimal risk, form a solid and solid foundation. Even if other investment fails, it will not endanger the normal life of the individual, and the possibility of not being able to recover the principal is relatively small .

[links to related words]

An investment portfolio is a collection of stocks, bonds, and derivative financial products held by investors or financial institutions, and its purpose is to diversify investment risks.Investors choose an investment portfolio that suits them, make rational investments, and take the realization of capital value preservation, appreciation, and improvement of personal life quality as the ultimate goal of investment on the premise of not affecting the normal life of individuals.Personal investment must guarantee property and life. No matter what kind of investment portfolio model is adopted, no matter how large or small the proportion is, savings and insurance should be an indispensable part of personal investment.

(End of this chapter)