We analyze two approaches to investments – optimization and timing models
Solo Brokers help to understand, how to form a long portfolio and not be distracted by news noise. Now let's talk about portfolio strategies.
specialist money management
Some financiers think, that the key to achieving is, to correctly choose the moment of buying and selling shares. Others prefer to distribute the assets in the knapsack by class. Of the huge number of investment approaches, one can single out
Optimization models, usually, based on the portfolio theory of Harry Markowitz, which we have already analyzed.
These models solve subsequent problems:
• maximize efficiency at a fixed risk;
• reduce the risk with a fixed efficiency.
Emergence of the theory, which describes rational knapsacks, simplified the task for long-term financiers. It became clear, what, if you collect assets with a negative correlation in a portfolio, this will lower the risk on a long horizon.
Timing models help to manage the structure of the backpack based on the current phase of the financial cycle.
The most recognizable approach is changing the ratio of stocks to bonds in a knapsack depending on the Schiller ratio. (CAPE). To calculate it, the current value of the share is divided by the average profit over the past ten years., adjusted for inflation.
The indicator can be applied to any stock index and indicates whether the market is overbought or oversold.
Overbought means, that the market is more expensive, than usual. In this situation, you can reduce the share of shares and increase the share of bonds in the knapsack. Oversold, vice versa, characterized by low prices. This is the right time, to add shares to the portfolio.
There are other models, which include elements of technical study. They use indicators, helping?? for participants in exchange trading to determine the moment of purchase and sale of shares.
These and other approaches can be used when forming a backpack.. With all this, in principle, so that the portfolio is selected based on your tasks, investment horizon and risk profile.
