Portfolio tactics. Tells a personal broker

We analyze two approaches to investments – optimization and timing models

Portfolio tactics. Tells a personal broker

Personal Brokers help to understand, how to form a long-term portfolio and not be distracted by news noise. Let's talk about portfolio tactics today..

Wealth Management Consultant

Frost Vildanov, Personal broker

Some investors believe, that the key to success is, to choose the right moment to buy and sell shares. Others prefer to classify assets in a portfolio. Of the many approaches to investment, one can single out

Optimization models, usually, based on the portfolio theory of Harry Markowitz, which we have already analyzed.

These models solve the following tasks:

• maximize profitability at a fixed risk;

• minimize risk with fixed income.

Emergence of the theory, describing optimal portfolios, simplified the task for long-term investors. It became clear, what, if you collect assets with a negative correlation in a portfolio, it will reduce the risk on the long horizon.

Timing models help to manage the portfolio structure based on the current phase of the business cycle.

The most famous approach is to change the ratio of stocks and bonds in a portfolio depending on the Schiller ratio (CAPE). To calculate it, the current share price is divided by the average profit for the last 10 years, adjusted for inflation.

The coefficient can be applied to any stock index and shows 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 stocks and increase the share of bonds in the portfolio.. Oversold, against, characterized by low prices. This is the right time, to add stocks to the portfolio.

There are other models, including elements of technical analysis. They use indicators, which help traders determine when to buy and sell stocks.

These and other approaches can be used when building a portfolio.. At the same time, it is important, so that the portfolio is selected based on your goals, investment horizon and risk profile.

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