Efficient Frontier
“A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies “ — Harry Markowitz (winner of 1990 Nobel prize for his theory on “on evaluating stock-market risk and reward and on valuing corporate stocks and bonds.”
So, before we walk you across this Nobel winning theory and how this theory acts as one of crucial backbones of our recommendation engine, what we might want to do first is to get you acquainted with risk and reward relationships.
The risk–return spectrum is the relationship between the
amount of return gained on an investment and the amount
of risk undertaken in that investment. The more return
sought, the more risk that must be undertaken. Often
risk is also associated with time as well. The sooner
you want a higher/considerable return, higher the risk
will be as one might have to investment in asset classes
with significantly volatile returns.
Indeed. Not all goals are similar. Few are long terms
goals like housing, education and few are short terms
like world tour or the next new car and then there are
the extreme long-term ones like retirement income goals.
Time buys you the luxury to offset risk. Long terms
goals can be fulfilled with medium to moderate risk,
while short term goals bear higher risk due to shorter
timelines and faster reward generations.
At Finvest.Ai our aim is to get the maximum/optimum
return/reward for your invested capital. Through a blend
of various asset classes with varied return rates and
risk classes we assist you in achieving those multiple
goals in a more synchronous way.
Traditional investments in fixed income products like fixed deposits and govt bonds not only impact your maximum potential to earn but also limit your capacity to think and achieve greater things in life. Refer to our blog “thing big think better” for better context. That said we aim to get maximum returns with optimum risk and guide you on the go to recalibrate the risk and reward parameters.
Traditional investments in fixed income products like fixed deposits and govt bonds not only impact your maximum potential to earn but also limit your capacity to think and achieve greater things in life. Refer to our blog “thing big think better” for better context. That said we aim to get maximum returns with optimum risk and guide you on the go to recalibrate the risk and reward parameters.
For starters imagine all the red and black dots as
various investment portfolios. As an investor your
portfolio will end up being one of the many
red/ambers/blue color dots. Few with high risk and high
returns while others where the risk is high, and returns
are moderate.
The optimal portfolio does not simply include securities with the highest potential returns or low-risk securities. The optimal portfolio aims to balance securities with the greatest potential returns with an acceptable degree of risk or securities with the lowest degree of risk for a given level of potential return. The points on the plot of risk versus expected returns where optimal portfolios lie are known as the efficient frontier.
Let’s us explain you step by step the journey of a retail investor.
The optimal portfolio does not simply include securities with the highest potential returns or low-risk securities. The optimal portfolio aims to balance securities with the greatest potential returns with an acceptable degree of risk or securities with the lowest degree of risk for a given level of potential return. The points on the plot of risk versus expected returns where optimal portfolios lie are known as the efficient frontier.
Let’s us explain you step by step the journey of a retail investor.
Many a time new retail investor tend to be super
conservative and end up being in Zone 1.
This happens due to multiple factors like sheer fear of losing wealth, extremely low risk appetite, lack of guidance or proper understanding of financial asset classes and risk-reward relationships. This leads to a highly underutilized portfolio generating low or minimal returns
This happens due to multiple factors like sheer fear of losing wealth, extremely low risk appetite, lack of guidance or proper understanding of financial asset classes and risk-reward relationships. This leads to a highly underutilized portfolio generating low or minimal returns
Due to incorrect selection of asset classes, investors
at times tend to expose their capital to comparatively
higher risk while still generating lower or average
returns. This is by far the trickiest situation an
investors portfolio can land into. Besides low or
moderate returns an investor might also end of loosing
his capital due to high-risk exposure.
Through some bit of guidance and knowledge quite a few
investors make it to Zone 3 where in they can increase
the return on their investments through high risk. While
this sounds convincing what if we tell you that you
would not want to expose your capital to such risk and
while optimizing the same and expect similar or higher
returns and that’s where the Zone 4 investors exist
In the below picture the all the green dots on the green
curve are Zone 4. That means for varying levels of risk
for all type of investors there’s always an optimized
portfolio existing where in the risk is optimized and
the returns are maximum. No matter what your risk and
return expectation is the efficient frontier will always
have an optimum portfolio for you. This not only means
better returns but also safer returns
Do remember the world is everchanging and there’s no one
solution fits all option available for any investor.
Goal based investing is a custom made and personalized
solution. Remember that tailor made suit that fits you
well and not to your cousin (if you have one who tried
borrowing it). Know why? Because that was stitched to
your needs and preferences.
An investment plan which a based on personal goals is similar to that personalized suit that we just spoke off.
An investment plan which a based on personal goals is similar to that personalized suit that we just spoke off.
- Efficient frontier is based on historical data. Correlation will change so will the composition and recommendations. What is today will become history tomorrow and will shape your portfolio accordingly. Our learnings from last 50 years while will chart out our present and on the other hand what is today and tomorrow will pave the way for your future.
- With the changes in underlying factors like socio economics drivers, GDP and inflation rates, foreign exchange rates and many more the “ideal” portfolio will change. While this change is not radicle but subtle and will change the composition in long run basis our ongoing learnings
- There and limitless asset classes and investment avenues and so are the multiple combinations. Let’s say a million combinations to choose from (and yes, it is in millions). Through our trademark algorithm we recommend the most optimum asset classes and combination of those asset classes basis your risk reward appetite. Just a quick reminder risk appetite is inversely related to the time by when you must achieve a certain goal.
- Overheads costs like brokerage fees, management fee and taxes are not considered while churning out these recommendations. These may or may not have a significant impact on your bottom-line returns.
