Portfolio theory is an investment approach developed by University of Chicago economist Harry M. Markowitz (1927 – ), who won a Nobel Prize in economics in 1990.
Portfolio theory allows investors to estimate both the expected risks and returns, as measured statistically, for their investment portfolios.
Markowitz described how to combine assets into efficiently diversified portfolios. It was his position that a portfolio’s risk could be reduced and the expected rate of return could be improved if investments having dissimilar price movements were combined.
In other words, Markowitz explained how to best assemble a diversified portfolio and proved that such a portfolio would likely do well.
There are two types of Portfolio Strategies:
A. Passive Portfolio Strategy:
A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index.
A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities.
B. Active Portfolio Strategy:
A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly.
Moreover, there are three more types of Portfolios:
1. The Patient Portfolio:
This type invests in well-known stocks. Most pay dividends and are candidates to buy and hold for long periods …
The vast majority of the stocks in this portfolio represent classic growth companies, those that can be expected to deliver higher earnings on a regular basis regardless of economic conditions.
2. The Aggressive Portfolio:
This portfolio invests in “expensive stocks” (in terms of such measurements as price-earnings ratios) that offer big rewards but also carry big risks.
This portfolio “collects” stocks of rapidly growing companies of all sizes, that over the next few years are expected to deliver rapid annual earnings growth.
Because many of these stocks are on the less-established side, this portfolio is the likeliest to experience big turnovers over time, as winners and losers become apparent.
3. The Conservative Portfolio:
They choose stocks with an eye on yield, as well as earnings growth and a steady dividend history.
Whichever strategy or type you will use, managing successful portfolios are a bit like cultivating gardens!
Although the fruits of one’s labors do not appear immediately, it is essential to maintain discipline and vigilance while focusing on the eventual harvest.
Discipline and vigilance must always characterize your management style. Stick to a core strategy with a low-risk profile, reflecting a more disciplined, value-oriented and diversified approach.
When markets rise many investors feel comfortable just to be participating. But when markets start gyrating investors start taking more critical looks at their portfolios.
On several occasions, stock prices will experience substantial increases or severe declines.
Amidst these ups and downs, follow your strategy, and as a refuge, concentrate mostly on dividend paying stocks and attractively priced companies that are poised for positive change.
Sweating over your portfolio?
You can beat the indexes and funds!
There are three ways to win:
1. Rational Analysis
2. Crystal Ball and
3. Inside Information!
You’d better leave the last two methods to fortune tellers and spies!
You should always focus on rational financial analysis with fundamental screening and charting.