Care to join us on a little journey through time? The foundation for building a securities portfolio efficiently was laid more than 60 years ago. A paper published in 1952 by US economist Harry Markowitz marks the starting point for over six decades of refining and optimizing his ideas within capital market research.
Put simply, Markowitz succeeded in calculating the blend of stocks and low-risk investments (high-quality bonds or money market instruments) that, for a given expected return, can be expected to produce the smallest possible fluctuation in portfolio value (i.e. risk). He was therefore able to construct portfolios that take near-optimal advantage of diversification.
Systematic vs. unsystematic risks
The less well-known but no less important economist William Sharpe made a key contribution to Markowitz's theories in the 1960s. Sharpe took risk head-on and dissected it into two parts. The first part, so-called systematic risk, refers to the price fluctuations you inevitably have to accept as an investor when you take a broadly diversified position in the stock market, for example through ETFs. Set against this is unsystematic risk. This is the risk that individual stocks carry within them by their very nature, but which has little to do with the general development of the global stock market. An investor can only expect additional compensation – a risk premium, as the jargon has it – for taking on systematic risk. This is referred to as the premium for taking on general market risk, in other words for an investment in the broad (blue-chip) market.
According to Sharpe, the weighting of securities should be based on their respective market capitalization. Investors' differing risk appetites are accommodated by assigning different weightings to the two investment segments – low-risk investments on the one hand and higher-risk investments on the other. One thing is crucial here: your individual risk appetite is the factor that should decisively shape how the portfolio is built – and not, as many investors still mistakenly believe, your current assessment of the markets.
Harnessing diversification potential across asset classes
In addition to the (blue-chip) market premium already mentioned, there are two further sources of premium in the stock market: small caps and value stocks. With a consistent, long-term investment, these offer you the chance to systematically capture returns that go beyond the general market return. As a general rule, therefore: an efficient securities portfolio always harvests all available premiums, and in doing so also makes use of the diversification potential that exists between asset classes. In sum, a portfolio built on scientific criteria covers the following market segments:
- Low-risk bonds
- Low-default-risk bonds with a long remaining maturity
- Bonds carrying default risk
- Blue-chip stocks
- Small caps
- Value stocks
95%
of a securities portfolio's long-term performance is based on decisions about asset structure
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Globally diversified and risk-aware
So what's the moral of this journey through time? Both the work of the pioneers of financial market research and the most recent studies make one thing clear: a whopping 95 percent of a securities portfolio's long-term performance is based on decisions about asset structure. The lesson for your investments is that you should let go of the all-too-human hope of finding one supreme investment strategy, or one supreme portfolio manager whose supposedly extraordinary talents will pave your way to eternal riches.
Instead, you should put the findings of more than 60 years of scientific financial market research to work for you. quirion applies these tested investment principles consistently and draws a clear line between speculation and investment. This digital asset management invests in a globally diversified way and takes your personal risk appetite into account by gradually adding bonds to the mix.
