2023-08-22 12:28:59
Stock traders sit in front of their monitors in the trading room of the Deutsche Börse in Frankfurt am Main. Image: dpa
If you want to increase your money, you don’t need complicated investment models. Sometimes it even helps to know little.
Harry Markowitz is an indispensable part of the modern investment world: he is considered the father of the so-called portfolio theory. In 1990 Markowitz received the Nobel Memorial Prize in Economics for his theories in Stockholm. The core of his ideas is to use mathematics and statistics to achieve an optimal distribution of the money to be invested across different assets. But Harry Markowitz once admitted that he doesn’t do complicated calculations himself, but simply invests half of his assets in bonds and equities. In short: Harry Markowitz himself had no Markowitz portfolio.
The idea of simply dividing your wealth evenly across different asset classes, like Harry Markowitz, is called naive diversification. This idea is not all that new, as the Talmud already says that one should divide one’s wealth into three parts, one third in land, one third in goods, and one third ready to hand, i.e. in cash. This is also referred to as so-called heuristic investing. A heuristic is a rule of thumb, a simple guide to solving complex problems. A complex problem like how to allocate your wealth between different asset classes is answered with a simple rule of thumb: spread it evenly across all asset classes. Arguably the most famous example of a heuristic is the Gordian knot, a complex problem for which Alexander the Great found a simple solution. He struck it through with the sword.
#doesnt #complicated #investment #model