Wednesday, January 31, 2007

A More Sophisticated Approach to Portfolio Construction

I don't think this article is as novel as the author and the blogger are making out. All it really says is build a balanced portfolio out of uncorrelated assets and then lever it up. Modern Portfolio Theory allows for that. But it is a more sophisticated approach to constructing an efficient portfolio than you will hear about in articles geared to the small investor that appear in the mainstream financial press. But you don't want to use very high margin lending rates to achieve this. You can achieve similar results by investing the stock portion of the portfolio in leveraged mutual funds, stock index futures etc. This means that less of your capital needs to be devoted to investing in stocks and more will be directed to real estate, bonds etc. The end result is a leveraged balanced portfolio. It will probably have lower volatility for a similar level of returns as an unlevered all stock portfolio.

This isn't far from the way my portfolio is currently constructed with a balanced mix of stocks, bonds, real estate funds etc. and then using leverage to trade stock index futures and ETFs. In the long run, I want to have a core of more hedge fund like investments for perhaps 50% of the portfolio, about 40% in funds which I will change the mix of over the 4 year stock cycle to have more stocks or more bonds and about 10% as capital for leveraged trading. Or up to 100% invested and then borrowing using low margin rates for the cash needed for trading. Currently Ameritrade are charging my account size a 10.5% margin rate which is ridiculous. CommSec in Australia are charging 8.9% (and interest rates are higher in Aus!). Interactive Brokers rate is less than 7%. The latter is economically viable.


violeta said...


My name is Violeta I live in Argentina. I made, with my brother, a Mail Checker with a postal seal of The Moomins. I would like that you know it!
( My mail checker is the third in the list )

I hope that you like it, thanks, Violeta.

mOOm said...

I downloaded it. It's VERY cool!

violeta said...