Question: Several years ago, probably more years than I care to think about, you presented your thoughts on a balanced portfolio that included commodities. The commodities part was not an insignificant percentage, maybe 20%. I jumped right in at that time. At first the commodity part did very well. Here lately, of course, not so well. Read more »
Lesson 11 – Your Life Is Only One Experiment
To be fair, I must note that a few theorists have offered a plausible case against reversion based on chaos theory, arguing that “off-the-chart” results occur in real life that normal statistics claim are impossible. (For instance, based on the calculated daily volatility of stocks, there is simply no way the U.S. stock market could Read more »
Lesson 10 – The Market Is Not a Pure Coin Flip
In the previous lesson, I promised to provide three reasons to use the median (which improves with diversification) instead of the mean (which does not). I’ll start with my weakest argument, although it is one shared by many academics in the field of finance: Equity returns revert toward long-run averages. The book that first popularized Read more »
Lesson 8 – Modern Porfolio Theory
Please read this one slowly (and, hopefully, more than once). Modern Portfolio Theory (MPT) is one of the most important concepts in investing to understand. It isn’t obvious: indeed, Harry Markowitz won a Nobel Prize in economics for coming up with this idea in 1951. (So the idea isn’t really all that modern at this Read more »
Lesson 7 – The Problem of the Short Term
People sometimes get the impression that I think all investors, regardless of their personal circumstances, ought to keep 100% of their investment funds in stocks all of the time. Now I won’t be so disingenuous as to say, “Nothing could be further from the truth.” But I will say that isn’t the truth. As books such Read more »