One of my favourite lessons in Business School was on Modern Portfolio Theory (MPT). The MPT introduced by Harry Markowitz, starts from the premise that investors should maximize returns while staying within their comfort zone of risk. The crux of this approach lies in constructing an investment mix that combines both stocks and bonds, carefully tailored to create a diversified portfolio.
The Power of Diversification
At its core, the principle is straightforward yet powerful. Stocks offer the potential for higher returns but come with higher risk, while bonds generally provide lower but more stable returns. Combining these asset classes constructs a portfolio that yields better risk-adjusted returns by limiting drawdowns - a portfolio that should navigate market turbulence more effectively. The key principle being that…