A New-Age Investment Philosophy
A New-Age Investment Philosophy
Potential Return and Volatility
At the most basic level, we’re looking for two things out of our investment portfolios: (1) high returns and (2) low volatility. The goal of any investment strategy is to maximize investment returns while minimizing the fluctuations of the portfolio’s overall value. In an ideal world, our portfolio returns would look something like the chart below:
This straight line increase in the value of our portfolio is created by earning a 10% return every year without fail. This is ideal because we know what the value of our portfolio will be at any point in the future. So, if I want to have 0,000 available at retirement, I’ll now exactly how much I need to invest every year to get to 0,000 at retirement. Unfortunately, this isn’t a reality. Investments fluctuate in value on a daily, weekly, monthly and annual basis. I would argue that no investment, not even government bonds, provides a certainty of real return (more on this later – for now, real return is the return we receive after inflation of the money supply is taken into account). So, we’re left with charts of the value of our investment portfolio looking more like the chart below:
In the real world, we’re not sure what the value of our portfolios will be in 3 months, 1 year, 5 years, etc. This characteristic of our portfolios is magnified by holding more volatile investments and reduced by holding less volatile investments. Generally, investments are more volatile the less certain their future value is. For example, a government bond issued by a G20 nation has a relatively certain future value because the market has a high level of confidence that