Efficient Frontier


Simple, powerful, obvious-in-retrospect concepts: in finance (and elsewhere) they're key to success. The fantasy of beating the stock market, in any meaningful way, is still fantasy. Sensible: diversifying so that, over the time horizon for an investment, return is maximized and risk minimized. "Modern Portfolio Theory" does that, with a bit of relatively straightforward mathematical modeling. Yes, models can be wrong — but they're explicit, they're testable, and in fact they're pretty good most of the time, especially over the decades. Handwavy "I'm smart (and rich, and handsome) arguments" aren't. (see Black Swan Swindle)

And the "Efficient Frontier"? That's the edge of a region on a graph, derived from Modern Portfolio Theory, where the blend of different investments cancel out as much short-term fluctuation in value as possible at a given level of long-term expected profit. Head for the Efficient Frontier; put more money into volatile high-return assets (e.g., stocks) when young, and shift toward less-volatile low-return choices (e.g., short-term bonds) as you age.

(cf. MoneyWisdom (2001-05-20), ... ) - 2014-08-27