Who is Harry Markowitz?

Who is Harry Markowitz?

Hey, welcome to this quick segment on Harry Markowitz. Who was he? What did he do? And what do we learn from his work? Well, he basically figured out the mathematical process that there is a a combination of risk that you can allocate, different assets to, to optimize the return. Okay. Or another way to say if you’re, you’re shooting for a particular set of returns, then there’s a way that you can optimize the asset allocation or minimize the risk.

And if you plotted that at all the different points of your risk spectrum, you would get what’s called the efficient frontier. And so he laid the groundwork for modern portfolio theory. Now, what caught me about his work, is the geek side of it, just loving all the numbers and the math behind it. But then when I started digging into how he actually allocated his own money, then I got to see a little difference, right?

There was a little bit more behavioral finance in it, you know, and he basically said, well, I get that. I’ve proven mathematically how you should optimize your portfolio, but my own money, I’m going to put 50% in bonds and 50% in stocks. Basically, he was trying to minimize his future regret, the future regret of if he was 100% in stocks and lost a whole bunch of money, or if he was 0% in stocks and the market, you know, went up a lot.

And so what we get to do here at Centennial is we get to actually find and balance that, that behavioral coaching with the expertise of the markets, the efficient frontier. Because we first figure out what is your required rate of return. Here’s what you need to make to make your plan for retirement work. Let’s just go backwards and then figure out, using all assets, options to figure out what a perfect portfolio for you might look like.