Investment planning and the D-Day landings…
The horror of the landing efforts as troops in heavy and cumbersome combat gear waded waist high through choppy, blood-stained water in the face of sustained enemy fire, must be etched deeply in the memories of those who took part.
Although US General Dwight Eisenhower led the Allied forces, the planning for D-Day was the responsibility of leading statisticians and mathematicians. Their role was to analyse all the various factors and to select — on a risk versus reward basis — which beaches were best placed to provide the optimum result.
At the end of the war, the boffins decided to apply their D-Day calculations to the world of investment and low and behold, the Modern Portfolio Theory (MPT) was born. Essentially, MPT proved that diversified portfolios were less risky than concentrated portfolios and that assets should, where possible, be uncorrelated.
Prior to that revelation, investment selection processes had been hit and miss, as was demonstrated at the Wall Street stockbrokers’ Christmas lunches. Children were invited to throw darts at the share listing pages of the Wall Street Journal and on that basis the kids regularly out-performed New York’s most respected stock market analysts!
The point of the foregoing, is that diversification is the key driver of investment returns and can reduce the risks. In which case, why do so many investors expose their investment and pension portfolios to much higher risks than they need to while putting up with poor results?Watch the video
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