The purpose of an investment portfolio: to make as much money as possible, while taking as little risk as you can get away with.
Because the financial world is overrun with the graduates of highfalutin business schools and holders of various math-based degrees, this general concept can't just stand at that. It has to get slathered with lots of complicated calculations and important-sounding jargon.
The ideas we noted above (maximizing returns and minimizing risk) contribute to a concept known as modern portfolio theory (jargon alert!). Meanwhile, the risk aspect gets measured in an equation tracking what's called variance (calculation alert!). Modern portfolio theory seeks to provide a mathematical description of the risk/reward balance inherent in any portfolio. That way, fund managers can crunch the numbers and see if they really have ample diversification. Portfolio variance measures this quality. It determines whether the assets in a portfolio are too closely correlated in performance to provide meaningful diversification.
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Finance: What does it mean to rebalance ...1 Views
finance a la shmoop what does it mean to rebalance an account alright people
here's your account pretty broad-based equity portfolio and pretty pie chart -
they're nice going there editor's 17% bank and insurance 14%
telecommunications 9% consumer comestibles 6% drugs legal ones 11%
chemicals in commodities 8% transport and whoa 35% tech well just five years
ago Tech was only 15 percent of your portfolio and it performs better than
double the returns of the rest of the market in that time period so Wow what
time is it need a high tech watch to answer no its rebalancing time why well
because you want to just compound at market rates and yes Tech has been
amazing and wonderful and loving but Tech can get crushed in bad times as
well and the huge 37% exposure to it is well keeping you up at night and it's
see it's gotten up 2% there since we started this video it's just too much [girl waking up in bed at night]
risk attributed to one relatively narrow area of the investing economy even [pie with a risk tag on it]
though it touches everything well you're thinking about making tech more
representative of a balanced broad S&P 500 index fund where in that fund it [S&P 500 document]
represents on only say 11 or 12 percent so you sell some Apple you sell some
Google you sell some Amazon Facebook Netflix Microsoft and you buy a [company logos]
smattering of high dividend high yielding defensive stocks like Chevron [military plane flying]
for Dow Chemical and Bank of America it's kind of defensive in practice [company logos]
portfolio managers rebalance their portfolios all the time so they
represent the promise they made to investors when they raise the money in [scale with tech out-weighted by diverse products]
the first place to be a fully diversified fund taking only market risk
in the process and if they still need to do any rebalancing beyond that and well [people doing yoga in park]
then they just enroll in a hot yoga class
Up Next
Modern Portfolio Theory claims there's a smart way to invest. If it's not "put all your money under your mattress," we might be doing it wrong...
