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Nobel Prize-winning economist Harry Markowitz on the best way to invest



Understand why diversification is the only free lunch in investing

Robin Powell: Diversification is sometimes referred to as the one free lunch in investing. That’s really just common sense, but so many investors, including the professionals, fail to take advantage of it. The most famous proponent of diversification is the Nobel Prize-winning economist Harry Markowitz. He says it’s just as critical today as it was when he first started writing about it in the early 1950s.

Harry Markowitz: Suppose there is only two asset classes in the world: stocks and bonds. And, bonds means just savings accounts or whatever is convenient. If you are a 21-year-old with a great deal of personal capital, you can go 100% into stocks. Then you switch to 50% and so on. If you’re getting on in the years you should be maybe more in bonds. But, you’re not going to consume everything at age 65, you’re going to live beyond. So, don’t go 100% in.

RP: Professor Markowitz says the biggest mistake investors make is that they chase performance, and often buy at the top and sell at the bottom.

HM: If gold is going up, there are people who are rushing in to buy gold. There are two kinds of people: ill-advised and well advised.

RP: So, how do the well-advised invest? Professor Markowitz gives the example of a lady who works at his local deli in San Diego.

HM: She overhears me having a conversation like this and she said: “How should you invest?”. I say, “Take half your money and put it in your savings account and take the other half and put it in a Vanguard, well-diversified, equity portfolio and leave it”.

RP: Global stocks have been on a long bull run. Professor Markowitz says that will end at some point, though it’s almost impossible to say when. This is his advice in the meantime.

HM: Diversify and rebalance. They never invite me onto television because my message is — don’t look at television, diversify and rebalance.

RP: So, there you have it. Investment advice from a Nobel Laureate. Remember diversify, and every now and again, rebalance to restore your original asset allocation.

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