User talk:Quebec/Portfolio theory

Wikipedia does this topic

I am curious how does this fit with Wikipedia's Modern portfolio theory? The generally philosophy of finiki is not to reproduce Wikipedia, just fill the gaps for Canadian investors, building on the vast knowledge base of FWF. Clearly this is just a rough guideline, but where a comprehensive Wikipedia work exists, care should be exercised to avoid duplication and write the FWF nuanced version. That all said, perhaps the best way forward might be using the {{Main}} template in the lead-in section to point to the Wikipedia article. If you need technical help on adding this, let me know. --Peculiar Investor 08:47, 3 January 2015 (MST)

Good point. But I am only aiming for a very basic introduction to portfolio theory, to illustrate why we mix stocks and bonds, and why we mix several types of stocks. No equations, no efficient frontiers, no portfolio optimization, no efficient markets, etc. Readers will be referred to Bernstein books and other sources for more information. Canadian content: there will be a correlation matrix (including several Canadian asset classes) and so on. This page is meant as a complement to the "risk" and "asset allocation" sections of the "Portfolio design..." page, and would also be linked with the "Simple index Portfolios" page. Many people don't care one bit about this stuff but personally, knowing what I intend to write up here, plus some financial history (tulip mania, the Great Depression, etc.), has helped me not to panic in 2008-2009. --Quebec 11:03, 3 January 2015 (MST)

Interesting idea, please continue. I suggest removing the spreadsheet formulas, as this introduces an "equation" to the content. Instead continue to reference Gummy - the concepts will be introduced in the appropriate context (as only Gummy can do...). --LadyGeek 11:40, 3 January 2015 (MST)

I understand the concepts you are developing, I'm just trying to understand how they fit into the existing mix of finiki articles. For example, how does this differ from asset allocation theory? The other challenge I'm finding is there are a number of new articles being developed in parallel which make it a difficult to collaborate across the project. I would suggest it might be more helpful to approach things in a more serial manner, it is quite okay to have links to articles that don't yet exist. --Peculiar Investor 12:14, 3 January 2015 (MST)

The core of the page will be graphs of annualized return vs. standard deviation, for different mixes of asset classes, to illustate how diversifaction works to reduce volatility. I don't see such graphs on "Risk and return", "asset allocation", or "Portfolio design...". To get to these graphs I have to explain a few basic things first... --Quebec 14:28, 3 January 2015 (MST)

"helpful to approach things in a more serial manner". It would, but I don't have a master plan:-) This particular endeavour started with the fact that I don't like the last graph of User:LadyGeek/Portfolio_design_and_construction#Risk because it shows a constant return no matter what the AA is, and wanted to replace it with something more "normal" (more risk = more return) which also shows volatility. So I read some Bernstein books again yesterday and when I woke up this morning thought, yes, theoretical risk-return graphs for sure, with different correlations, but I have to explain SD first, etc. --Quebec 14:28, 3 January 2015 (MST)

Master plan

Well here's a master plan... The key article is "Portfolio design and construction". The official version at the moment is very long and somewhat disorganized, and lacks a good introduction. It has a section, “Simple portfolios”, which is confusingly reproduced entirely as a separate page, and which also contains subsections which are not about simple portfolios. Also, Couch Potato portfolios are listed as “simple” although some are complex portfolios, e.g. the Uber-Tuber. The solution (and we’re 95% there already) is as follows:

• (1) reorganize "Portfolio design and construction" (see the LadyGeek user page version), add an introduction, delete unneeded parts, simplify the “simple portfolios” section greatly
• (2) the page “Simple portfolios” becomes “Simple index portfolio”, with much more details relative to what's in the "Portfolio design and construction" page, and focusing on 3-4-5 funds portfolios only (see the LadyGeek user page version)
• (3) Couch potato portfolios get their own page (see the LadyGeek user page version), and are mentioned (linked) in the other two pages.

The priority should be to finish this project and move it to the real finiki. Then we can see about a possible 4th page about portfolio theory.. How's that? --Quebec 04:34, 4 January 2015 (MST)

Here it is!

The page turned out to be very long, but a lot of fun to write. I would like some feedback please. Is this useful for finiki? I promised no MVOs but could not help it, sorry. I avoided equations, as they can be found elsewhere. --Quebec 12:14, 6 January 2015 (MST)

First, I reversed your ratio descriptions from "bond:stock" to "stock/bond" - the accepted reference convention. If you want some good feedback, rename (move) this page to the main namespace (Move --> (main) Portfolio theory) and start a thread in the FWF forum.

Can you provide a clear summary (new section "Summary) for mixing two and 3 risky assets? What message did you want to convey?

As for adding gold, that is a very controversial topic in the Bogleheads forum. I suspect you'll get some disagreement here, which is why I think the topic should be discussed in the forum. If so, feel free to use the {{Controversial}} template I just added to finiki:Template messages. Being controversial does not prevent you from using the article in finiki; only that there is no consensus from the forum members. (We have a few in the Boglgeheads wiki.) --LadyGeek 18:44, 7 January 2015 (MST)