Variable investment, constant risk?
JB Tanqueray
Chief Executive Officer @ Dorhyan.eu | EU fund passporting as a service Mentor to entrepreneurs and emerging fund managers
Why is a bubble spherical? Because a sphere is the optimal shape for balancing the pressure inside with the tension on the outer surface, i.e. the maximum gas volume for a given surface of soapy water.
How is this related to the topic at hand? Because when investing over different periods, you want to maximise the compound return for a given compound risk. And there is one optimal way to achieve that result: by having constant risk in a money-weighted fashion (i.e. the risk you take weighted by the money you invest in).
Having one lump sum is fairly straightforward, as constant risk means a portfolio of (almost) constant proportions: a sort of spherical risk… However, when you add regular and foreseeable contributions, a portfolio of constant proportions means that money-weighted risk is smaller at the beginning than at the end of your investment period, so you become more sensitive to the timing of market events. Constant (money) risk means riskier assets at the beginning, with a decreasing proportion of risky assets as contributions come in.
Let’s use a concrete example to explain further:
- You invest for 10 years
- However, you have ￡1,000 to invest now and another ￡1,000 to invest in five years from now.
To continue reading, please click on the link below!
https://www.stripyourbanker.com/magazine/2017/10/18/variable-investment-constant-risk