Even the queen’s at it!

Whilst studying my GCSE’s I took part in the stock market challenge which involved schools all across the UK competing against the market and against the other teams to earn the best return on their investment. I naturally invested my money into companies that were doing well following the past market trends believing that I was bound to be successful because I wasn’t making any stupid decisions. So how did the group that won the trip to New York win?

I put it down to luck investing in risky companies could have led to their investment going either way because you can’t predict that a struggling companies shares would suddenly be successful. Kendal found that prices changed in a random fashion and there is no link between one share price and the next. I knew this and so believing it was down to luck I went for low risk companies but received low return.

So this lead to my next question how can I get guaranteed high returns with low risk? This is a question I never really knew the answer to until my lecture on portfolio theory. Portfolio theory was developed in 1952 by Markowitz and in simple terms it suggests investors can reduce risk by diversification and holding a portfolio of investments.

An example of how this works can go back to the banking crisis if you had invested in Lloyds bank shares in 2007 there were around the price of 434.48 GBX a share and 2 years later the price dropped to 21.97 GBX. Leading to a huge loss for an investor; at the same time investing in gold from 2007 to 2011 you would have tripled your money. Having both of theses in your portfolio the gold price would have helped cancel out the loses made with the Lloyds shares. In one of the articles I read in my seminar many economists including the creator of this theory say the importance of diversifying into a number of areas.

Even good old Lizzy is at it? Granted the Queen will have the best advisors sorting her investment portfolio which includes art, property, UK bonds and equities. These have all been good investments; the price of older houses in the UK matched the capital value of shares (not including dividends). However a lot of the queens investments are expensive to manage and harder to trade (not many people are going to buy a 3000 carat diamond). This has led to the monarchy starting to diversify by including foreign assets and shares. 

Should you do this too? In my opinion to have a diverse portfolio means it is necessary to go international; as for a portfolio to reduce the risk of an investment the correlation between investments cannot be positive. This means that you need to invest in things that won’t be affected by each other so the broader your portfolio the better.

Maybe if I had known about portfolio theory when I did the stock market challenge I would invested in a greater range of companies and I'd have been the one that won the trip to New York.

Having an international portfolio is necessary to guarantee returns; the queen has started to do this and I think you should too!  Don’t leave it down to luck.

Thank you for reading, any comments are greatly appreciated