invest in gold


Did you design your sample precious metals portfolios with any particular rate of return in mind?

October 12, 2012, 12:00 PM Przemysław Radomski , CFA

I have just gone through your essay on portfolio structuring. Did you have some idea in mind as to a rate of return these portfolios were designed to achieve? Or was your idea to try to balance risk/reward and let the return find its own level? I am not at all criticizing your approach here, but I would like to better understand the reasoning behind it.

Generally, when constructing a portfolio for individual or institutional investors, an investment advisor needs to know a lot about the individual (or entity) before providing any suggestions or creating a portfolio. First of all, the advisor needs to know what goals need to be met by the portfolio (like retirement) in order to calculate the required rate of return from the portfolio. Then further details can be discussed such as the desired rate of return (for goals that are nice but not indispensable, like a trip around the world). Then there's a big discussion about risk (willingness and ability to accept it) and investment constraints (liquidity requirement, time horizon, taxes, legal issues, and other unique circumstances). Sample portfolios can't deal with these issues because they are not designed specifically for one person or entity. So the answer is no, there is no target rate of return for these 3 sample portfolios. Since there are 3 of them, they are much better in our view than just one big universal "recommended portfolio" and as you will soon see, the interactive Portfolio Assistant will be even better as it will help you with some of the above-mentioned individual, investor-specific issues.

We decided to approach the portfolio construction starting with risk. We thought of how risky each part of the portfolio was in the past and how much risk each investor can accept (and how much can be diversified away). Not losing money (and not taking on too much risk) is more important than making it (and taking on too little risk). So the common denominator of risk (not just return) allows us to do many simulations even though we don't know the exact details of each portfolio. It is also in-tune with Warren Buffet's rule of investing - not losing money. Please note that the risk increases along with profitability anyway (up to some point), so the more risky portfolios are also the more profitable ones. So it's not that we don't take profitability into account at all. We simply focus on keeping the risk at reasonable levels and providing bigger returns for those who accept more of the risk.

Did you enjoy the article? Share it with the others!

Gold Alerts


Dear Sunshine Profits,

gold and silver investors
menu subelement hover background