Building a framework for financial decisions
Daniel Rie, December 29, 2005

A new tool for analysing financial strategies

Preface

Our everyday experiences leave us poorly prepared to make many of the choices that comprise an investment strategy. Guiding principles such as those provided under the headings "Investment Fundamentals for Owners" and "Ten Things You Should Know" provide an excellent foundation for developing your investment strategy. However, moving from these principles to actual investment choices requires additional levels of intuition and judgment.  We are developing a set of interactive tools to help our visitors enhance their skill and intuition with respect to making sound portfolio choices.   These tools will help the committed visitor to explore the following issues:

A portfolio of assets differs from the sum of its parts through synergy

When considering investment choices, it is quite natural to look at each component of a portfolio somewhat in isolation, rather than in terms of how that particular investment relates to the other parts of the portfolio.  We may know intuitively that some assets are held for diversification rather than for their own individual merits, but it is not always easy to tell how to form an effective mix from the available choices. A calibrated assessment of the contribution that each asset makes to portfolio risk and anticipated return can provide useful guidance.  Our portfolio strategy tool provides a means of exploring the tradeoffs at various levels of risk to the overall objective.

Asset variety and proper weighting of a diverse set of assets can pose a significant challenge

Incorporating a variety of asset types whose returns are somewhat unrelated to each other can be of great value for reducing portfolio risk.  How much variety to include and how to set suitable target weightings is often difficult to judge.  Our portfolio risk/return analysis tool applied to various combinations of asset choice options can easily quantify the potential gain to additional diversifying assets.  The user can (optionally) modify the market expectations in order to view results under conditions that he believes likely to prevail.