Harry Markowitz Personal Investment Portfolio and Strategy

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As mentioned in my Acorns app review, Harry Markowitz won the Nobel Prize in Economics for his pioneering work in Modern Portfolio Theory, which says that a rational investor should pick an “efficient” portfolio that uses a mix of assets to maximize the expected portfolio return for a given level of risk. You can read all about the Harry Markowitz Model on his Wikipedia page.

Implementation of this mathematical theory has produced many “mean-variance optimized” portfolios containing upwards of 10 different asset classes. Basically these are backtested from historical performance numbers. One of the more complex examples is the 7Twelve Balanced Portfolio shown here:


But what did Harry Markowitz actually hold in his own personal portfolio? What was his investment strategy?

Consider this story from Jonathan Zweig in an NYT article about emotions and investing:

Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

Next, read this Chicago Tribune interview by Gail MarksJarvis:

Early in his career, he did not take the risks some investment advisers suggest for young investors to maximize returns. Rather, he saved regularly and put half his money into stocks and half into bonds to grow while controlling risks. When he thought he had accumulated too much in either category, he stopped putting money there for a while and directed savings to the neglected group. […]

“I never sold anything,” he said. If stocks were increasing in value, he would let that portion grow for a while, but eventually he would stop stock purchases and beef up the bonds. The idea: The bonds would insulate him from the downturns that crush stocks from time to time without clear warning. […]

“Say you were 65, and invested $1 million, with 60 percent in stocks and 40 percent in bonds,” he said. “It became $800,000 [during the financial crisis], and you are not happy, but you lived to invest another day.”

I happen to think Markowitz’s actions overall were quite rational and even wise. We could all learn some lessons from his personal strategies.

  • Rely on saving, not risk-taking. Markowitz understood the pain of losing your hard-earned money in a down market. Young investors are often told to go 100% stock or close to that, but he was 50/50 and stuck with it.
  • Don’t worry about fine-tuning to achieve the perfect portfolio, as it’s all based on the past anyway. Nobody knows what will actually be the “efficient” portfolio for the next 20, 30, 40 years. As long as you have your bases covered, keep it simple. Warren Buffett also recommends simplicity for his wife’s trust and even though he would do a 90% stocks and 10% bonds split, you likely don’t have the ability to lose 40% of your portfolio and go… ah well I’ll just live on the remaining $100 million.
  • Tweak, but don’t panic. Buy and hold is one strategy that will work “well enough”. However, if you feel like you must, you can do like Markowitz and make some tweaks now and then… just don’t do anything extreme that could catastrophically damage your portfolio.

Regular savings plus a simple 50/50 or 60/40 portfolio plus no panic selling will do quite well over a long period of time. That’s a solid game plan, even for mathematical geniuses.

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  1. Even if he does 50/50, he can still further diversify his stock holdings to meet his efficient portfolio goal right?
    I mean he clearly decided on his portfolio with a low risk tolerant threshold. The Nobel prize is about $1 million. I wonder how he invested those.

  2. Most financial advisors/experts dont folow their own advice. The ones that make lots of money wont tell you how.

  3. I have only seen one or two compelling arguments for a 100% stock portfolio if you’re young, the one I remember most is by William J. Bernstein. He sold me. I’m 23 and in my Roth 401k and Roth IRA, I have 100% stock. I would welcome the market tanking so I can stock up on the cheap because the market won’t be down for decades on end. Every time the market goes up, I am less happy. It makes my Roth 401k contributions, which are Dollar Cost Averaged against my will, worth less than they would if the market would go way down since I don’t want to touch that money for at least the next 37 years.

    If I don’t care about market downturns, and I actually welcome them, is there a compelling argument against keeping any allocation other than 100% stocks until I’m in my late 30’s? Won’t I, in all likelihood, make more than someone in 50/50?

    • Josh–
      60/40 gets you 80% of the return with 60% of the risk AND gives you the option to redeploy into 100% stocks again if and when the market tanks.

      Assumptions: 10% equity return, 5% bond return, 18% stock standard deviation, 7% bond standard deviation, .35 stock/bond correlation (all based on history, with 2% shaved off the historical core bond return because rates are currently so low).

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