99. Does a "diversified stock portfolio" guarantees returns?

 Harry Markowitz: Creator of Modern Portfolio Theory (investopedia.com)

There are hundreds of stocks listed in the Philippine Stock Exhange, if you are to design a well-diversified portfolio, which stocks will be select?

Diversification is the idea that not all securities will move in the same direction at the same time as each stock will be affected individually by changes in market conditions. For example, the OPEC announced a hefty price increase in the price of crude oil, among the listed companies - oil companies may benefit from this and see their stock price rise while companies dependent on oil like transport companies may see their operating margins shrink leading to lower stock price. By combining these two companies in a portfolio, the price drop of transport may be balanced off by the increase of oil companies' stock price.

A portfolio is a collection of assets (stocks) created by the investor intended to transfer the "purchasing power" of excess funds into the future.

Investors can design a portfolio made up of these individual stocks so that the overall return of the portfolio will be more predictable. 

The "Modern Portfolio Theory" was first published in 1952, it was discussed more extensively in the Markowitz's book "Portfolio Selection" in 1959. Here are some key ideas.

Portfolio design can be reduced to two dimensions - First is the expected return and its risk (as measured by the probability that it may not deliver the expected return - it's variance)

The risk of each stock that really matters is not the risk of the stock by itself rather its contribution to the risk of the aggregate portfolio.

With this insight, Markowitz was able to reduce the complicated and multi-dimensional problem of portfolio construction. From an investor's perspective, the more assurance that actual returns will parallel expected returns, the better!

The objective will be a portfolio with the highest expected return with the lowest variance.

Data needed are: 1. the estimated expected return of each individual stock and 2. the variance of its return and 3. the co-variance of the stock returns in relation with other stocks in the portfolio.

Diversification: Why Not Put Everything in Whatever Will Go Up the Most? – Marotta On Money

While a diversified portfolio is no guarantee of future returns, it increases the sense of comfort for investors that the actual return will not deviate too much from the expected return.

All the best my friends!

#acgadvice

98. If you forget your goal and just focus on your "system", will you succeed?

 

Winners and Losers have the same goal, the only difference is one achieves it while most others fail. If we are to apply this to the total number of financial advisors vying to qualify for the Million Dollar Round Table each year, statistically, just by setting a goal to qualify for the MDRT does not work!

The prevailing wisdom says that for us to achieve anything we want in life, we need to set goals and tie it to an action plan, Jim Collins even coined the term BHAG for "Big Hairy Audacious Goal", the idea is that the bigger, clearer and more well-articulated the goal, the more likely we are to achieve it, because it would constantly inspire and motivate us to reach it!

Inspiration and motivation are not sustainable! just look at new year's resolutions!

One interesting insight I gathered from reading James Clear's book "Atomic Habits" is that "Goals is just a standard to let you know you won the game" while "Systems is a set of habits that allows you to continue playing the game" even after your current (goal) game is won, the system will enable you to play bigger games in the future, one that builds from your latest success. 

A Habit is a series of Behaviors.

A System is a series of Habits.

Success habits for financial advisors are "Prospecting" and "Presenting", setting up a system to embed these two activities in our daily habits is the sure-fire way to success!

Building habits are daunting at the beginning, imagine telling yourself to make 5 client calls a day as suggested by a sales guru, you may do it for a day or maybe two, but as it goes on the weight of rejections may start demoralizing you and you most probably will give up after a while. The key idea is to develop habits to make this automatic!

BJ Fogg in his book "Tiny Habits" suggests breaking down the task to its smallest possible version - so making a client call may just become browsing your contacts in your phone directory. 

Next is to identify an "action prompt", this will tell you when to start a new habit, Fogg suggests tying this to an anchor (a habit you are already doing regularly like having coffee in the morning?)

Your anchor - After I ... (had coffee), the new tiny habit - I will.. (browse my contact list). browsing is much less intimidating than making an actual client call, its easier and you don't need a lot of motivation to do it, so it is an easier habit to create. But just browsing your contacts will not make you any money, you have to "grow this habit", How? 

By celebrating your small success (browsing your contacts)!  After browsing congratulate yourself for a job well done! It may sound ridiculous in the beginning to celebrate such an "insignificant" action, but the positive feeling generated will encourage you to repeat the habit again, this momentum that you have created may now give you enough motivation to repeat and grow this habit.

So the next habit that you formed in this progression may be, After I... (browsed my contacts) I will... (send messages to 3 of them requesting for an appointment)

Celebrate this and grow this to an even bigger habit till you are making 5 client calls a day!

Success is the result of what we do every day, and habits are what we do regularly, embed a new habit that would lead to your achieving your goals to a habit you are already doing will help ensure you do it everyday.

Read "Atomic Habits" (James Clear) and "Tiny Habits" (BJ Fogg | Tiny Habits) for more insights!

All the best my friends

#acgadvice