Between Now and Success
Deconstructing Modern Portfolio Theory to Build Better Investment Portfolios with Miguel Sosa
Jan 13, 2023
Research and product strategist Miguel Sosa discusses deconstructing modern portfolio theory and applying its three elements for building efficient portfolios. The conversation explores the benefits of adding private equity real estate, comparing private real estate with publicly traded REITs, and how regular investors can access high-quality private real estate investments.
25:41
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Quick takeaways
- Low correlation is the primary contributor to diversification benefits, accounting for about 70%, followed by low volatility at 20%, and negative correlation at 10%.
- Adding private real estate to a portfolio within the range of 10% to 15% allocation can be a meaningful contributor to overall diversification while mitigating concentration risk.
Deep dives
Understanding the concept of advanced diversification
The podcast episode explores the concept of advanced diversification in investment portfolios. While diversification has been understood for centuries, modern portfolio theory has allowed for the quantification of its benefits. The research discussed in the episode breaks down diversification into three components: low correlation, low volatility, and negative correlation or hedging. It is found that the primary contributor to diversification benefits is low correlation, accounting for about 70%, followed by low volatility at 20%, and negative correlation at 10%. The research suggests that traditional 60-40 portfolios with equities and fixed income have worked well in the past but highlights the need to adapt to a changing environment.
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