Wealthfront, the Silicon Valley’s premier automated investing service, recently announced its decision to lower the minimum initial deposit requirement from $5,000 to $500, thereby giving younger individuals the ability to invest in an incredible product. For those unfamiliar with Wealthfront, it is a “robo-advisor” service that automatically allocates deposits into a diversified ETF (Exchange-Traded Fund) portfolio.
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Minimize Risk, Maximize Return
There is a discernible thrill to picking stocks correctly. Carefully considering risks, weighing possible options, and evaluating every aspect of a company, pulling the trigger, and finally seeing all your hard work pay off is extremely satisfying—and it can be very profitable too. While one must take care to avoid being sucked into the gambler’s paradise of day-trading, there is clearly an important role for the active investor, in value and growth. But there is an obvious catch: consistently successful trading is extremely difficult (read more here).
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The Investor Balancing Act
This week I’ll shift away from the cognitive biases and irrational behavior that affect our decision-making, and instead shift my focus towards one of the most important aspects of investing: portfolio theory. Modern portfolio theory (MPT) focuses on building a portfolio of assets that maximizes the risk-adjusted return—that is, maximizes the expected return of an investment portfolio while minimizing its risk (learn more about how to avoid risk here).
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Beating The Odds
In my previous article, Getting Back To Basics, I explained why long-term investing is a viable strategy for new investors and provided numerous examples of basic investment fundamentals. This week, I aim to build upon those fundamentals by introducing two more investment concepts, diversification and index investing, while also describing how exchange traded funds (ETFs) help investors mitigate risk.
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