What is the Best Portfolio Optimization Method for You?

Let’s look at four portfolio optimization methods to find the right fit for your investing style.

One of my all-time favorite books about investing and trading is Jack Schwager's “Market Wizards”. If you haven’t read it yet (there’s a free pdf on google and an audio version on YouTube), it’s a series of interviews with some of the world’s best traders and investors from the 80’s. The interviews provide exceptional insight into the methods and attitudes of these skilled market participants, and the subjects of discussion cover a wide breadth of topics across different markets and trading styles.

Even though each interviewee was unique, there were a few key principles that were mentioned by many of them. One of those principles is risk management.

“[Bruce] Kovner lists risk management as the key to successful trading; he always decides on an exit point before he puts on a trade. He also stresses the need for evaluating risk on a portfolio basis rather than viewing the risk of each trade independently. This is absolutely critical when one holds positions that are highly correlated, since the overall portfolio risk is likely to be much greater than the trader realizes.” 

― Jack D. Schwager, Market Wizards: Interviews With Top Traders

As an individual investor and trader, I too believe it is critical to maintain risk in individual positions and across the entire portfolio. However, with myriad ways to manage risk at both of these levels, it can be difficult to discern what is the best approach for your unique style and risk tolerance requirements.

So, today I want to examine four portfolio optimization methods to show how they work and to evaluate why you might choose one strategy over another.

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