The Only Free Lunch in Investing

Nobel laureate Harry Markowitz famously asserted that diversification is the only free lunch in investing. His insight was simple yet profound: by diversifying across assets, investors can achieve higher returns without necessarily increasing risk.

We'll use this insight to highlight this month's updates to Asset Allocation Interactive (AAI), where we have a new and improved portfolio builder together with several newly modeled assets. We'll provide a demonstration of these features by building and analyzing a toy portfolio, which, in a nod to Harry Markowitz, we'll playfully dub "Free Lunch."

We caution readers to not interpret the toy portfolio in our example as investment advice (the countries in our example represent only 7% of world GDP!), but rather to demonstrate the essence of Markowitz's renowned insight on diversification.

Introducing AAI's New Assets

The table below shows the expected returns and volatility for our 18 newly added public equity assets. Notice that in general, the newly added assets, across both developed and emerging markets, show substantially higher levels of risk than their corresponding multi-country market capitalization weighted equity indices. Note also that many of these markets offer double-digit expected returns, with dividend yields over 5%. For example, an investor seeking to capture the 11% expected return from Norway would be subject to 28% volatility, nearly double the 15% volatility of the Developed Markets index.