Given the question came from my friends at kidssavingsaccount.info I offered to write a guest post on the topic and explain how a high interest savings account or high rate CD could function to improve the risk/return profile of a risky asset portfolio.
What I discuss is what the risk/return profile looks like when you take a risky asset portfolio and allocate some portion of the investment in a ‘risk-free’ asset such as a CD and the remainder in your efficient portfolio of risky assets. KidsSavingsAccount.info probably isn’t the right venue for such a high level discussion true, but we aren’t really getting into the mechanics of how these portfolios are created – we only discuss what the expected performance of said portfolios looks like, and how a fixed income asset can enhance that picture. Clear as mud, right?
Think of it another way. You don’t have to know how an engine works to use a car to get from point a to point b – but you do have to be able to recognize that a car needs an engine to move. Likewise an efficient portfolio needs to be paired with a risk-free asset or fixed income asset to acheive an optimal profile picture.
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#1 by onefineham at June 13th, 2010
I recently finished reading a book by Nassim Taleb called The Black Swan which has radically changed any thoughts I had on portfolio management.
I think short term investing, along the lines of binary options trading offers investors a better chance of preserving capital while jumping in quickly on “big movement” or “black swan” days.