Harry Markowitz is the 1990 Nobel Memorial Prize winner in Economic Sciences, and a recipient of the 1989 John von Neumann Theory Prize.
Markowitz, who is known as the “father of Modern Portfolio Theory” for his work in portfolio construction, is a member Personal Capital’s Board of Academic Advisors, which works to devise innovative solutions to help millions of Americans reach their retirement goals and better manage their money.
In an interview with Personal Capital, Markowitz was asked, “What is the best way for first time investors to get started?”
Finding a financial adviser is a great first step. But, if you’re a first time investor and not wealthy enough to afford a good personal adviser, then you should start by splitting your funds between a well diversified stock portfolio and a savings account.
The ratio of the split will depend on your age — young people should have some savings for liquidity, but could be invested almost entirely in stocks if they want.
It’s also important to know your risk tolerance. If you’re young and heavily invested in stocks, for example, make sure that you’re not so invested that if the market declines 30%, you’ll chicken out of stocks altogether?
Risk tolerance — which simply means how much risk you can afford to take in your investments — generally depends on three factors: how much money you have, how much time you have, and how you feel about it.
Generally, 20-somethings with steady incomes are well-positioned to take much more risk in their investments than 50-somethings nearing retirement because they have years for their portfolio to even out. But if the idea of being heavily invested in more volatile stocks gives those 20-somethings hives, they might feel more comfortable dialling down the investing aggression a notch.
As far as deciding how much cash to keep in your bank account and how much to invest, Markowitz, who owns his own business, told Personal Capital that cash should usually be used for liquidity purposes. “There are a lot of different schools of thought on how much cash you should keep in your accounts for emergency purposes,” he said. “My rule of thumb has been at least three months of gross income plus enough to pay imminent estimated taxes.”
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