Modern Portfolio Management Indicator

2023년 7월 13일

After weeks of grueling over this indicator, I am excited to be releasing it!

Intro:

This is not a sexy, technical or math based indicator that will give you buy and sell signals or anything fancy, but it is an indicator that I created in hopes to bridge a gap I have noticed. That gap is the lack of indicators and technical resources for those who also like to plan their investments. This indicator is tailored to those who are either established investors and to those who are looking to get into investing but don't really know where to start.

The premise of this indicator is based on Modern Portfolio Theory (MPT). Before we get into the indicator itself, I think its important to provide a quick synopsis of MPT.

About MPT:

Modern Portfolio Theory (MPT) is an investment framework that was developed by Harry Markowitz in the 1950s. It is based on the idea that an investor can optimize their investment portfolio by considering the trade-off between risk and return. MPT emphasizes diversification and holds that the risk of an individual asset should be assessed in the context of its contribution to the overall portfolio's risk. The theory suggests that by diversifying investments across different asset classes with varying levels of risk, an investor can achieve a more efficient portfolio that maximizes returns for a given level of risk or minimizes risk for a desired level of return. MPT also introduced the concept of the efficient frontier, which represents the set of portfolios that offer the highest expected return for a given level of risk. MPT has been widely adopted and used by investors, financial advisors, and portfolio managers to construct and manage portfolios.

So how does this indicator help with MPT?

The thinking and theory that went behind this indicator was this: I wanted an indicator, or really just a "way" to test and back-test ticker performance over time and under various circumstances and help manage risk.

Over the last 3 years we have seen a massive bull market, followed by a pretty huge bear market, followed by a very unexpected bull market. We have been and continue to be plagued with economic and political uncertainty that seems to constantly be looming over everyone with each waking day. Some people have liquidated their retirement investments, while others are fomoing in to catch this current bull run. But which tickers are sound and how tickers and funds have compared amongst each other remains somewhat difficult to ascertain, absent manually reviewing and calculating each ticker individually.

That is where this indicator comes in. This indicator permits the user to define up to 5 equities that they are potentially interested in investing in, or are already invested in. The user can then select a specific period in time, say from the beginning of 2022 till now. The user can then define how much they want to invest in each company by number of shares, so if they want to buy 1 share a week, or 2 shares a month, they can input these variables into the indicator to draw conclusions. As many brokers are also now permitting fractional share trading, this ability is also integrated into the indicator. So for shares, you can put in, say, 0.25 shares of SPY and the indicator will accept this and account for this fractional share.

The indicator will then show you a portfolio summary of what your earnings and returns would be for the defined period. It will provide a percent return as well as the projected P&L based on your desired investment amount and frequency.

But it goes beyond just that, you can also have the indicator display a simple forecasting projection of the portfolio. It will show the projected P&L and % Return over various periods in time on each of the ticker (see image below):



The indicator will also break down your portfolio allocation, it will show where the majority of your holdings are and where the majority of your P&L in coming from (best performers will show a green fill and worst will show a red fill, see image below):



This colour coding also extends to the portfolio breakdown itself.

Dollar cost averaging (DCA) is incorporated into the indicator itself, by assuming ongoing contributions. If you want to stop contributions at a certain point, you just select your end time for contributions at the point in which you would stop contributing.

The indicator also provides some basic fundamental information about the company tickers (if applicable). Simply select the "Fundamental" chart and it will display a breakdown of the fundamentals, including dividends paid, market cap and earnings yield:



The indicator also provides a correlation assessment of each holding against each other holding. This emphasizes the profound role of diversification on portfolios. The less correlation you have in your portfolio among your holdings, the better diversified you are. As well, if you have holdings that are perfectly inverse other holdings, you have a pseudo hedge against the downturn of one of your holdings. This is even more helpful if the inverse is a company with solid fundamentals.

In the below example you will see IRDM in the portfolio. You will be able to see that IRDM has a slight inverse relationship to SPY:



Yet IRDM has solid fundamentals and is performing well fundamentally. Thus, this makes IRDIM a solid addition to your portfolio as it can potentially hedge against a downturn for SPY and is less risky than simply holding an inverse leveraged share on SPY which is most likely just going to cost you money than make you money.

Concluding remarks:

There are many fun and interesting things you can do with this indicator and I encourage you to try it out and have fun with it! The overall objective with the indicator is to help you plan for your portfolio and not necessarily to manage your portfolio. If you have a few stocks you are looking at and contemplating investing in, this will help you run some theoretical scenarios with this stock based on historical performance and also help give you a feel of how it will perform in the future based on past behaviour.

It is important to remember that past behaviour does not indicate future behaviour, but the indicator provides you with tools to get a feel for how a stock has performed under various circumstances and get a general feel of the fundamentals of the company you could potentially be investing in.

Please note, this indicator is not meant to replace full, fundamental analyses of individual companies. It is simply meant to give you a "gist" of how companies are fundamentally and how they have performed historically.

I hope you enjoy it!

Safe trades everyone!