Portfolio Ninjas

Growing up, my brother and I used to climb trees – practicing to be ninjas or something. To prove his ninja skills, he’d jump to grab a higher branch. But he fell and broke his arm. He had a ton of little breaks, and it made his arm all bendy. He was in total shock, and he looked up at me and asked if he was gonna be retarded. Yeah. And not to be outdone by my younger brother, I did the same thing the next day. Stupid? Yes. But it proved I had skills…until I fell and broke my arm too.

Being a ninja was way more important than being healthy or whole or sane. Financial stuff’s the same way; you have to balance risk versus return. And the returns on being a ninja are very high.

The basic concept of portfolio theory is simple: it’s the idea that buying lots of little pieces of different investments in the right combination will get you the safest investment with the best return possible.

Now here’s where most people stop getting it. If we assume that market’s irrational and that the variance of an asset’s net present value’s an accurate proxy for risk, then with a little bit of math…and a little bit more math…okay, it’s really tons of math. But anyway, after all the math and given those assumptions, which aren’t too far-fetched as assumptions go, portfolio theory isn’t just a nice theory anymore – it becomes a mathematical fact. Like how it takes 0.3 seconds to fall out of a tree and break your arm. Uh-huh. Like a ninja.

Start crunching the numbers for a portfolio of assets, and here’s what you end up with: the global minimum variance curve. The more assets you add, the more advantageous the curve. The proper mix will put you right here, where you have the least amount of risk with the best returns possible. Because at the end of the day, that’s what most portfolio managers want: the least risk, with the most return.

You see, it’s simple! Like falling out of a tree. AAAHHH I’m a ninja…

Yeah, you probably don’t care about all that. But what you do care about is how portfolio theory affects your daily life, like shopping for a car loan, or investing in a mutual fund, or even opening up a savings account. Ninja-nomics.

Portfolio theory explains why some borrowers and lenders give better rates, even though it’s the same time, and the same location, and the same economic conditions. You see, to a bank loaning you money, you’re an investment. Because you’re gonna pay them back, with interest. And the investment in you is one little asset in a big portfolio that they balance very carefully – like a ninja – for risk versus return.

So if your local bank has all the mortgages they need right now, you may end up getting a not-so-great deal simply because their portfolio needs more short-term, high-risk asset like car loans to balance itself out. Like a ninja! Likewise, an insurance company or mutual fund might crunch the numbers and find out they have to adjust their portfolio. Virtually all big financial businesses balance themselves this way. Like a ninja! Or at least, using the same strategy.

That’s why in the big world of finance and investment, you always need to shop around for the best rate. You may feel weird, sneaking around from bank to bank shopping for that perfect loan, but…ninjas do it. “I’d like to invest in your nin-jitsu portfolio, with the special yakuza rates.”

Whether it’s legitimate financial markets or the underworld, you can always find a better deal. If you’re a ninja.

You know, they say that it takes money to make money. Of course, if you’re taking money, then you’re making money. Like a ninja! I don’t see why that’s even a question.

Transcribed by: Danielle G.

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