Not all investors want to analyze the whole market, but want to have relative simple rules for creating and adjusting the portfolio.

Common Strategies

There are a couple of rule-based strategies that investors choose to use. Here are some:

• Market Weight Portfolio: mimics the relative market capitalization (no of shares * price per share) of each asset ($\approx$ hand-made ETF)
• Diversity Weight Portfolio: applies a specific power transformation to the market weights
• Equal Weight Portfolio: 'one-over-N' rule (very simple but it works great)
• Risk Parity Portfolio: chooses weights proportional to the inverse of either variance or volatility
• Minimum Variance Portfolio: the left-most point on the Mean-Variance Efficient Frontier
• Equal Risk Contribution Portfolio: constructs weights such that each asset contributes equally to the total portfolio variance.
• Kelly Rule Portfolio: weights such that the portfolio's expected log return is maximized.
• Proportional to Sharpe Ratio Portfolio: invests relative to the realized past 5-year Sharpe ratios of each asset class in the portfolio.

Performance Summary

• Diversified portfolios perform well
• Equal weight portfolio does really well
• Strategies that rely on fewer inputs perform better than complex models that are theoretically optimal but require many inputs (Reason: Garbage-in and Garbage-out)

Opinion: There is no need to know how these portfolios work exactly, but rather understand that there are rule-based portfolios and generally how they perform.

Choose your Strategy