Harry Markowitz: great economist, ordinary investor

Tributes poured in last week for Nobel economist Dr Harry Markowitz, who died at the age of 95.

Markowitz revolutionised the way people invest. Before his work investors typically focused on individual investments and their potential returns. Markowitz devised a more systematic way to approach portfolio construction, showing that diversification across different asset classes could help investors bag the same returns with less risk.

As Markowitz famously put it, diversification is the only free lunch in investing.

However, for all Markowitz’s ground-breaking research he was as human as the rest of us when it came to investing. In his book Your Money and Your Brain, Jason Zweig relates how Markowitz responded when stocks collapsed on Black Monday in October 1987.

‘I remember what it was like to count my pennies. Money allows me to live a life I’ve always dreamed of’

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Markowitz knew what exact adjustments he needed to make to his retirement account but he didn’t make them. “Instead I visualised my grief if the stock market went way up and I wasn’t in it – or if it went way down and I was completely in it”, said Markowitz. “My intention was to minimise my future regret. So I split my contributions 50/50 between bonds and equities”.

Knowing what you should do is one thing; actually doing it is another. As Warren Buffett often says, investing is simple but not easy.