Quantitative Investing Strategies for Beginners: Diversification and Risk Management

May 12, 2025

Chat with this page

Key Insights for Australian Investors

LIVE

Speed1
Subtitles
Quality

🔉🔉🔉 CLICK TO UNMUTE 🔉🔉🔉

0:00

PRIVATE CONTENT

Enter password to view

Please enter valid password!

This video breaks down the fundamentals of quantitative investing, focusing on risk diversification and portfolio construction. Unlike quantitative trading, which often involves high-frequency strategies, quantitative investing aims to systematically manage risk exposures to capture long-term market returns. Here’s a distilled overview:

Core Concepts

Portfolio Risk Components: Equity portfolios face three primary risks:
- Idiosyncratic Risk: Firm-specific (e.g., Apple’s performance).
- Industry Risk: Sector-wide (e.g., tech regulation).
- Market Risk: Macro-driven (e.g., GDP, inflation).
Diversification Goal: Neutralise idiosyncratic and industry risk, retaining only market risk to align with broader economic growth.
Correlation Dynamics: Pairwise equity correlations are time-varying; a well-diversified portfolio requires assets with low or negative correlations.

Actionable Takeaways

Equally Weighted Portfolios: Allocate evenly across 30+ stocks to mitigate single-stock volatility. Example: A $30,000 portfolio split into $1,000 positions.
Rebalancing: Adjust allocations periodically to maintain equal weighting, especially after significant price movements (e.g., Nvidia doubling in value).
Correlation Analysis: Use tools like Portfolio Visualiser to assess historical correlations, but acknowledge their non-stationarity. For instance:
- Johnson & Johnson vs. Chipotle: Near-zero annual correlation (0.1%), but 60-day rolling correlations can spike to 70%.
- Apple vs. Amazon: Higher baseline correlation (0.52 annually) due to shared tech sector exposure.

Practical Consideration for Retirees: While this strategy reduces unnecessary risk, it does not eliminate market risk. Australian investors should assess their tolerance for volatility and consider blending equities with defensive assets (e.g., bonds or gold) for further stability.

Charts for Context

Note: The video emphasises that historical simulations (e.g., 7% average returns) are not predictive. Always align strategies with current market conditions and personal financial goals.

“Remember, your goal is to trade well, not to trade often.” – Alexander Elder

This website is owned and operated by Investor Unity Pty Ltd (ABN: 90 160 624 331). Any advice included in this website or correspondence is general advice only and is based solely on consideration of the investment or trading merits of the financial products alone, without taking into account the investment objectives, financial situation or particular needs (i.e. financial circumstances) of any particular person. In addition to its internal services, Investor Unity is compensated by brokers and other third parties by way of referral/affiliate and/or general partnership arrangements, via its websites and other communications. Investor Unity is genuinely interested in your long-term trading & investment success. We advise you to take all necessary steps to ensure you have a good understanding of the products & services you’re considering investing in – particularly if they involve leverage. While Investor Unity takes every care to ensure that we only deal with the highest quality services, from throughout the industry, past performance is not a guarantee of future performance. Before making an investment or trading decision based on the general advice, the recipient should carefully consider the appropriateness of the advice in light their financial circumstances and should carefully review the PDS of the relevant financial product as provided by your investment broker. Past results are not a guarantee of future performance. Please contact us, to discuss any questions or concerns you may have- we are here to help.