Altruistic investors differ from ordinary investors in that they don’t just care about their own investments, but about the investments of all altruists.
We can use our own investments to improve the overall altruistic portfolio in two key ways:
- Increase expected return by investing in high-return assets or by using leverage.
- Reduce risk by investing in assets with low correlation to the altruistic portfolio.
At the margin, we have to choose between either increasing expected return or reducing correlation. How do we make that decision?
We can extend the commonly-used technique of mean-variance optimization (MVO) to derive optimal asset allocations under various assumptions. We don’t know which assumptions apply to the real world, but we can draw some general lessons. The result suggest that we should try to both increase expected return and decrease correlation, but that we should prioritize increasing expected return.
Disclaimer: I am not an investment advisor and this should not be taken as investment advice. This content is for informational purposes only. Please do your own research or seek professional advice and otherwise take reasonable precautions before making any significant investment decisions. Any given portfolio results are hypothetical and do not represent returns achieved by an actual investor. Any asset allocation described as “optimal”, how an investor “should” invest, or similarly, is only considered such for the goal of maximizing geometric return under specific theoretical conditions, and may not be optimal for any actual investors.
Cross-posted to the Effective Altruism Forum.Continue reading