How Modern Portfolio Theory Could Wreck Your Retirement! Posted by nick_niesen on November 8th Wholesale Kids Jerseys , 2010
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Modern Portfolio Theory altered the investment landscape forever when it was introduced in the 1950s by Nobel Prize winning economist Harry Markowitz.
Virtually every financial planner and money manager touts its tenets of asset allocation and risk management but is it even valid? And if it is, does anybody understand it well enough to put it into efficient practice?
For example, an investor who buys a stock that profits on cloudy days and buys another that profits on sunny days, will theoretically profit regardless of the weather.
An over simplification of MPT is a fixed asset allocation portfolio invested in bonds, gold, large companies and small companies. Bonds and gold assets would typically under perform when large andor small company stocks are doing well 聴 and vice versa 聴 assuring that some portion of the portfolio is always increasing in value. But does it really work?
Like all theories Wholesale Womens Jerseys , Modern Portfolio Theory has serious short comings when applied to the real world.
Here are some of the significant problems for investors looking for solid returns and a safe retirement:
1. MPT guarantees that a large portion of your portfolio will under perform the market at all times.
2. MPT assumes that assets will act without correlation, that is, they will act differently from one another. However, market historians have proven that this isn聮t always true.
3. MPT doesn聮t keep up with or perform as well as the overall markets.
4. MPT is based on a 70 year investment time period. If you can invest for 70 years, MPT can work for you. However Wholesale Mens Jerseys , most investors don聮t have a 70 year time horizon.
Your retirement money is the most important money in the world, and it聮s only good common sense to make certain it聮s deployed in a portfolio that is both risk averse and at the same time offers significant upside potential.
However, it聮s quite likely that Modern Portfolio Theory is not the right answer for many modern investors.
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