New Update Available Show 29

It’s fascinating to me that in our day of high speed innovation, how we invest is slow to innovate. Modern Portfolio Theory was developed years ago and it’s broken. Harry Markowitz developed MPT in 1952 and won a Nobel Peace Prize for it.

Investopedia.com states, “Modern portfolio theory (MPT) is a theory on how risk-averse investors can construct portfolios to maximize expected return based on a given level of market risk.

Leland B. Hevner in an article states, MPT dictates that portfolios be designed to match the risk tolerance of each investor using asset allocation techniques. Then they are to be held for the long-term. Because these portfolios have no sensitivity to market, they are dangerously vulnerable to market crashes.

Hevnver goes on to state that we saw portfolios that were constructed using MPT experience 30% to 50% losses in 2008 during the Great Recession and states we saw these portfolios strained again this year with the coronavirus pandemic.

The average portfolio construction for those within a 10-year window of retirement is normally problematic. Why? Because many portfolios are setup using MPT and they are on a set it and forget trajectory.

A better way is to use professional money managers who dynamically position your investments. By doing this, when economic storms happen, we can potentially mitigate losses and develop a more consistent return.

Often, at our firm we use mutual funds and exchange traded funds that are either evaluated on a daily or monthly basis in an attempt to ensure your investments are not sustaining massive losses. 

But why is set it and forget it method not okay for a retiree? Well, number one volatility is here to stay. We’ve seen thousand-point drops in the market somewhat routinely the last few years.

Right now, the market is running up on the hope that a Covid vaccination will get things back to normal. The market likes when the rules stay the same. When the rules shift, the market gets nervous. So, when more regulations come or higher taxes, volatility may increase.

Our goal is to avoid violent downturns in the market. Our goal is to create an all-weather financial plan where you are able to make a return, but attempt to limit your downside losses.

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