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Modern Portfolio Theory (MPT)


Its nice to have a theory with the word modern in it.

 

Modern flat world theory; it just sounds true.

Perhaps.

Modern Portfolio Theory seeks to find the optimum amount of diversification, say 8 to 12 uncorrelated investments.

Contrasted with this complex math driven solution we have an honest speculation rule: Wealth is made through concentration, preserved through diversification.

If you are already wealthy you need diversification. You need to invest in different markets, in different parts of the world. It can get complex, read a bit more about acquiring wealth and preserving it In this article about the Eight Steps To Financial Freedom.

The other end of the equation is for the normal guy that wants to make some money for himself, his kid's college, and retirement.

For this guy the key is to do a lot of research, and put all of his eggs in just one or two baskets; - then he needs to watch those baskets very closely.

It takes a lot of character to jump out of losing investments quickly, or to hold on to winning investments without cashing in. That is what it takes to develop wealth.

Modern Portfolio Theory may have been modern in the middle of the last century. Real modern financial management is to research and manage your own money.

By the way: Harry Markowitz, father of modern portfolio theory, put half of his assets in stocks and half in low-risk assets. Now he says "In retrospect, it would have been better to have been more in stocks when I was younger."

Of course when we get old we can also look back and see all the opportunities we missed. Those misses will probably be different than the ones professor Markowitz reflected on. With an unknowable future before us - we should follow sound wealth creation and preservation rules.

 

Nobody cares more about your money than you.

 

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