Does Modern Portfolio Theory Still Work?

On October 1, 2014

In 2013, Financial Planning published an article by iSectors® CEO, Vern Sumnicht, titled “Does Modern Portfolio Theory Still Work?

The core of the article focuses on the application of Modern Portfolio Theory (MPT) to create properly allocated portfolios for clients.  The heart of the article summarizes the solution to the problems of applying MPT with 4 concise points:

  • Standard deviation is a poor measure of risk.
  • Traditional asset classes have become too correlated.
  • The factors utilized to determine an optimal asset allocation within the mean variance optimization process are too narrow.  A wider, more applicable set of input factors that utilize real-world economic and capital market factors, including inflation, unemployment, interest rate and other meaningful data can result in a more precisely optimize an allocation.
  • Reducing investing costs improves returns.

These four points summarize Post-Modern Portfolio Theory.  A complete discussion of this topic can be found in Vern’s White Paper: Practical Applications of Post-Modern Portfolio Theory.

iSectors has built two investment allocation strategies based upon these principles: iSectors® Post-MPT Growth and iSectors® Post-MPT Moderate Allocation.  Since its inception nearly 10 years ago, the strategy has regularly outperformed the S&P 500 (gross of fees) with less risk (as measured by draw down).

Advisors seeking a more dynamic investment approach can learn more about the iSectors® Post-MPT allocation models in the Allocation Models section of our website.

Financial Planning prides itself as the only website dedicated to serving independent financial planners with news, opinion, expert advice and practical business building ideas that independent financial planners need to be successful.

 

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