*** Modern Portfolio Theory Assumptions — The Root Of All
*** Modern Portfolio Theory Assumptions — The Root Of All Evil
Rumor has it that a group of economists sitting around the super computer one day smoking a “potpourri” of perfect statistics when they right-easy-to-support come to the conclusion that not too many professional investment managers were able , “beat the market average” consistently.
With the right stats (and generally accepted assumptions) this was to weave a simple action of the imperial clothing. And with a ready audience both on Wall Street and Main Street (do not you just hate that expression), this conclusion set out the framework for passive investment mentality that has overtaken the markets.
With some pretty impressive theory armed, the economists’ poipetrated “the first occupation of Wall Street!
We now have more derivative bets mechanisms disguised as ordinary shares as ordinary shares we ourselves — ’nuff said on volatility. As long as derivative chips are in play, it will run the casino (high volatility).
Clearly, the MPT creators were once mutual fund investors, in search of something better after years of disappointing returns. True, fund managers rarely beat the markets — but why? And also true, private, individual, portfolio manager rarely not to beat the market average over significant periods of time.
Investment fund managers were on the day that the first was created “self-directed” retirement / savings plan doomed to failure. This transfer of management responsibilities to inexperienced “Main Street” spelled disaster from the get-go.
Around the same time, market cycle analysis (peak-to-peak, peak-to-trough, etc.) were scrapped in favor of a competitive, calendar year, race track scenario.
When the going gets tough, become professional investment fund managers sell order-taker. When bubbles evolve, “prospectusly” are required to join the lemmings in their race to and over the cliff. Mutual funds are managed by the mafia quite literally.
Independent executives (especially MCIM practitioner and CEF portfolio managers) have no push-pull relationship with the mob. Management rules are applied to economic realities, to statistical probabilities Monday morning QBs left. Property managers call the shots, where our profits comes before the mob in panic and selection bargain, while the cyclical router is underway.
The probability of winning the bet on probabilities
MPT (Modern, lazy, if you will, Portfolio Theory) has other erroneous ideologies and assumptions in its DNA. She wants to believe investors that the growth in the portfolio market value in the short term the nuts and bolts of investment, and the correct alignment of any number of speculations is an acceptable investment strategy.
The creation, development and growth of the income component of a portfolio systemically ignored and left to chance in the MPT portfolio design process, while out an all-consuming battle against the simple fact that a calling rather easy to deal with the reality of the market cycle .
Economists are simply averse by nature, admitting that they can neither predict nor control, still ahead market, interest rate and economic cycles as well as an experienced professional investors only needs. They observe and study the past — managers and investors actually work in the present, and deal with an unknowable future with the help of rules and disciplines — not probabilities.
But MPT promoters, the University funded economists and Wall Street have deeper pockets than small and independent investment professionals. The ability of all kinds of securities (or theories) to create out of thin air is much more profitable and less risky (of an action perspective) than with the intricacies of individual stocks and bonds.
There is no real question about the prospects for market volatility — it is here to stay. The real question is how to deal with it profitably. The most obvious solution is quick trade for fun and profit, a result that most readers of this article will nod their heads.
But long-term portfolio development-wise, to a secure retirement or other destination, there is a non-MPT, not short-term trading solution — one that both the extreme volatility and hugging repetitive (if not predictable) way the market cycle.
Market Cycle Investment Management with core share trading discipline, and mandated “basic income” growth mechanisms, is a proven method that common sense is not self respecting economist will always appreciate.
The K.I.S.S. Principle just is not as sexy as standard deviations, correlation coefficients, alphas, betas and. But basic investment principles, applied with professional decision-making and risk mitigation capabilities, have fared far better without MPT hoax than they ever will with him.
And for the record market volatility is nothing to fear, to be really — just let me know!