Is Modern Portfolio Theory Dead?

Episode #124 of the Disciplined Investor podcast (iTunes link) by Certified Financial Planner Andrew Horowitz and his guest Harold Evensky discusses the question, "Is modern portfolio theory dead?"

Even if you don't know what modern portfolio theory means, you've probably heard the basic premise if you've invested some time in a retirement planning seminar trying to figure out how to allocate your funds in your 401K.  Modern portfolio theory dates to 1952 and earned Harry Markowitz a Nobel Prize in economics 38 years later.

The basic idea is that if you diversify your investments across different asset classes (stocks, bonds, real estate, etc.) that you can achieve similar investment returns with lower risk.   The idea is that if stocks go down, for example, perhaps bonds or real estate might go up to offset the loss in stocks.  Modern portfolio theory helps create recomendations as to the optimum mix of financial asset classes so as to minimize the risk for a given expected rate of return on your investment.

In he recent financial meltdown, many people observed that almost all financial asset classes moved in the same direction - down.  Hence, some people are suggesting that the modern portfolio theory is "dead".  If you're struggling with investment decisions for your nest egg, give this podcast a try.