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Started By
Message
Is Modern Portfolio Theory Dead?
Posted on 3/2/24 at 8:43 am
Posted on 3/2/24 at 8:43 am
I ask this somewhat tongue in cheek but wanted the boards thoughts.
The savings thread got me thinking so the wife and I sat down and and realized we have way more cash than is needed for emergencies only. So I went down the rabbit hole of some basic allocations on Portfolio Analyzer back testing to see what would be a good strategy for money that a)we want to invest and grow but b)wouldn’t be so at risk that we’d lose that cushion given a big down turn. Note that I’m very protective of cash as I want it available should an opportunity or disaster arise.
After some analysis I came up with a mix of MM at close to 5% with the rest split between large cap growth and large cap value. A 40/30/30 split seemed to maximize return and minimize risk….fully understanding that if rates turn the 40 would need to be reallocated as the 5% would disappear quickly. Correlation for this is 98%.
This is all well and good until you benchmark it against the S&P which basically blows any allocation away over any time frame you choose. Which brings me to my question….is their any point at this time in trying to diversify investments or when everything is almost 100% correlated to the market should you just plug all risk capital into the S&P and let it ride?
The savings thread got me thinking so the wife and I sat down and and realized we have way more cash than is needed for emergencies only. So I went down the rabbit hole of some basic allocations on Portfolio Analyzer back testing to see what would be a good strategy for money that a)we want to invest and grow but b)wouldn’t be so at risk that we’d lose that cushion given a big down turn. Note that I’m very protective of cash as I want it available should an opportunity or disaster arise.
After some analysis I came up with a mix of MM at close to 5% with the rest split between large cap growth and large cap value. A 40/30/30 split seemed to maximize return and minimize risk….fully understanding that if rates turn the 40 would need to be reallocated as the 5% would disappear quickly. Correlation for this is 98%.
This is all well and good until you benchmark it against the S&P which basically blows any allocation away over any time frame you choose. Which brings me to my question….is their any point at this time in trying to diversify investments or when everything is almost 100% correlated to the market should you just plug all risk capital into the S&P and let it ride?
5
Posted on 3/2/24 at 8:57 am to SquatchDawg
It would depend on whether one of your objectives is something like,
If your objective is to just grow over a 30 year period or something to that effect, it's hard to argue with a high sp500 index weighting
quote:
b)wouldn’t be so at risk that we’d lose that cushion given a big down turn.
If your objective is to just grow over a 30 year period or something to that effect, it's hard to argue with a high sp500 index weighting
Posted on 3/2/24 at 9:18 am to SquatchDawg
If you simply want something that blows away a mixed portfolio and the S&P 500 and you are “young”, just go 95% QQQ (100 Companies) and 5% Money Market. Practically nothing will beat that, but you have to be able to stomach 40% losses every 15 years or so.
Posted on 3/2/24 at 11:01 am to SquatchDawg
Yes
Posted on 3/2/24 at 12:10 pm to SquatchDawg
While I am a firm believer in KISS and that a simple sp500 port is most likely going to provide the best returns weighted against the effort and risk involved but it aounds like you want an emergency fund/opportunity fund that is very liquid and protected against drawdowns.
There’s a real chance that the opportunity you find or emergency you have comes at a time that sp500 is down (and maybe even down big).
Most likely you would be fine and have way outpaced cash or a hysa, but seems relatively high risk for what you want the money for.
There’s a real chance that the opportunity you find or emergency you have comes at a time that sp500 is down (and maybe even down big).
Most likely you would be fine and have way outpaced cash or a hysa, but seems relatively high risk for what you want the money for.
Posted on 3/2/24 at 2:05 pm to SquatchDawg
Paul Merriman Portfolio beat the S&P 500 over the last 50 years. With less volatility. And fewer down years. Link
25% small cap value, 25% small cap blend, 25% large cap blend, 25% large cap value.
25% small cap value, 25% small cap blend, 25% large cap blend, 25% large cap value.
This post was edited on 3/2/24 at 4:56 pm
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