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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 9:45 am to Skippy1013
quote:
and you are “young”, just go 95% QQQ…Practically nothing will beat that
Sure; 1999 was the peak in the Nasdaq but it represents the problems associated with expecting anything will always lead.
It took you nearly 14 years to recover losses in QQQ if your entry point was in ‘99.
Meanwhile, small cap stocks broke out from ‘99 highs roughly 3 years later.
Nasdaq probably has plenty of room to run but there’s going to be a point in time where it isn’t beneficial to be massively overweight.
This post was edited on 3/2/24 at 9:51 am
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
Posted on 3/2/24 at 2:39 pm to SaintsTiger
Another one that appears to give less downside risk and has slightly beaten the S&P 500 is 80% SCHD (a top performing dividend/value ETF) and 20% QQQ.
Posted on 3/2/24 at 3:59 pm to SaintsTiger
quote:
Paul Merriman Portfolio beat the S&P 500 over the last 50 years.
Sure if you invested a lump sum 50 years. If you compare the returns of the the last 5, 10, 20 years it would lose to S&P 500.
Posted on 3/2/24 at 4:53 pm to gpburdell
Watch this video. Breaks it down decade by decade since the 1930s. LINK Includes charts and graphs. Outperforms by a lot. And oh by the way the 4 fund portfolio does include the S&P 500 companies.
https://ibb.co/P6kc25d
https://ibb.co/P6kc25d
This post was edited on 3/2/24 at 5:01 pm
Posted on 3/2/24 at 4:56 pm to gpburdell
quote:
Sure if you invested a lump sum 50 years. If you compare the returns of the the last 5, 10, 20 years it would lose to S&P 500
From point A to point B, sure, but that’s not how life often works. I think that’s often overlooked in these threads. Average and median S&P 500 one year returns smoke pretty much every traditional asset, but it doesn’t mean it’s a good idea for money you need in 12 months.
Posted on 3/2/24 at 5:02 pm to slackster
You obviously didn’t watch the 20 minute video. Also the S&P 500 lost 1% from 2000 to 2010.
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[/url][/img]This post was edited on 3/2/24 at 5:06 pm
Posted on 3/2/24 at 5:30 pm to SaintsTiger
quote:
You obviously didn’t watch the 20 minute video. Also the S&P 500 lost 1% from 2000 to 2010.
You misunderstood my post. I’m not arguing for or against a particular asset.
Posted on 3/3/24 at 1:11 am to SaintsTiger
quote:
Watch this video. Breaks it down decade by decade since the 1930s. LINK Includes charts and graphs. Outperforms by a lot. And oh by the way the 4 fund portfolio does include the S&P 500 companies.
I don't need to watch the video. I can do my own research. What does it matter what asset class was better for a certain decade. How does that help you?
Are you completely changing your investments every decade based on some criteria and chasing returns?
Performance comparison for the past 20 years:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=6eLLfZozz4uZSKXIg5PMgs
The past 10 years:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=Ly8qsJ28410Zi9CklcLFd
The past 5 years:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=57OOP1hQdFpePv5IVgn9G
Posted on 3/3/24 at 1:24 am to slackster
quote:
From point A to point B, sure, but that’s not how life often works. I think that’s often overlooked in these threads. Average and median S&P 500 one year returns smoke pretty much every traditional asset, but it doesn’t mean it’s a good idea for money you need in 12 months.
I never said that's realistic but that's what historical returns are based on. Also I was just countering the idea that investing in that specific allocation was better than the S&P 500 today because it outperformed for a past 50 year period.
That allocation hasn't outperformed the S&P 500 for the past 5, 10 year and 20 years going back from today.
Posted on 3/3/24 at 8:27 am to gpburdell
And I was just building off of that too. 
Posted on 3/3/24 at 9:05 am to JohnnyKilroy
quote:
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).
This is why I like the mix that still has a pretty large cash position…with a potential shift to bonds if it looks like rate reductions start moving to the forefront. Having dry powder earning 5% seems like a good play.
Also I’m 52 so horizon for needing IF nothing else comes up in meantime is around 8 years. However this would also be our new car, home repair, kids need something, etc money so I want to be pretty conservative.
ETA: thanks for all of the responses.
This post was edited on 3/3/24 at 9:06 am
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