Modern Portfolio Theory (MPT)

(Picture above is for illustration purpose only. NOT INVESTMENT RECOMMENDATION!)

By Al Thomas

Has your broker called you this week? You may have called him.

“Why is the market going down?” Bet he had several hundred of those calls. Whatever his excuse for this “correction” might be I will guarantee he really doesn’t know.

He will in 99% of the answers give you one of the 10 Commandments of Wall Street that I have written about many times in this column and in my book.

Most will talk about Buy N Hold in the sophisticated broker language along with a lecture on Modern Portfolio Theory. It really sounds good and is taught in the Wharton School of Economics at Penn State by Jeremy Seigel PhD. He came up with this wonderful sounding idea.

This is what they teach the kids before they turn them loose on Wall Street. There is only one problem. It doesn’t work.

Brokers have now thrown this article into the waste basket, but you smarter people who are still reading please let me prove to you why it doesn’t work.

Just for openers from 2000 for the 10 years to 2010 Buy and Hold LOST S&P500 Index 24% of the investors’ money. Basically without all the BS that is what MPT breaks down to, BuyNhold.

It is supposed to give the investor enough diversification into many sectors so he will at least break even. It hasn’t done that.

What they have left of the theory is they leave investors’ money fully invested while the market is going down. It does not address the normal major bull and bear cycles. There is no exit strategy to protect client money during bear periods.

For whatever reason there is no technical analysis applied to the theory.

Simple, very simple technical methods can have the client in cash while the market is dropping and fully invested while the marker is going up. For some reason the economists who do market analysis with Greek configurations distain the simplicity of technical methods. MPT probably would work if some type of market timing strategy would be added.

Any simple long term technical investment method will beat the return of MPT by several hundred percent over any 10 year period. You can prove this to yourself by going online and using the SP500 Index plotted against a 200-day Moving Average.

You don’t need or want Greek formulas for your investment portfolio. If you have been losing money with this nonsense it is time to find a simple technical method. There are many that can be found on the Internet. Do a search for “Market Timing”. Then pick out a simple method.

Do it now before this next bear market eats all your money.

Al Thomas’ book, “If It Doesn’t Go Up, Don’t Buy It!” has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at and discover why he’s the man that Wall Street does not want you to know. Copyright 2010 Williamsburg Investment Co. All rights reserved.