Modern Portfolio Theory

 In Personal Finance

When I begin working with a new client, I get asked many common questions by the client. What’s my investment style? How do I decide an investment is a worthwhile investment? And what should they expect from my firm?

I could spend an inodorimate amount of time answering each one of these questions, but I will not bore you with such details. However, the succinct answer to these questions is explaining the investment strategy for which I subscribe to which is the Nobel Prize winning, and time-tested, Modern Portfolio Theory.

What’s Is Modern Portfolio Theory?

Modern Portfolio Theory (MPT) is an investment philosophy developed by renown economist, Harry Markowitz. Markowitz’s theory operates under the assumption that investors are risk averse; however, an investor can optimize their return by investing in asset classes with varying degrees of correlation, and in-turn, reduce risk.

Why I choose to follow Modern Portfolio Theory?

Over my long career in financial services, I have had the privilege to hear from thousands of investors. What I have learned is that the overwhelming majority of investors want a portfolio that meets their goal, while simultaneously keeping the volatility of their portfolio in check. And this makes perfect sense, as it is how we are wired as human beings. It’s some respects it is akin to traveling on an airplane. We expect the pilot of the plane to use his professional expertise to map a route that will take us from Point A to Point B in the shortest amount of time and with the least amount of turbulence. Many of these same principles apply to investing and how I approach a client. My goal is to bring my clients to their desired destination, but I try and avoid turbulence and make the ride as smooth as possible by taking on only enough risk required to achieve my clients goal. And this is exactly what Modern Portfolio Theory does for an investor – it optimizes the route based on historical volatility of asset classes, thereby making a client’s retirement journey much more comfortable.

Hear more about Modern Portfolio Theory from the Nobel Prize winner himself by watching this video.  

 

Paul Hundley
Paul Hundley is a Senior Financial Adviser with Lighthouse Capital, LLC. Hundley has been working in financial services since the late 90's and focuses his practice on the investment needs of individuals and families.
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