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A Guide to Modern Portfolio Theory

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A Guide to Modern Portfolio Theory

Photo courtesy of siam.pukkato@gmail.com via Getty Images. Article by Mark Berger. Worth – February 23, 2021.

According to modern portfolio theory, there are three rules to be followed to make an investor earn more money with less risk during long periods.

Modern portfolio theory (MPT) is a fundamental wealth management strategy that won the Nobel Prize in economics in 1990. There are three components of MPT:

  1. Pick a fully diversified portfolio—meaning stocks and bonds, U.S. and foreign, small and large companies, etc.
  2. Implement your portfolio with diversified, low-cost investments.
  3. Rebalance the portfolio on a regular basis.

As straightforward as it sounds, sticking with this strategy can be difficult since an investor is never completely concentrated where things are doing best. While an investor owns top performing assets, they will also own the asset class doing the most poorly. This is due to the full portfolio diversification. […]

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