Update for Investing's Classic 'Efficient Frontier'

One of the classic underpinnings of Modern Portfolio Theory needs an update.

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Comments (1)
Modern Portfolio Theory was an interesting theory when it was presented 60 years ago, but it's flawed and should not be used as a basis for portfolio diversification. One major reason is that it is based on allocating capital across "asset classes" in order to establish a portfolio that lies on the efficient frontier.

Asset classes themselves are self-limiting. They were created in a time when even the simplest financial calculations took hours or days to complete. Today we can evaluate individual "trading strategies," each based on a unique "return driver;" we are not constrained by asset classes. I discuss this in this chapter (provided complimentary) of my best-seller: http://bit.ly/qG6oNE.

My approach to diversification is quite different from conventional investment wisdom. As I've alluded to in this comment, I replace asset classes with "return drivers" and "trading strategies". Once viewed in this fashion it is easy to create a truly diversified portfolio, rather than one constrained by the shackles of asset classes. I'm also pleased to provide a complimentary link to the final chapter of the book, where I present the benefits of a truly diversified portfolio: http://bit.ly/vxDo6v.
Posted by mike d | Saturday, June 01 2013 at 9:11PM ET
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