One of the great aftershocks felt in the wake of the financial meltdown has been a fairly loud drumbeat against Harry Markowitz’s modern portfolio theory.

Within certain circles of the financial services industry, the economic recession exposed modern portfolio theory as a lousy way to diversify. From this assailment on one of investment’s cornerstone theories has come the oft-repeated line, “buy and hold is dead.”

So railing against modern portfolio theory is not really going to cause any shockwaves. And Jack Reutemann, founder and president of Research Financial Strategies, is aware of this. But the fact that the message is getting a lot of play in the press these days could be more a validation of something he’s been saying for years.

In other words, buy and hold is dead.
“We’re in an ‘I told you so’ economy,” Reutemann said. “Seeing the press picking up on the message that buy and hold is dead, for a guy like me it’s pretty funny.”

The problem, according to Reutemann, is that many baby boomers have held onto the buy and hold approach for too long now. He said the S&P is down 27% over the past 10-and-a-half years.

“The baby boomers are in trouble because they have listened to this methodology,” Reutemann said.

He added, “[Buy and hold] has been an utter failure for 20 years. It worked in the 90s but when there’s a bull market it’s hard to think about things like technical analysis and risk management. It’s like trying to sell hurricane insurance in June when the sun is shining.”


So that’s Reutemann’s message to baby boomers: Technical analysis, risk management and investing in exchange-traded funds instead of mutual funds. More accurately, this is the message that Reutemann is delivering to registered independent advisors who are servicing baby boomers.

Along with Ric Lager, founder of Lager & Co., a 401(k) advisory service, Reutemann created an investing strategy for advisors called, “No More Pies!” The thrust of this approach is to ditch pie charts, ditch modern portfolio theory and re-assess client risk. But the use of ETFs over mutual funds is a key component of their message.

“Mutual funds are overpriced and built to underperform,” Reutemann said.