Modern Portfolio Theory doesn't apply anymore

Discussion in 'Share Investing Strategies, Theories & Education' started by John Ferguson, 11th Nov, 2018.

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  1. John Ferguson

    John Ferguson Well-Known Member

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  2. Nodrog

    Nodrog Well-Known Member

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    For us time poor retirees (getting the BBQ ready and I’m in charge of beer / music selection) can you please give a summary or at a minimum a few examples:):cool:?

    Never been a fan of MPT myself at any stage. Simply mostly equities and some cash to support income (if needed but hopefully not) when the **** hits the fan.

    Personally volatility to me has always been my friend, not something to fear. An opportunity to purchase future income streams cheaply whilst ignoring it from a capital perspective which appears to have most others with brown stained trousers heading for the hills faster than a tsunami warning in low lying coastal areas.
     
    Last edited: 11th Nov, 2018
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  3. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Are we not using a form of MPT to construct our portfolios? That is, a portfolio that covers the wide range of options available: Australia and International, Large / Medium / Small cap, Growth / Value, property / infrastructure and alternatives. Nothing we build will perfectly model he efficient frontier but I am assuming that our decisions to deviate are for a reason, e.g.

    - reduce small cap, only a small percentage
    - increase Australia for franking and reduced currency risk
    - reduce value in a bull market

    etc
     
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  4. Nodrog

    Nodrog Well-Known Member

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    To me it’s just Equities as a growing source of income. I like diversification, low fees and most importantly I don’t want to have to do the work myself. Hence I outsources it to someone (LICs) and some thing (ETF).

    There was a time when just ASX felt enough but as I get more conservative with age I decided that some broader diversification and importantly protection against Home country risk would enhance my SANF.

    There’s none of the concern about capital volatility and correlation etc that are at the heart of MPT. Mind you it’s that long since I read about it I might be a bit muddled.

    My investing world is a very simple one. Equities as an income stream and Cash to supplement any shortfall, if needed, when the market has it’s regular cyclical hissy fit. The market is very predictable in it’s behaviour albeit the timing of such events far less so. But any rational investor knows that booms and busts are to be expected. I don’t need a PHD in MPT to deal with this but simply an understanding that equities are two dimensional. Focus on the wrong dimension and the ride may be a very scary one indeed. I choose to focus on the other:cool:.

    Of course as @SatayKing often says, it’s all about me. Words can’t describe how wonderful this approach has been for us both financially and psychologically. Others however will need to choose what suits them.
     
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  5. Zenith Chaos

    Zenith Chaos Well-Known Member

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    I'm similar - my goal is to reach financial independence (FI) through passive share income. As I want this income before I can access Superannuation (RE) I need it structured outside super but that doesn't really change the investment philosophy.

    I buy LICs and ETFs because I know little about trading and company research. The only decision I need to make is when to buy the next parcel, which tends to decide what I am buying based on "value" at the time using NTA, EPS, and yield for LICs and moving averages and yield for ETFs. I try to keep an overall portfolio balance between Australia and International as well as capitalisation size.

    Most of what I learned has been from you @Nodrog so thank you. One important lesson I haven't yet applied is holding my nerve during a crash. No-one knows how they react until they've been punched in the mouth but I hope to use it as the opportunity to FIRE.
     
  6. SatayKing

    SatayKing Well-Known Member

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    Well, maybe. I've no "doubt" I'll still have that plus nerves, etc. While I can say Yeah, been there done that, it will take some degree of effort on my part not to follow the masses to the exit.
     
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  7. Nodrog

    Nodrog Well-Known Member

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    For younger FIRE investors if it doesn’t go to plan you at least have the fortunate, albeit likely not desired, option of returning to paid employment.

    When older, retired and likely not having that option regardless of any previous market crash experience(s) it will still probably be scary for even the most hardened investors. Just part of being human unfortunately.

    I try my best to know my own risk tolerance in how much cash I need for SANF then when the inevitable scary event arises I know that no matter what for us Selling is not an option regardless of how anxious I might become. Hopefully like in the past I’ll also be courageous enough to add to our holdings.

    Dare say I’ll do my usual thing of being excited at first of buying opportunities but as things deteriorate further sick to the stomach when pulling the trigger as major fear / panic takes over the market. And I can assure you I’m a very nervous type having it even affected my health severely at times in my lifetime and needing medication. So I would suggest that if I can manage to make it through market crashes despite my nervous / fearful disposition there’s High hope that most others can do the same.

    Do whatever to be prepared for such events. Have on hand anything that helps you stay the course. For example, I know you and others here have seen it before but something like this from @truong posted next to your computer if it’s message reaches your deeper core might be helpful:
     
  8. Cityman

    Cityman Well-Known Member

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    Interesting podcast, will defntely give it a follow and have quickly listened to parts of 3 of them.

    On MPT - it makes sense what he is saying and I guess many here have come to similar conclusions. MPT was based on creating an efficient mix based on expected returns vs volatility/standard deviation etc.

    What he is suggesting is that these days, the extreme events happen more regularly - and in his experience this was the driver when dealing with clients. Ie they didnt worry as much about having the most optimised portfolio, but wanted to avoid the extreme crashes etc.

    We all word this differently, but to me it is another way of realising the investing is as much, if not more about the psychology than the actual returns/instruments we are using.

    I had a quick listen to his recent 'educating kids' podcast, might have to re-listen as Im not sure i agreed with much of it. Maybe I misunderstood him but I did jump through it quickly.

    @Alex Straker would like his episode on the distributed ledger technology and how it will radically change the way institutions go about things etc. Working out how to profit from this change interests me, as it seems it is going to be a significant part of the world moving forward.
     
  9. The Falcon

    The Falcon Well-Known Member

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    TLDR ; Barbell / Black Swan type portfolio?
     
  10. Nodrog

    Nodrog Well-Known Member

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    I’m still non the wiser with this podcast. I tried listening to it today but fell asleep three times then gave up. Happens all the time with podcasts which is why I liked stuff in print. I manage to get through it without falling asleep.

    But I see @Cityman summarised it so thanks.
     
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  11. The Falcon

    The Falcon Well-Known Member

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    Yeah I struggle with investment stuff now. Have looked down all the rabbit holes and I am comfortable like a junior @SatayKing . I've got one more thing to say on the concept of "investment" that I will get around to one day, but Meh!
     
  12. Cityman

    Cityman Well-Known Member

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    I hear ya - find it hard to listen to a podcast at home or at the office, but in the car with the playback speed adjusted to 1.3-1.5 generally allows me to power through em.
     
  13. Nodrog

    Nodrog Well-Known Member

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    As a retiree who usually looks at this stuff in a recliner or in bed staying awake is a real challenge:).
     
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  14. Snowball

    Snowball Well-Known Member

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    The fear of having to go back to real work should help my keep my nerve during a stomach-churning market :p
     
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  15. Pier1

    Pier1 Well-Known Member

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  16. John Ferguson

    John Ferguson Well-Known Member

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  17. John Ferguson

    John Ferguson Well-Known Member

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    I’ve been implementing acts of gratitude into my daily life lately and it occurred to me that I am very grateful for the input from more astute members of this forum. This platform is an amazing tool for new investors and anyone interested in financial independence through investing In various assets to access. To be able to tap into the knowledge of those who have the skills and experience to share is invaluable. So thanks! I am grateful for your input. I would have to say I have learnt more from this forum than the hundreds of books I’ve read on investing over the past ten years.
     
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