Nov 09 2008
The Modern Portfolio Theory
One of the hot new buzz phrases in investing is the concept of Modern Portfolio Theory. This counters the idea that the fundamentals of your portfolio is only in stocks, bonds, and cash. Instead, the theory is that if you enter another component to the mix, a certain percentage that holds investment items such as broker traded Forex accounts, real estate and other assets to your portfolio, the stability of your portfolio will be enhanced. A very nice bunch of mathmatical formulas can be seen on Wikipedia concerning the background research and analysis that has gone into this.
In this blog, I have long advocated a variety of investment strategies be in your portfolio, particularly real estate. Investments and “assets” are terms that are sometimes used too losely when it comes to discussions with some investment advisors. I prefer to use the School of Common Sense, the one advocated by Robert Kyosaki, of the Rich Dad, Poor Dad series. This is a simple: if it puts money into your pocket, it is an asset. If it takes money out of your pocket, it’s a liability. That said, some things take money out of your pocket initially, but put money in later. Gold coins, silver bars, high denomination bills, signed rare baseballs could all be considered assets. Remember, it should only be a limited section of your overall portfolio. The problem is collectors often become totally obsessed with a collection regardless of its worth and then forget to keep the whole of it in perspective. That’s when it moves out of asset, and into clutter. Nothing is worth a dime unless you can sell it and get food on your table.
I have other concerns about the Modern Portfolio Theory. The fact that something as unpredictable as the stock market or Forex investments can be somehow explained mathmatically reminds me of the derivative equations that were put together to advocate it as an investment vehicle. The stock market can’t be predicted by math formulas because it’s often moving on human emotion. I understand there are sound studies behind this theory, but no one should use math strategies to legitimitize investment strategies.
I have other concerns about this theory. Wall Streeters who advocate this, are using it to create all new investment brokers who will do the trading for you, ever mindful that most investors like you and I can only keep our mind on a few areas of investing. The money made before the internet leveled the playing field for the average investor was mind boggling. I remember an investment forum where one woman lamented the $120 going in and going out of a stock in her Merril Lynch account. Those were the days of the dinosaurs, and now Wall Street suits are advocating going back to the days when brokers again make you money and the ripe commissions this will generate must make these people salivate. Not only that, some broker that lives thousands of miles away from you has his own pockets to worry about, not yours. Unless s/he are making you over 30% returns, I would question why anyone would sit and just pay commissions.
All investments must be entered into prudently. If it is going up, up, up and has your attention through the media, then it is probably time to not buy in. If you can see stress in the market, that’s probably time to buy. It doesn’t matter if it is real estate or rare gold coins. But read, read, read. Analyze, analyze, and then get more data to analyze. Know the investment before you jump into it. Don’t get more than an opinion from a salesman. Check with a few other salesmen or women after that. There is enough information on the internet now that you can follow up to find out if those opinions have merit.
Don’t worry about chasing the newest theory. Chances are if you are a long term investor, you’ve already been doing that anyway.
Very informative article.
I like your idea on the adding coins, bills, and other rare collectibles to your portfolio. I have gold in my portfolio but adding gold coins would add more value than the gold alone.
Thanks for stopping by. Gold coins can also be rare, thereby fluxuating in price. One such coin that I looked at was once selling for $3,000 at its high. Since I can’t follow the market on these coins, I didn’t pick it up when it was low. Watch those slick salesmen. They’ll try to talk you into rare ones that may never see the high prices twice. Take care!
Oh, absolutely. If you buy art, you better like it, because not all good artists will end up with the money power of Van Gogh. But imagine if you did buy art that really took off! It has happened, of course.
My thing is, keep the investing in rarities smart. And know thy collectable. Thanks for stopping by.