Just read a great story on FA Magazine from Harold Evensky, titled “Maybe MPT Isn’t Dead?”.
The answer is… it is not. I like the story because he correctly points out that it can on occasion run into implementation issues, and in some market environments, it doesn’t provide the protection investors expect.
He has a great line in the story…. “I only know of three alternatives to MPT—market timing, absolute return and tactical allocation.” He goes on to say that he doesn’t know of a market timer with a good long tem track record, or any absolute return manager that consistently provides true absolute returns. He does say he believes that being tactical can co-exist with MPT.
My take is it would be easy to say “just diversify”, find several MPT managers (fundamental, technical, etc..), find several timers, find several absolute return managers, and find several tactical managers (and Jeff Joseph at www.venturepopulist.com would say to add some private equity).
If you don’t have time, find a great financial advisor to track several managers of the different type of strategies, and truly diversify. Why, because everything breaks, and if you are truly diversified, then you will be holding something that works while something else is breaking.
I struggle with why this is so difficult when we do the same things with other aspects of our lives. Do you cut the sleeves off a winter coat so you can wear it in the summer? No, you have summer clothes. When you see summer is approaching, do you increase your allocation to summer clothes, of course? Sometimes it rains, you of course don’t know when it is going to happen, but when the conditions are right, just in case, you have a rain coat readily available. Why can’t a portfolio be managed the same way? Why can’t you have a closet full of different investment options that you change your exposure based on the prevailing conditions?
On one hand, it seems an easy concept to implement, on the other; it does take careful watching and assessment. If you can’t do it yourself, get a recommendation for a good financial advisor.