At Keel and Long, we use our combined experience of nearly 20 years to help you reach your financial goals. We specialize in portfolio management, 401k plan services, and financial planning in general. If you have questions about financial scams, or if you’re ready to set up your financial future with us, contact us as soon as possible. We’re ready to help!
We believe that the design of investment portfolios should consider several factors. We base our approach on Modern Portfolio Theory, which recognizes the relationship between risk and return. We seek to maximize returns for your level of comfort. Our long-term approach emphasizes a proper Asset Allocation, diversification among asset classes, and rebalancing to achieve this balance.
So what is Modern Portfolio Theory (MPT)? According to Investopedia, MPT is a practical method for selecting investments in order to maximize their overall returns within an acceptable level of risk.
American economist Harry Markowitz pioneered this theory in his paper “Portfolio Selection,” which was published in the Journal of Finance in 1952. He was later awarded a Nobel Prize for his work on modern portfolio theory.
A key component of the MPT theory is diversification. Most investments are either high risk and high return or low risk and low return. Markowitz argued that investors could achieve their best results by choosing an optimal mix of the two based on an assessment of their individual tolerance to risk.
The modern portfolio theory argues that any given investment’s risk and return characteristics should not be viewed alone but should be evaluated by how it affects the overall portfolio’s risk and return. That is, an investor can construct a portfolio of multiple assets that will result in greater returns without a higher level of risk.
As an alternative, starting with a desired level of expected return, the investor can construct a portfolio with the lowest possible risk that is capable of producing that return.
What are the benefits of MPT?
The modern portfolio theory can be used to diversify a portfolio in order to get a better return overall without a bigger risk.
Another benefit of the modern portfolio theory (and of diversification) is that it can reduce volatility. The best way to do that is to choose assets that have a negative correlation, such as U.S. treasuries and small-cap stocks.
Ultimately, the goal of the modern portfolio theory is to create the most efficient portfolio possible.Schedule a free consultation with us at Keel and Long today! We’re happy to talk more about Modern Portfolio Theory with you, and we’d love to manage your portfolio for you. Let us know how we can help!