Planning Briefs
The Most Important Financial News Of 2018
Published Wednesday, February 13, 2019 at: 7:00 AM EST
The most important financial news of 2018 was that Modern Portfolio Theory (MPT), the strategic underpinning of prudent investing, worked. Yet you just don't see front-page headlines saying conventional wisdom worked. Why? Because when what's expected to happen actually occurs, it's not news. Nonetheless, the fact that modern portfolio theory worked, just as academia has expected it would, was the most important financial news of 2018.
Performance of an equal-weighted portfolio of seven assets for the 49 years through 2018 validated the theory pioneered in academic research in 1948 by Harry Markowitz. MPT holds that a broadly diversified portfolio rebalanced periodically is the best way to get equity-like returns with less risk. The Standard & Poor's index of the 500 largest publicly-held companies over the 49-years averaged a 10.21% return annually and a 16.98% standard deviation (risk rating), compared with a 10.23% risk rating and 9.48% return on a broadly diversified portfolio. This big news happened in plain sight — as it does every year — and, as always, it occurred so very slowly that it was easy to overlook. Based on monthly portfolio design research reports we license by Craig Israelsen, Ph.D., who's taught this class annually for three decades, here's what happened.
In January 2019, the Jubilee year of the modern era of investing, the wisdom of MPT was confirmed: A broadly diversified portfolio over the near half-century long period averaged a return annually on par with stocks but with much less risk! The data on these seven indexes representing these asset classes only goes back to 1970, which is why having another year of data supporting the theory is important confirmation that this relatively new theory explaining investing is correct. Despite the stagflation of 1970s, high inflation of the 1980s, boom and tech crash of the 1990s, the credit bubble and financial crisis of 2008, and current uncertainty, a prudent course of moderation and quantitative analysis has worked as expected for another year.
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