627 karma · joined December 14, 2013
Personally, I think the biggest problem with any ideal portfolio allocation tool are black swan events (Taleb).
Of these three, if you believe in MPT, the financial advisor is simply a coin-operated sales guy. At a 1% fee against $25 million, your business represents $250K/yearly. That is a solid sum of money to any business.
But practically speaking, what is that financial advisor going to sell you? Odds are after you get past the glossy color printed custom, just-for-you, spiral bound investment plan, you will see a custom portfolio that will be assembled with MPT. This is the product that sell every day to every other $25 millionaire that walks in the door.
Sure, you get to tune the outcome based on your risk threshold, or other biases you may have. But unless you are rolling your own investment strategy based on your own perception of future returns across asset classes (in other words running your own micro-hedge fund) you are buying MPT.
Are there managers and funds that beat everyone else year in and year out. Yes there are. Why don't you get the chance to park your $25 million with them? Because even the choice of parking your funds with them is bound by the math of MPT.
In order to maximize return over your preferred time frame (while minimizing risk), you have to examine the whole universe of investable assets, examine their volatility as well as correlations amongst themselves.
From there, your goal is to assemble an ideal basket of assets maximizes your return for your personal level of risk. Running these filters and choosing when to rerun/rebalance is the basis of modern portfolio theory.
Managing your money using MPT is the service that many investment houses sell. Rolling your own is absolutely possible, but it is not as simple as stocks vs bonds.
The math behind MPT might be hand waved as followed: goal seek a maximum portfolio return by combining assets with minimal correlation under a fixed risk scenario. In the end, you will have portfolio that will give you the maximum theoretical return for your selected amount of risk.
In practice, outside of running a hedge fund, or a mutual fund with explicit investment guidelines (e.g. we invest in emerging market energy companies), a responsible asset manager has no choice but to follow MPT. In other words, if you are not a specialized fund, there is no mathematical justification for deviating from an MPT constructed portfolio. By definition, any deviation from a MPT balanced portfolio means you have either a) taken on more risk than necessary or b) reduced your potential return or c) do not believe in the underlying assumptions of MPT.
So what is the amateur person worth $25M to do today? As with all things, you should seek professional advice. There are many nuances of tax efficiency, estate efficiency, asset protection, personal needs, etc. that a professional advisor should guide you through.
Apparently the folks at WealthFront and FutureAdvisor are selling MPT driven portfolios to employees of SF bay area tech firms.
edit: As a couple of users point out below, there is controversy over the effectiveness of MPT including: whether the models effectively capture the distribution of risk vs return and whether the values desired by the models can be calculated with proper accuracy. PMPT (post-modern portfolio theory) builds upon MPT. Lastly there are critics such as Nassim Taleb (of Black Swan fame) who find some of the core assumptions flawed.
Tax arbitrage strategies can be shutdown by governments. Transparency would be a good start. Require every listed corporation to diagram all of their corporate/llc vehicles worldwide and their interdependencies. Require balance sheets and cash flow statements for each of these entities.