Modern Portfolio Theory
(MPT) is the term used for the growing body of academic
investing research that has emerged since the 1950s.
A number of the developers of MPT have won Nobel
Prizes in recent years for their contributions to
our understanding of how financial markets really
work.
MPT underlies every aspect of our investing philosophy:
using passive management, having broad diversification,
tax reduction strategies, risk management, etc.
Dimensional Fund Advisors,
our institutional fund provider, has Nobel Prize
winners on its staff that use current research findings
to improve investment portfolios.
1. Markets
process information so rapidly when determining
security prices, that it is extremely difficult
to gain a competitive edge by exploiting market
anomalies.
2. Over time, riskier assets provide
higher expected returns as compensation to investors
for accepting greater risk.
3. Adding high risk, low-correlating
asset classes to a portfolio can actually reduce
volatility and increase expected rates of return.
4. Passive asset class fund portfolios
can be designed with the expectation of delivering
the highest returns for a chosen level of risk over
time.
