How Portfolio Theory Worked In Real-World 2017
The orderly rotation of the leaders and laggards vividly illustrates how Modern Portfolio Theory worked in the real world last year. Modern Portfolio Theory is a large body of knowledge based on 70 years of research by investment academics. It's a framework for how investing is now taught in the world's best business schools and long embraced by institutional investors. Basically, classifying investments based on their statistical characteristics imposes a discipline for managing assets based on history and fundamental facts about the economy.
Of course, human judgment based on a good sense of history is critical in applying the theory to people in the real world. And all this doesn't guarantee success. It's a theory. But it is the best solution spawned of the research by several generations of the world's best minds for increasing the likelihood of investment success, and it is the framework for investing that this firm believes in.
Applying portfolio theory at the end of 2016 meant lightening up proportionately on the most-appreciated types of assets - small-cap value stocks - and buying more of the types of assets that lagged, the S&P 500 large-cap growth stocks. The exact amount of each type of asset is set based on your personal preferences and appetite for risk.
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