Thursday, December 15, 2005

Modern portfolio Theory (MPT)

Its nice to have a theory with the word modern in it.

Modern flat world theory; it just screams like it has to be true.


Modern Portfolio Theory is involved with finding the right amount of diversification, say 8 to 10 uncorrelated investments.

To contrast with this complex math driven solution we have an honest proverb: Wealth is made through concentration, preserved through diversification.

If you are already wealthy you need diversification. You need to invest in different markets, in different parts of the world. It can get complex, read a bit more about acquiring wealth and preserving it In this article about the Eight Steps To Financial Freedom.

The other end of the equation is for the normal guy that wants to make some money for himself, his kid's college, and retirement.

For this guy the key is to do a lot of research, and put all of his eggs in just one or two baskets; - then he needs to watch those baskets very closely.

It takes a lot of character to jump out of losing investments quickly, or to hold on to winning investments without cashing in. That is what it takes to develop wealth.

Modern Portfolio Theory may have been modern in the middle of the last century. Real modern financial management is to research and manage your own money.

Nobody cares more about your money than you.



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