Quote:
Originally Posted by Slava
I really wish I had more time for this, but MPT is something that I disagree with entirely. I basically think its junk. The entire notion of putting a number on risk is a bad idea and I wouldn't put any faith in peoples ability to do so. Risk is one thing and one thing only, losing money.
Secondly, Standard Deviation is almost as useless. No one is worried about the upside volatility, but its measured in just the same as downside.
Anyway, I don't have time to run through all of this at this point...as much as I would love to!
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Not wanting to derail the thread but I agree that there are limitations to SD as a measure of risk. In the real world of investing, returns do not follow a classic "normal distrubution," but instead more closely approximate a lognormal distrubution. The most important criticism of SD as a measure of risk is that is assigns equal importance to returns both above and below the mean, wheras clearly only events occuring below the mean are of importance to any measurement of investment risk. Saying this SD and Beta are the measurements most commonly used and are even found on Andex charts ect so they do have some merit and should be considered when looking at risk. I also do not agree 100% with modern portfolio theory but more along the lines of a hybrid of this theory, something along the lines outlined by William Bernstein in the Intelligent Asset Allocator. Asset Allocation is the only factor affecting your investments that you can actually influence.
The point I was getting at is when you say that the Fed is gently directing people to take on more risk like it is a good thing without considering the risk that people would be taking on is too simplistic and not considering those people who can't afford to take on that much risk depending on where they are in their investment timeline. Where do they hide at this time? Ironically, based on history I outlined above, things are different now and fixed-income is no longer the safe asset class that it once was not to mention the low rates we are currently seeing. Increased risk of default and historically low interest rates mean you need to keep a closer eye on your bond holdings. What does a conservative portfolio consist of today?