Several media outlets have been writing about the demise of modern portfolio theory and that models used in the past need to be reevaluated in light of the current financial markets.

We agree.  The old models need to be reexamined and then discarded.  Financial models work well until they don’t work anymore.  The reason that they stop working is that they are simply models.  They are not theories, like the theory of gravity or the theory of relativity.  They are models based on fitting past data into a regression equation.  The regression equation is suppose to give everyone an elegant equation upon which to determine asset allocations, among other things.

The problem is that these equations are based not on financial laws but simply past data. Relying on past data to predict future performance is frightening!  The world has changed over the past decade and will continue to change.

If you are a Baby Boomer, I strongly suggest you reconsider using models to determine your financial plan and read my book, Bifurcated Retirement: A New Approach for Today’s Baby Boomers. We don’t rely on models.  We rely on better ways to secure your financial retirement.

The book can be found at

www.amazon.com.

Below is a link to a recent Wall Street Journal article regarding your 401(k).  The article mentions four common mistakes.

Two of the four mistakes to avoid are excessive fees and a lack of proper allocation. These are the two most important aspects of retirement.  Stay with ETFs and their low fees rather than invest in mutual funds.  Extensive research has shown that, without question, mutual funds cannot outperform the market on a long-term basis: and you are investing on a long-term basis.  As such, the extra fees are not worth it.

Secondly, asset allocation.  This is the gorilla in the room.  A retirement plan must be properly allocated.  There are plenty of retirement planning software programs to help you determine your personal allocation.  It is best to DIY and understand the whole process, and then visit an advisor, if necessary.

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Below is a link to an article in the WSJ regarding diversification.  It contans some very sound advice.

Basically, the article recommends thinking about your retirement portfolio in terms of what might happen in the future: expansion, recession, inflation, deflation.  That pretty much sums it up.

If we have an expanding economy, stocks should do well and inflation may increase.  As such, you might want to own equities and perhaps TIPS for the inflation protection.

If we have a recession, stock will not do well and we might experience deflation.  Bonds would be the best security to own.

According to the article, “Viewed this way, the challenge you face isn’t figuring out which assets are cheap today. It’s building a portfolio that can prosper regardless of whether economic growth is high or low or whether prices are rising or falling.”

“In your “expansion” bucket, for the scenario in which the economy grows faster than forecast, you want stocks, real estate and, if you can tolerate their risk, commodities. In your recession bucket, for times when economic growth falters, you want bonds. The inflation bucket, for periods when the cost of living rises faster than expected, holds Treasury inflation-protected securities, or TIPS, and, if you can stand the volatility, commodities. Finally, in your deflation bucket, for times when prices are falling, you want stocks and conventional bonds like U.S. Treasurys.”

“Of course, prices can rise or fall as the economy grows, and a shrinking economy can experience either surprisingly high or low inflation—which is precisely why you need money in each bucket.”

Very good advice and one that I think is worthy of consideration by everyone.  You might not hit a home run, but you will be protected under many different scenarios.

http://online.wsj.com/article/SB10001424127887324906004578292200253111008.html?mod=WSJ_Markets_LEFTTopStories