Is MPT and buy and hold DEAD?

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Feb 23, 2009 10:02 pm

It seems MPT is dead. The whole house burned to the foundation with everything perfectly correlated to go down 50% +  in a perfect symphony of wealth destruction.

  Or did most forget that a healthy dose of fixed income was a key part of MPT asset classes?
Feb 23, 2009 10:10 pm

model portfolio isnt dead, just busted.  the firms still want you to peddle their great asset allocation models in mutual fund wrap accounts.  the money managers win, and the firm wins.  2 out of 3 aint bad.

Feb 23, 2009 10:30 pm

As your screen name indicates, you don’t understand the whole concept. The idea is returns of a large period of time vs. other possible outcomes. Of course I don’t expect a ‘daytradah’ to comprehend a time horizon that’s not measured in minutes.    

Feb 23, 2009 10:55 pm


So your 50 year old growth clients are now 65 and your brilliant advice to buy and hold over the past 15 years with your MPT and Monte Carlo illustration delivered what? A break even at best?  You and Bill Miller need to drink another beer and wash down that crow stuck in your throat.

In the long run we are all dead so yes it all works out that we wont need to access our money. Your magical answer to everything is just give it time....Wow that is DEEEEEP.

Appearantly You have no concept of point in time risk or "useful life' of an investment horizon.

You are probably telling your 65 year olds they can wait this out and it will all come back. Just hold on and close your eyes Millicent....You dont need the money right now anyway..... Its only a "temporary" unrealized loss..   AHaAahahahaha  
Feb 23, 2009 11:46 pm

hmm…break even?  I think not.  

  Try 15 year annual average of 10.5% with single largest loss coming in 2008 @ -22%.  Unfortunately, 17% of that was in Oct & Nov.   Prior to '08, next largest loss was in 2002. That year we lost a whopping 0.8%.   I  doubt a daytradah can see the value of those returns--but we're pretty damn happy thus are our clients that dont pay daytradah commissions...   Regardless of what you might think--it DOES work....and quite well.      
Feb 24, 2009 1:07 am
The more I watch here, the more ridiculous the talk gets..."beta-centric", "buy and hold", "MPT"...all have been recently declared dead forevermore.  Baloney.   I think that once all the "buy & hold is dead" talk dies down and we return to a more normalized market, all the idiot talking heads on CNBC will be the ones eating crow.  No strategy has been proven to work in EVERY kind of market scenario.  I'll take my chances with the old fashioned boring strategies that have proven time and again to work in almost any kind of market.  Based on my education in this bear, I may tweak some time-honored strategies, but I'm not going to just throw them out with the bath water simply because they didn't happen to work very well in one extreme market situation.  If you spend your entire career throwing out strategies that didn't work in all market conditions, you'll be left with nothing but chasing the latest fad and your clients will be the ones ultimately left for dead.
Feb 24, 2009 8:55 am

Buy and hold worked perfectly fine from 1975-1999.  That’s 24 years.  Secular markets turn, and we don’t always know when that will be.  Buy and hold is the clear winner in a Secular Bull.  Buy and Hold kills you in a Secular Bear, even when there are Cyclical Bulls mixed in (i.e. 2002-2007 was a cyclical bull inside a secular bear - obviously just holding from 2000-2009 didn’t work well, unless you knew exactly when to “stay-holding”). 

  If you tried market timing and using absolute return strategies from 1975-1999, you would have far under-performed a simple buy-and hold strategy.  The same can be said for 1942-1972.  This is not my opinion, it is fact.   It's not that either camp is wrong, it's that it's about what investing "era" you are working with.
Feb 24, 2009 9:21 am

Certainly buy and hold has not worked overly well over the last few years, but then again we’re living in a culture where the media thinks ‘history’ is what we had for breakfast.

It would seem that NOW we are in a PERFECT environment to start building a portfolio of good quality stocks to buy and hold for a 5-10 year time frame.  Just about everything is cheap, so now you just need to determine which ones are most likely to be survivors, which are most likely to maintain their dividend(since yields are so high) and which have the best potential to out perform.

Buy a little bit of the first one you find that fits that criteria, put it away on the shelf and then go back and start digging for the next one.  Things are so cheap right now the hardest thing is figuring out what to buy first.

Of course, the strategists and so-called gurus won’t tell you that.  They’re too busy arguing over what the market will do in the next 6 months, and whether you should have 25% or 50% gold in your portfolio.

The world is on sale people.  Don’t miss it because you’re too busy trying to figure out which exotic trading strategy you want to deploy this week.

Feb 24, 2009 9:25 am

Hyman, you are correct.  My problem is trying to get people to overcome their fear, and I’m telling people to let this thing do whatever it’s going to do, and then we’ll start to nibble.  I’m now getting pushback on that.  Loads of fear, which of course is what a buyer wants.

  Will keep plugging.
Feb 24, 2009 9:45 am

buy and hold works even through 95% of bear markets. it’s that once in a lifetime economic downturn that it doesn’t

stocks went down 87% from 1929 to 1932.

Ireland stock market is down 80% since it’s peak a couple years ago

Japan stock market is 81% lower than it’s peak in 1989

Feb 24, 2009 9:49 am

[quote=josephjones107]buy and hold works even through 95% of bear markets. it’s that once in a lifetime economic downturn that it doesn’t

stocks went down 87% from 1929 to 1932.

Ireland stock market is down 80% since it’s peak a couple years ago

Japan stock market is 81% lower than it’s peak in 1989


Yep.  That horse is already out of the barn.

So what is your point?

Feb 24, 2009 10:00 am

this is the once in a lifetime economic downturn, we could see 2800 on the dow

Feb 24, 2009 10:05 am

My Dad, an old Air Force pilot, told me as a boy, many times, the old “when all about you are” etc… He really drilled that in my head.  It seems to me that now is not the time for academic discussions of mpt.  Common sense, and trying to give your gut instinct best common sense advice is the best thing we can do.

  We know that this may be a long slog, get income on your stocks, buy highest quality balance sheets for debt and equity pieces.  Average back in, etc.....  Most of all, and I'm speaking to myself here, have the courage to face these clients with a look towards the future.  We've all probably done a pretty good job avoiding a good bit of this massacre.  Get back in the game.  Get on offense, even if its just telling people that you will get them moving forward again, if only with baby steps at first.  Common sense when dealing with people is usually a good place to start.  They are scared, acknowledge that.  They have good reason to be fearful.  It aint pretty.  But, in the end, Americans usually acknowledge and solve their problems, and historically, many of the worlds problems. 
Feb 24, 2009 10:08 am

So 1991 levels?  Why not we’re already at 1997 levels! 

Feb 24, 2009 10:08 am

[quote=iceco1d]Lets have a little fun with this…

  For all of the "MPT is dead" and "Death of Beta-Centric Portfolio Mgmt" people...lets start a healthy discussing of why exactly you feel MPT is "dead" and/or doesn't otherwise work.  Please be SPECIFIC about the pieces of MPT that you feel are incorrect, not applicable, and/or broken/damaged.   Just curious.  [/quote]   In response to your question, I sorta feel like the guy after Hurricane Katrina who was asked to discuss specifically why the levees failed. I don't know why the levees failed, but I do know my house is under water. More specifically, it eems the correlation models failed spectacularly, especially when pricing mortgage risk. And it turned out that bonds and stocks CAN fall at the same time, along with every other asset class (except Treasuries). And I've read some stories that suggest the historical models that built these strategies didn't go back further than 20 or 30 years. ... I know my firm built portfolios to handle inflation risk, but discounted market risk. ... I could go on, but it seems there has been a massive failure of risk management, largely caused by people believing that we had solved the business cycle. And by people who leaned on MPT and other models.        
Feb 24, 2009 10:10 am

Alan Skrainka put out a great piece for us this morning.  I’d get in trouble if I just copied and pasted the whole thing, so I’ll just pull some quotes. 

  First, he calls this time frame a black swan event.  Black swan, if you're like me and hadn't heard that term before, is a large impact, hard to predict, and rare event beyond the realm of normal expectations.  Simply put, you can't statistically predict everything that will ever happen.  No matter how many times you crunch the numbers, sometimes things just go wrong.  A poet once wrote "the best laid plans of mice and men oft go awry."    Second, buy and hold does work, even after a time like this.  Everyone's thinking about the Great Depression and the crash of 1929.  NOBODY is thinking about 1933, 1934, 1935, or 1936.  If you would have bought into the S&P with dividends reinvested 4/20/32, not at the bottom of the downturn but in the middle of it, your returns would have looked like this:   1 yr - -58.8% 3 yr -  -4% 5 yr -  +4.8% 10 yr  - +.5% (there was a good sized bear in 1937) 20 yr  -  +7.7%   So, you take the worst market we've ever seen and invest right smack in the middle of it and you averaged 7.7% over the next 20 years.  If you would have held on for a few more those returns would have gone up pretty well because 1954 and 1955 were phenomenal years.  Better than the 1990's.    So, to my simple brain, buy and hold still works.  MPT still works.  Of course when you throw in human emotions, which are running really high right now, it might make you think that we need to reinvent the wheel.  We don't.  We just need to push on the gas so the wheel will start turning again.
Feb 24, 2009 10:13 am

Spaceman, excellent post.

Feb 24, 2009 10:17 am


  I don't disagree with anything you've put in your post.  And it's all well and good but what about your 55-70 year olds that have had money invested are taking withdrawals or were going to start taking withdrawals as income.  The numbers work extremely well if you have 20 years to invest and not take an income.  Jones has always been good about touting that but I'm trying to manage portfolio' in the real world in real time.  My people under 50 aren't worried one bit about this, it's my 55 and older crowd that are freaking out. 
Feb 24, 2009 10:19 am

1932 was the stock market bottom in the depresssion. It’s easy to use that year as a starting point to make your numbers look good

Feb 24, 2009 10:21 am

MPT has never worked because to much is charged in commissions a year to make it a viable strategy. It is nothing more then a scape goat, and gives branch managers a reason to say quit looking at what the market is doing an go prospect. You could effectively do it now with ETF’s especially adding into it reverse etfs but then you wouldnt make enough money to survive. The problem with the whole platform is FA’s cant effectively do their job for their clients and make a living. Best solution is to go with what has always worked fairly well, bear markets buy commodities and utility stocks and during the bull buy equity stocks and start phasing in fixed income.