Modern Portfolio Theory recognized by the 1990 Nobel Prize

• Markets are efficient. It is virtually impossible to anticipate the future direction of the market as a whole or of any individual security
• The design of the portfolio as a whole is more important that the selection of any particular security within the portfolio.
• The appropriate allocation of capital among asset classes (stocks, bonds, cash, etc.) will have far more influence on long term portfolio results that the selection of individual securities.
• Investing for the long term (preferably longer than 10 years) becomes critical to the investment success because it allows the long-term characteristics of the asset classes to surface.
• For a given risk level, an optimal combination of asset classes will maximize the returns.
• Diversification helps reduce investment volatility. The proportional mix of asset classes determines long-term risk and return characteristics of the portfolio as a whole.
• Portfolio risk can be decreased by increasing diversification of the portfolio and by lowering the correlation of market behavior among the asset classes selected.
• Investing globally helps to minimize overall portfolio risk due to the imperfect correlation between economies of the world. Investing globally has also shown historically to enhance portfolio returns.
• Equities offer the potential for higher long-term investment returns than cash or fixed income investments. Equities are also more volatile in their performance. Investors seeking higher rates of return must increase the proportion of equities in their portfolio, while at the same time accepting greater variation of results.
• Picking individual securities and timing the purchase or sale of investments in the attempt to “beat the market” are highly unlikely to increase the long-term investment returns; they also can significantly increase the portfolio operating cost. Such practices are, therefore, to be avoided.