Issue with Modern Portfolio Theory

[benjamen]

The widely used Modern Portfolio Theory stresses maximizing year to year total returns through balancing investment returns and risks.  However, this method was never supposed to be used by a household.  

A much better method is using asset-liability matching.  Instead of a goal of maximizing total returns, the target is to cover spending with reliable cash flow.  While the below article suggests using annuities and bonds, this can also be done with stable dividends paying blue chips.

http://www.forbes.com/sites/wadepfau/201...cb1d526d09

[DividendGarden]

Agreed on both points.

-I really don't like MPT. Markets aren't efficient and investors don't act rationally. And a number (Beta) doesn't measure risk. I think most of us would agree with Warren Buffett on this issue.

-Asset/liability matching is a great idea. It's always wise to forecast out obligations & cash flows.

[cannew]

Quote from article:"The goal is to have cash flows available to meet spending needs as required, and investments are chosen in such a way that meets those needs. Assets are matched to goals so that the risk and cash flow characteristics are comparable."

For essential spending, Modern Retirement Theory argues that funding must be with assets meeting the criteria of being “secure, stable, and sustainable.” Funding options can include defined-benefit pensions, bond ladders, and income annuities. In this regard, another important aspect of the investment approach for the safety-first school is that investing decisions are made in the context of the entire household balance sheet."

Bonds, annuties, DB Pensions...No mention of Dividends or Dividend Growth which would achieve the stated goal!

[DividendGarden]

(05-01-2016, 12:44 PM)cannew Wrote: Bonds, annuties, DB Pensions...No mention of Dividends or Dividend Growth which would achieve the stated goal!

I personally consider a dividend payment from JNJ more secure than a bond.