Did you know?

Did you know?

Posted on June 01, 2011

Modern portfolio Theory, first introduced by Nobel Prize winner Harry Markowitz, states that one can generate a higher return with less portfolio fluctuation if the investments in your portfolio work together. This may be accomplished by owning a diverse group of securities that fluctuate different from each other. Markowitz said, “Predicting the most efficient portfolio requires predicting future correlation and returns.” Yogi Berra said, “It’s tough to make predictions especially about the future.” Most modern portfolio theorists typically use “the bell curve of normal distribution” on historical market to predict future returns and correlations. The truth is, the bell curve is better at predicting the probability of flipping a coin to get five heads in a row than predicting the twists and turns of the markets. The financial markets are dominated by high impact / low probability events. The problem is that these “unlikely events” occur with much more regularity than bell curve models would predict. Market prices are driven by the Law of Supply and Demand which is driven by the beliefs and emotions of buyers and sellers. Sometimes markets are efficient and investors are rational. Other times, irrational investors cause inefficient markets resulting in bubbles and busts. The past decade was anything but “efficient” or “normal.” As a result, risk management and diversification models based on normal distribution fail when high impact/low probability events occur. During volatile and emotional times, traditional diversification simply doesn’t work!

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.