All I wanted was a 12% Return – (a look at the actual performance when using Modern Portfolio Theory).
So I learned Modern Portfolio Theory in graduate school and then decided I was super smart and could pick pandemic stocks – which didn’t work. So after a proper whooping, I decided to go back and put some money into a portfolio and use Modern Portfolio Theory as the strategy. Right away, it wasn’t what I expected in terms of the funds that were chosen by the model or how the portfolio has performed since early 2023. First of all, it didn’t come close to the 10-20 funds that I expected as we only used four or five funds at most. After the model turned diversification on it’s head (from what I was expecting), the performance of the fund was a lot more volatile that I had thought it would be. In the beginning, we started out with a 2% return and it was fairly boring, but before long the portfolio was down by almost 9%. I never expected to be in negative territory for some reason, but for over a year the fund was far below the positive 12% return I was looking for. For most of that year it was sort of painful to even look at the account summary. Eventually, it did reach and even exceed the 12% annual return goal. So what does that all mean?
I suppose it means a few things. One, don’t be shocked if you find yourself in the red for a time. Two, it did reach the 12% annual return goal, but I had to wait for it and you may have to as well. Three, a lot depends upon the risk free asset you choose which is a topic discussed more in the video below. Basically, there is a difference of opinion about the proper risk-free asset (think US treasury bond funds, either a short term or a long term fund) as the one that should be deployed by portfolio managers, in this case me! Well, I decided to use the long term US treasury bond fund, TLT, and while I expect it to outperform in 2025, I must admit that 2023 and 2024 were a bit rough. We will see if the longer duration bond fund TLT pays out as I expect in 2025 or if it continues to be a drag on the portfolio’s performance.
I continue to keep the same portfolio and track it over the successive months. Currently it is up about 10.38% annualized as of October 25th, 2024. Here’s the full analysis…
