Weekend Reading: Helpful in Theory

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend reading helpful in theory Weekend reading helpful in theory
Weekend Reading

You’ve heard of the most popular investment concepts and maybe feel more keen toward one over another in your retirement planning process. However, all come along with pros and cons you should be aware of.


Four in particular include:

📌 Modern Portfolio Theory: The “efficient frontier” is one of this theory’s core components. It’s based on past performance and offers a mix of “portfolios that’ll deliver the highest expected return for a given level of risk.” It can also lead to hefty allocations in one particular stock, however, which might cause too much turbulence for the average investor. As such, “uncorrelated assets” and stock diversification is key.

📌 Monte Carlo analysis: This concept considers how a portfolio would perform under 1,000 possible market scenarios; however, it also only provides a “one-dimensional assessment of risk”, especially when it comes to sequence of returns.

📌 Endowment Model: This model turns to alternative investments that aren’t tied to the market, such as private equity, hedge funds, etc. While not utilized as often, its focus on the advantage of a long term investing horizon holds true.

📌 Factor investing: This strategy focuses on choosing securities based on attributes – or “factors – that are linked with higher returns. After producing disappointing results, this concept has since lost popularity; however, it does reveal there is more to risk than volatility, including inflation, lack of diversification, home bias, overconfidence, etc.

You shouldn’t fall in love with any investment theory. Instead, learn from it and make it part of a larger, more comprehensive process. Hint: The Retire With Purpose Framework.