FutureAdvisor has benefited from the ideas that comprise Modern Portfolio Theory. Essentially, Modern Portfolio Theory suggests that investments should not be considered on a stand-alone basis, but in terms of what they bring to the portfolio.
For example, an investment that tends to rise when another falls might be very useful in helping construct a portfolio that is balanced over time. This demonstrates why bonds can be an attractive investment. Historically, bonds have offered good returns but often less than stocks. As such, you might be tempted to construct a portfolio entirely from stocks because performance is better.
However, Modern Portfolio Theory suggests that would be a mistake. When stocks fall, bonds often rise. So if you have bonds in your portfolio returns are likely to be more stable over time. In addition, bonds may enable you to rebalance in to stocks when they are particularly cheap, potentially boosting returns. This is one of the insights we use when constructing portfolios at FutureAdvisor.
Nobel Winning Research which influenced Modern Portfolio Theory:
- 1990. Harry Markowitz wins the Nobel Memorial Prize in Economic Sciences for his work on portfolio choice, which was used in creating Modern Portfolio Theory.
- 2013. Eugene Fama wins the Nobel Memorial Prize in Economic Sciences for research which laid the foundation for building Modern Portfolio Theory.
Modern Portfolio Theory is not perfect. Much emphasis is made on historical correlations, which aren't always that reliable in predicting future correlations. That's why at FutureAdvisor we also consider different economic scenarios and how they might impact investments, even if those scenarios haven't been particularly common in the recent past. If you'd like to see how FutureAdvisor puts Modern Portfolio Theory into practice, you can get your own personalized portfolio in under 2 minutes - for free.