PFP2519. A New and More Intuitive Way to Invest in Retirement: Dedicated Portfolios

Modern portfolio theory (MPT) stems from a 1952 article by Harry Markowitz based on his doctoral dissertation. MPT became the darling of the large Wall Street brokerage houses looking for a larger market share of the personal investing industry. It was easy to understand, easy to implement to gain scale, and had the aura of academic prestige.

But Markowitz did not have individual investors in mind when he did his original research. He wrote his paper for institutional investors, as he later clarified:

“The ‘investing institution’ which I had most in mind when developing portfolio theory for my dissertation was the open-end investment company or mutual fund… …[but] reflection convinced me that there were clear differences in the central features of investment for institutions and investment for individuals…”

Markowitz’s clarification, published in 1991, came a little too late. By then, MPT had become the dominant strategy used not only by Wall Street brokers but also by certified financial planners and other advisors who’s training never even exposed them to alternative strategies such as dedicated portfolio theory (DPT).

DPT is a better fit for personal investors, especially retirees who are in the “distribution” phase of life. This talk will explain the dedicated portfolio strategy in detail.

Learning Objectives:

• Distinguish why personal portfolios based on dedicated portfolio theory (DPT) are different from and better than those based on modern portfolio theory (MPT).
• Identify the difference between an “income portfolio” and a “growth portfolio.”
• Analyze the “critical path” and how it pertains to monitoring a portfolio to make sure it is on track to meet personal financial goals.
• Recognize how dedicated portfolios are based on the classic “matching cash flows” problem.