 What
is the Modern Portfolio Theory?
Modern Portfolio Theory says that a security's current market
price is fair and fully reflects all available information about
that security. This does not mean that prices are perfect; some
prices may be too high and some too low, but there is no
reliable way to tell. Investors cannot expect to earn
above-average profits by constantly buying and selling
securities. This strategy of active portfolio management adds
costs but does not generally add additional returns. Over any
period of time, some investors will beat the market, but the
number of investors who do so will be no greater than the number
of investors who buy and hold a diversified investment portfolio.
Since active portfolio management does not generally produce
excess returns above the market, a logical conclusion is simply
to buy and hold a diversified portfolio of securities. This
passive portfolio management strategy ensures lower costs and
may produce higher returns over time. At Breckenridge
Financial we follow a passive portfolio management strategy
exclusively.What is passive
portfolio management?
Passive portfolio management is a buy-and-hold strategy that
emphasizes diversification among the various asset classes, i.e.
cash, bonds, real estate and securities. In contrast, active
portfolio management follows a strategy of continually buying
so-called under priced securities and selling so-called over
priced securities in an effort to produce higher returns.
According to
modern portfolio theory, active
management is fruitless and actually generates excess expense,
thereby lowering the overall returns.
What is a mutual fund?
The idea behind a mutual fund is simple: Many people pool their
money in a fund, which invests in various securities. Each
investor shares proportionately in the fund’s investment
returns—the income (dividends or interest) paid on the
securities and any capital gains or losses caused by sales of
securities the fund holds.
How can diversification
potentially lower my risk?
The returns of stocks, bonds, and cash
investments usually don't all rise or fall at the same time.
When returns for one asset class fall, those of another asset
class may be rising.
Diversification—the simple concept of not putting all your eggs
in one basket—takes advantage of this investment principle. When
you diversify, you invest in different asset classes—and even in
different segments of those asset classes. In this way, if an
investment in one asset class does poorly, the loss may be
tempered by an investment in another asset class. Although
diversification can never eliminate the risks of investing, it
may lower your overall risk by spreading the risk around. Investing
in mutual funds is a proven diversification strategy. By
investing in a mutual fund’s array of assets, you may be able to reduce the
risk that comes with owning any single stock or bond.
Diversification does not guarantee against loss; it is a
method used to help manage risk. Though it’s important to diversify across the asset classes, you
can also help lower your risk by diversifying within asset classes.
For fixed income
investments, consider buying both short-term and
intermediate-term bond funds. Many investors further diversify
by holding international stock funds or stocks of firms that own
real estate.
What is comprehensive planning?
Comprehensive planning is organizing an
individual’s personal and financial information with the purpose
of creating a cohesive plan to achieve strategic goals and
objectives. This includes but is not limited to:
1. Investment planning
2. Education planning
3. Retirement planning
4. Insurance and risk management
5. Estate planning
6. Tax planning |
