Morningstar Advisor - August/September 2009 - 29
Gray Matters MPT Put Through the Wringer By Paul D. Kaplan After another market crash, advisors question whether Modern Portfolio Theory is the best way to tackle asset allocation. We asked two experts to debate its merits. On the heels of the financial crisis and market crash, advisors are asking whether Modern Portfolio Theory is a valid approach to asset allocation and portfolio management. To shed light on this issue, I asked Steven Fox, director of capital markets research at Russell Investments, and Michael Falk, vice president and chief investment officer of ProManage LLC and an adjunct professor at DePaul University in its Certified Financial Planner program, to debate this question on May 28 at the 2009 Morningstar Investment Conference. Here is an edited transcript of our discussion. Paul Kaplan: Steven, the current market environment reminds us again that capital markets can be very risky. Less than a decade ago, we had the tech bubble burst. We had the crash of October 1987, we had the bear market of the 1970s, and we had the great crash of 1929. Nearly every time there’s been a crash, years pass before the market reaches its previous peak. Yet, the way that Modern Portfolio Theory models risk implies that these sorts of events never happen. In light of capital market history, why should investors use Modern Portfolio Theory? Steven Fox: This question reminds me of the debates we’ve had in the past decade or so. We had the death-of-beta debate, which was probably premature, and the debate about the equity risk premium, which we could argue still exists. The common characteristic of all these debates is that a market event caused stress on investors. We’re all looking around for explanations of something that in advance of the event seemed impossible. Today, we’re calling into question one of the most powerful, intuitive, and accessible MorningstarAdvisor.com 29
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Morningstar Advisor - August/September 2009
Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2009
Morningstar Advisor - August/September 2009
New on MorninstarAdvisor.com
Letter from the Editor
Contributors
Are We at the Beginning of a New Small-Cap Era?
At Home Around the World
Staying Nimble
Investment Briefs
Asia's Way Forward
MPT Put Through the Wringer
Recession Rallies' Sweet Spot
What Makes Small Caps Tick
The Trick to Small Caps
Value Hound
Four Picks for the Present
Signs of Stabilization in the Housing Industry
The Not-Ready-for-High-Yield Players
Moats Around Small Castles
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
The No in Innovation
Morningstar Advisor - August/September 2009 - Morningstar Advisor - August/September 2009
Morningstar Advisor - August/September 2009 - Cover2
Morningstar Advisor - August/September 2009 - 1
Morningstar Advisor - August/September 2009 - 2
Morningstar Advisor - August/September 2009 - 3
Morningstar Advisor - August/September 2009 - 4
Morningstar Advisor - August/September 2009 - 5
Morningstar Advisor - August/September 2009 - New on MorninstarAdvisor.com
Morningstar Advisor - August/September 2009 - 7
Morningstar Advisor - August/September 2009 - 8
Morningstar Advisor - August/September 2009 - Letter from the Editor
Morningstar Advisor - August/September 2009 - Contributors
Morningstar Advisor - August/September 2009 - 11
Morningstar Advisor - August/September 2009 - Are We at the Beginning of a New Small-Cap Era?
Morningstar Advisor - August/September 2009 - 13
Morningstar Advisor - August/September 2009 - At Home Around the World
Morningstar Advisor - August/September 2009 - 15
Morningstar Advisor - August/September 2009 - 16
Morningstar Advisor - August/September 2009 - Staying Nimble
Morningstar Advisor - August/September 2009 - 18
Morningstar Advisor - August/September 2009 - 19
Morningstar Advisor - August/September 2009 - Investment Briefs
Morningstar Advisor - August/September 2009 - 21
Morningstar Advisor - August/September 2009 - 22
Morningstar Advisor - August/September 2009 - 23
Morningstar Advisor - August/September 2009 - Asia's Way Forward
Morningstar Advisor - August/September 2009 - 25
Morningstar Advisor - August/September 2009 - 26
Morningstar Advisor - August/September 2009 - 27
Morningstar Advisor - August/September 2009 - 28
Morningstar Advisor - August/September 2009 - MPT Put Through the Wringer
Morningstar Advisor - August/September 2009 - 30
Morningstar Advisor - August/September 2009 - 31
Morningstar Advisor - August/September 2009 - 32
Morningstar Advisor - August/September 2009 - 33
Morningstar Advisor - August/September 2009 - 34
Morningstar Advisor - August/September 2009 - 35
Morningstar Advisor - August/September 2009 - Recession Rallies' Sweet Spot
Morningstar Advisor - August/September 2009 - 37
Morningstar Advisor - August/September 2009 - 38
Morningstar Advisor - August/September 2009 - 39
Morningstar Advisor - August/September 2009 - 40
Morningstar Advisor - August/September 2009 - 41
Morningstar Advisor - August/September 2009 - What Makes Small Caps Tick
Morningstar Advisor - August/September 2009 - 43
Morningstar Advisor - August/September 2009 - 44
Morningstar Advisor - August/September 2009 - 45
Morningstar Advisor - August/September 2009 - The Trick to Small Caps
Morningstar Advisor - August/September 2009 - 47
Morningstar Advisor - August/September 2009 - 48
Morningstar Advisor - August/September 2009 - 49
Morningstar Advisor - August/September 2009 - 50
Morningstar Advisor - August/September 2009 - 51
Morningstar Advisor - August/September 2009 - 52
Morningstar Advisor - August/September 2009 - Value Hound
Morningstar Advisor - August/September 2009 - 54
Morningstar Advisor - August/September 2009 - 55
Morningstar Advisor - August/September 2009 - Four Picks for the Present
Morningstar Advisor - August/September 2009 - 57
Morningstar Advisor - August/September 2009 - Signs of Stabilization in the Housing Industry
Morningstar Advisor - August/September 2009 - 59
Morningstar Advisor - August/September 2009 - 60
Morningstar Advisor - August/September 2009 - 61
Morningstar Advisor - August/September 2009 - The Not-Ready-for-High-Yield Players
Morningstar Advisor - August/September 2009 - 63
Morningstar Advisor - August/September 2009 - Moats Around Small Castles
Morningstar Advisor - August/September 2009 - 65
Morningstar Advisor - August/September 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - August/September 2009 - 67
Morningstar Advisor - August/September 2009 - 68
Morningstar Advisor - August/September 2009 - 69
Morningstar Advisor - August/September 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - August/September 2009 - 71
Morningstar Advisor - August/September 2009 - Undervalued Stocks
Morningstar Advisor - August/September 2009 - 73
Morningstar Advisor - August/September 2009 - 74
Morningstar Advisor - August/September 2009 - 75
Morningstar Advisor - August/September 2009 - Most Popular Variable Annuities
Morningstar Advisor - August/September 2009 - 77
Morningstar Advisor - August/September 2009 - 78
Morningstar Advisor - August/September 2009 - New at Morningstar
Morningstar Advisor - August/September 2009 - The No in Innovation
Morningstar Advisor - August/September 2009 - Cover3
Morningstar Advisor - August/September 2009 - Cover4
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