Inside Modern Portfolio Theory – For Emperors Only

Maybe it’s just me, but when I hear “Monte Carlo”, I can’t help but think “casino”…

My previous article post dealing with the income growing opportunities of 401k account “drawdown” elicited some interesting commentary from the MPT community.

Apparently, if we apply the proper mathematical algorithms to all stock market probabilities, including all possible cash flow scenarios, we will be able to deal with 401k participant expectations better…

I can’t control the warmth and fuzziness that has taken over my financial feelings… future predictions that possibly, maybe even more often than not, can reduce my drawdown to a less painful level than otherwise, while doing nothing to boost the income generated by my portfolio is certainly bringing on a huge sigh of relief…


I’m the type of investor who cringes when he hears market analysts explain how investors are “placing their bets” but how can you possibly sleep at night when you know that your 401k selections are “probably” being designed using the “Monte Carlo” algorithm subset of Modern Portfolio Theory?

Check it out if you wish, but if you aren’t rolling-on-the-floor, LOL, when you finish, have I got a new suit of clothes for you:

How many soontobe retirees (including myself, eventually) would even pretend to understand it. Really, a show of hands would be appreciated. How many of you think that these probability games are “investing”.

Retirement income is not (and should not be) about gambling. A fundamentally sound (i.e., quality) portfolio that generates 6% or so income (tax free, even) is easy to put together… yes, in today’s low interest rate environment.

4% to 5% in the 401k space, convertible upon rollover to the 6% variety is doable as well. You need to make a market value drawdown an opportunity to grow the income… faster.

Once the retirement income has been secured, then you can tour the world’s casinos until the excess capital is gone.

The MPT portfolio that bursts like a 4th of July “finale” in my weakened brain is reminiscent of the magical Junk Bond Portfolios of the ‘1980’s.  Don’t worry  about it, investors, we’ve put all these fundamentally speculative securities together in such a brilliant manner that the sum of the junk has been transformed into non-junk.

As of August 31st, 2014, the Vanguard Target 2015 portfolio was still 51.8% invested in the World’s Stock Markets and generating less that 2% in spending money…

Yes, it is true, the inmates really have taken over the asylum.