Editor’s Note: Today’s Wealthy Retirement comes from Andy Snyder, founder of Manward Press. Below, Andy shows why most mainstream investment research is impossibly outdated for today’s modern – and manipulated – markets.
– Mable Buchanan, Managing Editor
I’m going to show you my No. 1 tip for making a lot of money. Follow these basic instructions and your ability to earn big money in the stock market will soar.
But first… here’s what’s NOT working.
If you’ve ever picked up a book on investing, you know much of the investing world follows a model known as “modern portfolio theory.”
It’s the idea that if we put a mix of stocks together, measure their correlations and adjust our position sizes based on those figures, we can optimize our portfolio’s returns and reduce our risk.
Its debut revolutionized the world of money. In fact, it won a Nobel Prize.
On its face, the math behind the idea is sound.
If we add the right mix of this… a little bit of that… and spice with just a splash of something else, we can optimize our portfolio.
Economists rejoiced when they first did the math. It all adds up.
The recipe is delicious. But there’s a problem… a big one. It turns out botulism kicks in the second we pull the soup from the burner.
Problems… Lots of ‘Em
I recently sat down to list all the problems with this Nobel Prize-winning theory of “modern” money management. I quickly needed a second sheet of paper.
The first problem is obvious. The theory is about as modern as a black-and-white TV. In fact, the first color set didn’t hit the market until 1953… a year after Harry Markowitz published his coveted research.
That’s important because economics isn’t a physical science… it’s a psychological science. Math formulas may not change, but markets and the investors who make them do.
Take, for example, the fact that Markowitz’s theory of reducing risk was penned before the first stock options were widely available… decades before exchange-traded funds (ETFs) became popular… and generations before the internet… And it was devised while – this is huge – a buck was still backed by a sliver of gold.
Quantitative easing… the death of interest rates… and runaway government debt… were never part of the math.
But in today’s market, these things shouldn’t just be part of the math… They are the math.
To have a “modern” system that doesn’t include truly modern assets, like options, Bitcoin, ETFs and ultra-efficient markets spurred by the instantaneous spread of ideas on the internet… is flat-out silly.
Bad Assumptions… Big Losses
That’s the idea that takes us to the biggest flaw in this not-so-modern formula… correlations.
Again, the math behind the theory is sound. It all adds up. In fact, in business school, I spent an entire semester building a program that mapped out what Markowitz dubbed the “efficient frontier” – the ultimate mix of assets for performance and risk.
But again… the soup went sour as soon as it was served. By the time I entered a correlation into my spreadsheet, it was already old and inaccurate.
That’s the problem with theory and reality.
One sounds good… but the other is either ignorant or deaf to what it hears.
In reality, correlations go to hell when we need them most.
For example, when Markowitz and his cult followers were penning their first drafts of the idea, it was widely believed – and the math at the time backed it up – that bonds and stocks moved in opposite directions.
It’s the same with gold and stocks… the dollar and stocks… and even inflation and interest rates.
The textbooks say one thing, but reality hits us with its own ever-evolving opinion.
These assets are tethered… until they’re not.
We saw it during the 2008 crash and then again during last year’s meltdown. All at once, historically negatively correlated assets (those that move in opposite directions) moved in tandem. And it happened at exactly the same time as investors – who depended on Markowitz’s theory – needed protection the most.
Take a look at this chart. It shows how when times are good, the diversification called for by modern portfolio theory holds us back. And worse, it shows that when times get tough, historically uncorrelated assets suddenly move together, costing us even more money.
This is a dangerous trait that far too many textbooks and so-called financial experts blindly overlook.
Again, it’s the difference between theory and reality.
It’s all because economics is a social science… not a physical one. Once the majority of folks are following the rules, the rules change.
Understand that and you’re automatically ahead of the majority of investors.
It’s my No. 1 tip for investing – if you do what everyone else is doing, then the very best you can hope for is mediocrity.
You must think differently… and invest differently.
In today’s modern market, you need stocks… gold… options… and even crypto.