Most investment managers base their practice on modern portfolio theory, which says that greater risk yields greater rewards and that markets are “efficient,” meaning that they self-correct and reflect the true value of stocks, bonds and other securities.
It turns out, though, that modern portfolio theory is in need of an update. An award-winning paper from Mike Hartmann of Plan To Invest Capital Management, Inc. not only disproves modern portfolio theory, it provides a new way to pick mutual funds. Hartmann’s paper, “Short Term Alpha as a Predictor of Future Mutual Fund Performance,” shows that:
- Less risk may mean more reward
- The “efficient frontier” isn’t so efficient
- Short-term alpha is an effective predictor of mutual fund performance
Check out this insightful white paper and let us know what you think of Mike’s findings. Disclosure: Plan To Invest is a client.