Why a 70-Year Old Theory Still Holds the Key to Smart Investing
Harry Markowitz’s Nobel-prize-winning Modern Portfolio Theory still holds up well in the age of cryptocurrencies and meme stocks
An important milestone passed almost unnoticed last month when Modern Portfolio Theory, or MPT, turned seventy. It was in March 1952 when Harry Markowitz published his seminal paper, Portfolio Selection, in the prestigious Journal of Finance. Those fifteen pages not only helped Markowitz win a Nobel Prize in Economics, but also helped to shape an industry, and the way we invest today. If you have a stock investing app offering Exchange Traded Funds (ETFs), you have Markowitz to thank.
While it’s commonplace to think of constructing a diversified portfolio, that wasn’t always the conventional wisdom. It was Harry Markowitz who provided a theory and a process to the notion of diversification. My co-author, MIT Sloan Finance Professor Andrew Lo, and I had the pleasure of interviewing Markowitz for our book, In Pursuit of the Perfect Portfolio, and he shared that Pre-MPT there was no “notion that you should have a theory about what makes…
