Page 91 - Ready Set Retire

Ready. Set. Retire!
Here’s another quick example of fairly standard advice that
isn’t necessarily in the client’s interest. Often we are told to just
purchase an index fund, and more often than not, we are told
to make the index the S&P 500. That’s the reason so many
portfolios seem weighted heavily in U.S. Large Cap. However,
if you look at what’s going on, lean in a different direction.
Following is what’s known as the “Efficient Frontier.”
Economist Harry Markowitz, who later won a Nobel Prize for
his work, first identified the Efficient Frontier as part of his
Modern Portfolio Theory work in the 1950s. The notion
behind the theory is it’s possible to correlate an asset’s risk, or
standard deviation, with its return over time. We know this to
be true, and it’s the basis of many investment models. It
follows that you could then chart assets on a graph such as the
Efficient Frontier, based on risk and return.

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