Recent attacks on modern portfolio theory have been overstated and unhelpful, said David Blanchett, Morningstar's head of retirement research, at the 2012 Morningstar Investment Conference. Blanchett suggested enhancing the standard framework for asset allocation that was initially introduced by economist Harry Markowitz, rather than scrapping it for a new approach.
Blanchett had five primary points.
1) Yes, the basic principles of diversification worked in 2008.
It is true that stocks globally struggled, across regions and styles, but many other assets performed well. Also, the simple act of spreading investments across many stocks via a mutual fund rather than owning a single security greatly reduced risk. A full 25% of U.S. stocks plunged 75% or more in value during 2008, whereas less than 0.1% of U.S. mutual funds lost that much money.
