Dedicated Portfolio Theory versus Modern Portfolio Theory

In this article, published in the NAPFA ADVISOR magazine (April, 2018), Asset Dedication’s Stephen J. Huxley, Ph.D. and Brent Burns discuss how dedicated portfolio theory challenges modern portfolio theory.  Daniel Kahneman, Nobel Memorial Prize in Economic Science, 2002, essentially advocated for the dedicated approach to personal investing in his discussion at the 2018 MorningStar Conference in Chicago.  This is the strategy pioneered by Asset Dedication for personal finance as outlined in our bookClick here to read the article>>.

Interest Rate Freight Train

In May of 2013, a small rise in interest rates highlighted the risk that bond fund investors face in their “safe” investments.  The relationship between interest rates and market risk is clear.  The mathematical relationship is straight forward.  When interest rates rise, the value of bonds goes down.  For bond funds, rising rates means that total return has to fight the headwind of losses on the underlying portfolio.  As NAV declines, coupon interest generated by the bonds in the portfolio may or may not be enough to overcome the price loss.  On the other hand, making the same fixed income allocation to high quality individual bonds and holding them to maturity is a clearly superior strategy when rates rise because it can protect principal and avoid losses in a way that bond funds cannot. Download the white paper  >>>