The Academy of Financial Services 35th Annual Meeting

Modern Portfolio Theory (MPT), Efficient Markets Hypothesis (EMH), passive investing, indexing, portfolio management

Modern Portfolio Theory (MPT) and the Efficient Markets Hypothesis (EMH) have influenced investment management strategy for decades, but little mention has been made as to how they have served the average US family in its financial planning for retirement. Previous studies using Canadian data have shown that a strategy based on passive investing, dollar-cost-averaging, and dynamic asset allocation could allow an average family to build a portfolio that would meet their retirement needs at age 65. This study examines the same question for the average US family. Does a strategy based on MPT, EMH, and generally accepted rules of financial planning lead to the family having sufficient resources to retire comfortably? To determine this, models were devised to follow the median US family over a 40-year period. Models had the family invest 10%, 15%, and 20% of their pre-tax income into broad based equity and fixed income indexes. The success of the strategy was measured by its ability to provide enough resources at age 65 to provide 70% of the family’s pre-retirement income after retirement. The strategy was deemed to be successful in varying degrees for each of the 10%, 15% and 20% contribution scenarios.