Portfolio construction and safety are directly linked to what the market IS doing NOT what it is supposed to be doing. By tracking the irrefutable law of supply and demand, market prices signal when and where to best deploy your assets. By listening to what the markets are doing, you are able to follow trends as they develop. Trends can be positive or negative. Paying attention and making portfolio adjustments is the difference between winning and losing.
“…the key to good performance is the ability to identify those stocks that are detracting from the performance of the portfolio. Most portfolio managers spend most of their time and effort trying to find the next big winner in the stock market but good portfolio performance depends more on finding and eliminating the bad stocks from the portfolio.”
Invest in markets, asset classes or sectors with positive trends. Avoid or sell markets or sectors with negative trends. This creates the possibility of preserving capital in declining markets or participating in rising markets/sectors.
"There is plenty of evidence among academia that supports the potential value of relative strength, also called momentum, as an investment factor. This research has shown that, over multiple decades, relative strength strategies have consistently outperformed the overall market during bull and bear market cycles."
If not MPT, then what? Clearly, the markets are significantly riskier than MPT has led investors to believe. Following MPT allocations means that you are just waiting for another “once in a lifetime market move” to blow up your portfolio again! This has happened all too often with market volatility since entering the 2000s.
Nassim Nicholas Taleb, author of The Black Swan:The Impact of the Improbable, has said:
"Asset-class diversification remains desirable, but is not sufficient." (emphasis added)