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MEDIQUS Asset Advisors, Inc

INVESTMENT COMMITTEE SUCCESS ROOTED IN THEORY

JOEL M. BLAU, CFP®
RONALD J. PAPROCKI, JD, CFP®, CHBC
MEDIQUS ASSET ADVISORS, INC.
“RESULTS. ONE CLIENT AT A TIME.”(SM)

Investment-CommitteePhysicians who serve as a treasurer or as an investment committee member constantly strive to achieve attractive returns on their associations’ reserve fund portfolios. While it’s important to invest in order to have the portfolio grow over time, members must be equally focused on and concerned with downside risk. While the perfect investment would have the attributes of high growth with little or no risk, the reality of course is quite different. Not surprisingly, significant time is spent developing methods or strategies that come close to that “perfect investment”. None is as popular or compelling as Modern Portfolio Theory (MPT).
Developed by Harry Markowitz and published under the title “Portfolio Selection” in the 1952 Journal of Finance, MPT explores how risk-adverse investors construct portfolios in order to optimize market risk against expected returns. The theory quantifies the benefits of diversification — not having all of your investment eggs in one basket. In 1990, 38 years after he wrote the paper while teaching at the University of Chicago, Markowitz was awarded, along with fellow academicians Merton Miller and William Sharpe, a Nobel Prize for what has become the most widely used strategy for portfolio selection.

Recognition for the achievement was delayed because, although developed in the early 1950s, the task of applying MPT was only made possible by the use of modern computers that could handle the vast number of calculations and range of historical data needed by the model. Portfolio management today combines theory and technology in order to optimize portfolio performance.

For most investors, the “risk” they take in an investment is that the return will be lower than expected. In other words, it is the deviation from the average return. The MPT model calculated for each investment a “standard deviation” from the mean that the model calls “risk”. Through diversification, the “risk” of one investment may offset the “risk” of another. The key behind the MPT model is the plotting of an “Efficient Frontier” of the varying combinations of investments in a portfolio that provide the “maximum return and lowest risk”. For every point along the Efficient Frontier, the MPT model displays the combination of investments that produces the optimal level of return and risk based on past performance of the various investment markets. While the past is not always a predictor of the future, MPT uses this data to estimate various risk/return scenarios.

The key today to the utilization of MPT is understanding that a variety of “asset classes” provides diversification and quantifies the risk and reward of any given portfolio. Examples of major asset classes include large U.S. companies, small U.S. companies, international companies, domestic bonds, international bonds, and real estate. Understanding the various asset classes and their respective indices leads to the construction of a portfolio that can still encompass the historical validity of MPT.

Funding the various asset classes for reserve funds can be easily accomplished through mutual funds or exchange traded funds (ETFs) that mirror a specific index or asset class. Even after all these years, and a number of bull and bear markets and new investment vehicles, MPT continues to play a crucial and meaningful role in investment management strategy.

Mr. Blau and Mr. Paprocki welcome readers’ questions. They can be reached at 800-883-8555 or atblau@mediqus.com or paprocki@mediqus.com.

200 North LaSalle Street – Suite 2300 – Chicago, Illinois 60601
312-419-3733 – Toll Free 800-883-8555 – Fax 312-332-4908 – www.mediqus.com
Securities offered through and Registered Representatives of Ausdal Financial Partners, Inc. Member FINRA/SIPC
220 North Main Street, Suite 400, Davenport, IA 52801 563-326-2064
MEDIQUS Asset Advisors and Ausdal Financial Partners, Inc. are independently owned and operated.

MEDIQUS Asset Advisors, Inc. and Ausdal Financial Partners are independently owned and operated. Investments are not FDIC-insured and are not deposits of or guaranteed by a bank. The material has been prepared or distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

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