I was recently asked to give a presentation at the 28th annual personal financial planning conference discussing the changing dynamics of investing in a liquidity driven, computerized and global interconnected marketplace.

Here are the major points from the presentation:

• Due to computerized trading and the explosion of ETF's, highly correlated markets are likely here to stay.
• Diversification is no longer about small, mid, large and international stocks but rather stocks versus bonds and cash.
• Portfolio managers today need to be extremely aware of the impact of psychology and behavior of investors.
• Despite the plethora of commentary and studies that support "buy and hold" investing over very long periods of time – there are two simple realties: Time is the only commodity that no investor can get more of or replace.
  • Individuals cannot successfully navigate market reversions (panic sell)
  • They don't have 100 years to invest.
• Valuations matter and price is the common denominator in almost all valuation analysis: P/S, P/E, P/B, etc. Not paying attention to the trend of prices will lead to a misunderstanding of the changing dynamics of the markets.

As I have stated many times in the past - "This time IS different." There are no two periods in the market where the dynamics between the economy and the financial markets are the same. However, the "outcome" to investors from taking on excessive risk in a lquidity fueled environment will lead to the same inevitable result.

Without the future benefit of falling interest rates, inflation and a rising consumption as a percentage of GDP, the future of modern portfolio theory may look markedly different than the past.

Modern Portfolio Theory 2 by streettalk700

Lance Roberts