(Word count = 540 plus 68 words for About the Author)

If you are like an increasing number of advisors and their clients, you may find a safer haven for your nest egg by using the newly-developing "Un-Modern Portfolio Theory," and sleep more soundly.

Several smart financial advisors have been abandoning the old Nobel-prize-winning Modern Portfolio Theory, partly due to their clients' discontent with lackluster returns and partly due to the growing fear of risk.   Many investors have become traumatized by significant declines in portions of their portfolios and are not willing to stay on the roller coaster ride.    Both advisors and clients are realizing that they are more afraid of risk than they initially thought.   A few good reasons include growing geopolitical risks caused by war and terrorism and the potentially detrimental economic effects of a seriously slowing housing market.

The elements of Modern Portfolio Theory emphasizes that a wide diversification of managed investments can give a good investment return over time, with moderated volatility.   The theory claims that there should be a diversification in the major classes of investments such as cash, bonds, equities, and real estate, and that, within the equities class, there should be diversification between growth and value, between domestic and international, and by sectors and industries. The expected result is that gains in one type of investment would offset the losses in another, and, over time, the total portfolio is expected to earn over 10% annually.   The hope was that good investment performance could help an investor attain her or his retirement or other financial goals, when combined with continued employment, tax planning strategies, a savings program and moderation in spending.

However, with the rising fear of risk, the new strategy being used by certain financial advisors and investors may be termed the "Un-Modern Portfolio Theory" and has the following four main elements: ( 1) Protect principal - Reduce the portion of the portfolio for which principal is unprotected (e.g. stocks, equity mutual funds, bond mutual funds) to a very small percentage, like 10%, of the total portfolio. Bond investments should be made directly into quality bonds, insured if tax-free, with definite maturity dates. ( 2)   Avoid management risk - Avoid managed investments in order to reduce management risk, which rises in uncertain times, and instead invest via indexed investments.   ( 3)   Rebalance quarterly between cash and a stock index fund - For equity investments that have fluctuating values (e.g. mutual funds or variable annuities), investors should utilize a “barbell” strategy that uses rebalancing, at least quarterly, between an index fund and a money market fund in order to take advantage of volatility in the markets, and ( 4)   Diversify geographically within the United States - For bond investments (including insured tax-free bonds) and certain equity and real estate investments, investors should diversify geographically in case one section of our nation is more adversely affected by terrorist activities, economic upheaval or panics than other sections.

Investors should consider getting help from advisors who are generalists, who understand the historical patterns of investment volatility over very long periods of time (200 plus years) as well as over short periods, who are familiar with assessing risk in extreme geopolitical environments and potentially turbulent economic times, and who are expert at guiding people on understanding their own needs and risk tolerance.     

About the author

Frank Sisco is a CPA and Personal Financial Specialist, and author of several articles about personal finance and issues of life and money.   His firm, Financial Management Corporation, is located in New Rochelle, NY, where he resides with his wife and daughter..  He can be reached at his home office at 914.740.4422 or by email at ideasmoney@aol.com, or visit his website at www.LifeAndMoney.com which contains this article and prior ones.