It's frequently said that you should buy a "high-risk" portfolio with lots of stocks when you are young, and then move into "low-risk" portfolio with lots of bonds when you are older, essentially moving along the efficient frontier. However, according to MPT it would make more sense to just buy lots of market portfolio (tangent portfolio) (with leverage if necessary) when you are young, and gradually move some of the capital to risk free assets, rather than tampering with the portfolio composition.

Why isn't this practice treated as common wisdom?

EDIT: E.g. this article notes:

However, every portfolio on the mean-variance frontier can be formed as a combination of a risk-free money-market fund and the market portfolio of all risky assets. Therefore, every investor need only hold different proportions of these two funds [...] Everyone holds the same market portfolio; the only decision is how much of it to hold

1 Answer 1


Investing is always a matter of balancing risk vs reward, with the two being fairly strongly linked.

Risk-free assets generally keep up with inflation, if that; these days advice is that even in retirement you're going to want something with better returns for at least part of your portfolio.

A "whole market" strategy is a reasonable idea, but not well defined. You need to decide wheher/how to weight stocks vs bonds, for example, and short/long term. And you may want international or REIT in the mix; again the question is how much. Again, the tradeoff is trying to decide how much volatility and risk you are comfortable with and picking a mix which comes in somewhere around that point -- and noting which assets tend to move out of synch with each other (stock/bond is the classic example) to help tune that.

The recommendation for higher risk/return when you have a longer horizon before you need the money comes from being able to tolerate more volatility early on when you have less at risk and more time to let the market recover. That lets you take a more aggressive position and, on average, ger higher returns. Over time, you generally want to dial that back (in the direction of lower-risk if not risk free) so a late blip doesn't cause you to lose too much of what you've already gained... but see above re "risk free".

That's the theoretical answer. The practical answer is that running various strategies against both historical data and statistical simulations of what the market might do in the future suggests some specific distributions among the categories I've mentioned do seem to work better than others.

(The mix I use -- which is basically a whole-market with weighting factors for the categories mentioned above -- was the result of starting with a general mix appropriate to my risk tolerance based on historical data, then checking it by running about 100 monte-carlo simulations of the market for the next 50 years.)

  • What you describe is what is frequently taught, but my question was why you would want to decide the weight of stocks/bonds at all, when you could buy the market portfolio (which is the market cap. weighted portfolio of all assets, including stocks/bonds/REITs etc.) and adjust your risk exposure with risk-free assets (i.e. this theorem: en.wikipedia.org/wiki/…) Commented Dec 28, 2014 at 17:16
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    I'll have to look at that, but i don't know of a truly risk-free asset. There is always opportunity risk, if nothing else.
    – keshlam
    Commented Dec 28, 2014 at 22:44
  • Also, there are times when you legitimately want to take more risk than that average rather than less. Or select which risks you want to take. I think the article oversimplifies, badly. Im not interested enough to analyze why.
    – keshlam
    Commented Apr 10 at 3:11

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