On Saturday, TechCrunch published Is Modern Portfolio Theory Dead? Come On. by Wealthfront advisor Paul Pfleiderer. Professor Pfleiderer, the C.O.G. Miller Distinguished Professor of Finance at the Stanford Graduate School of Business and co-founder of Quantal International, takes on critics of Modern Portfolio Theory in the article.

Modern Portfolio Theory (MPT), which won a Nobel Prize in 1990, is the most accepted way to manage a diversified investment portfolio. A small but vocal minority has criticized it for not sufficiently protecting investors’ portfolios during the financial crash.

Wealthfront Advisor Paul Pfleiderer

Paul Pfleiderer, C.O.G. Distinguished Professor of Finance, Stanford University Graduate School of Business

“It’s particularly important that young people at the beginning of their investing careers understand why the sloppy arguments against MPT are so dangerous. With its insights about diversification and controlling risk, MPT provides the best foundation for developing low-cost portfolios like the ones being used by the Internet startups to ‘eat the personal investing world,’” Professor Pfleiderer wrote in the TechCrunch post.

Wealthfront recently published a white paper outlining the way we use Modern Portfolio Theory.

Historically, rigorous MPT-based financial advice has only been available through high-end financial advisors, many of whom require minimum account balances of at least $1 million and charge average annual fees of 1% of assets under management. By implementing a completely online solution, Wealthfront delivers MPT at a much lower cost thereby democratizing its availability.

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About the author(s)

Journalist Elizabeth MacBride is Wealthfront's editor. Her work has appeared in Crain's New York, Advertising Age, the Washington Post and the Christian Science Monitor, among other publications. View all posts by Elizabeth MacBride