After spending several years working in the hedge fund world, followed by another (too long) period working as a lead ‘sell-side’ securities analyst for a securities brokerage house issuing ratings and price targets on securities in tandem with published research reports, my concern for individual investor’s welfare has markedly increased. That said, rumors of conflicts of interests are widespread and, in my opinion, have been quite valid for several reasons: (i) yes, analysts are often directly or indirectly pressured for positive ratings and lofty price targets on securities from investment banking departments (bonus incentive), from trading desks (to sell more), and from the companies covered (for better access); (ii) yes, brokers are often encouraged to actively trade accounts, often to the disservice of their clients; and, (iii) the system is fraught with inappropriate incentives, such as loads for mutual funds sold and poor price transparency on corporate bonds traded to customers in which the brokerage company handsomely profits from a ‘hidden spread’ – often 0.5% up to as high as 1.5% of value, on top of the commission.But there are also many other pitfalls that average investors have fallen prey, such as actively trading their own accounts (from day trading to week trading now) or owning individual stocks without understanding diversification and exposure to sector or asset class risk. Indeed, research shows that over 90% of the return is attributable to proper selection of and allocation between asset classes, rather than stock "picking." In my opinion, the costs of trading or the risk of holding individual securities is simply dangerous without financial stock knowledge, ‘living and breathing’ the market and having diverse holdings. And if you use a broker, you must ask yourself these questions: Does your broker listen to the company conference calls? Does your broker have access to management? Do you think your broker wants to call you when one of your stocks just blew up with an accounting scandal, management corruption or disappointing earnings? Even if the brokerage house has analysts covering these matters, how involved is your broker in the process and is he brave enough to tell you to “sell & sell now” – not to mention was it appropriate for this stock or bond to be in your portfolio in the first place? So what do you do? Do you buy a mixture of stock and bond mutual funds, and if so which ones and how much of each? The answer goes beyond your return requirement, risk tolerance, individual constraints (liquidity, taxes, income needs etc.) or even your age and size of financial assets. Granted, you must consider all these factors, but for the appropriate investment allocation to be correctly implemented, it should involve a degree ‘financial science.’ First, let me educate you on Modern Portfolio Theory.Modern Portfolio Theory advocates a process first developed by Nobel Laureate Harry Markowitz, of selecting an optimal mix of asset classes based on past and forecast returns, volatility (i.e., standard deviation and beta values), and cross relationships (i.e. correlations and co-variances) that matches investor's quantifiable risk tolerance and gives them best possible rate of return. The goal is to have a low covariance portfolio based on each investors risk profile and return requirement so that the mean-variance is optimized (this is technical but I will make it clearer).