PMPT Definition, Investment Strategy, and Differences With MPT

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Definition: Post-Modern Portfolio Theory (PMPT) is an investing theory and strategic investment style that is a variation of Modern Portfolio Theory (MPT). Similar to MPT, PMPT is an investing method where the investor attempts to take minimal level of market risk. through diversification. to capture maximum-level returns for a given portfolio of investments.

PMPT History and Difference With MPT

PMPT is the culmination of research from many authors and has expanded over several decades as academics at universities in many countries tested these theories to determine whether or not they had merit. The term post-modern portfolio theory was first used in 1991 to describe portfolio construction software created by engineers Brian M. Rom and Kathleen Ferguson. Rom and Ferguson first publicly described their ideas about PMPT in the 1993 Journal of Investing article, Post-Modern Portfolio Theory Comes of Age .

The difference between PMPT and MPT is the way they define risk and build portfolios based upon this risk. MPT sees risk as symmetrical; the portfolio construction is comprised of several investments with various risk levels that combine to achieve a reasonable return. It is more a big picture view of risk and return. Rom and Ferguson explain that MPT is limited by measures of risk and return that do not always represent the realities of the investment markets.

However PMPT sees risk as assymetrical; the way investors feel about losses is not the exact opposite mirror image of how they feel about gains; and each economic and market environment is unique. PMPT sees that investors do not always act rationally. Therefore PMPT accounts for the behavioral aspects of the investor herd.

Simple Explanation of Post-Modern Portfolio Theory

Your humble Mutual Funds Guide is not a math genius but I am an investment advisor and Certified Financial Planner (TM) that does not completely adhere to MPT or PMPT, which enables (or forces) me to provide an understandable explanation of PMPT. In different words, I have a simple mind and can only explain things simply!

PMPT is an investing theory that recognizes that mathematical models, such as Modern Portfolio Theory, look good on paper but statistical science does not explain human behavior, nor does it provide the ideal means of profiting from human behavior! For example, science can explain emotion but it has limitations in predicting it!

An investing strategy that has parallels to PMPT (and incorporates much of its most effective aspects) is tactical asset allocation. which will guide an investor to purposely go against the crowd at times by over-weighting or under-weighting certain assets or investment types that have been overly influenced by irrational investor behavior (i.e. extremely high and overbought or extremely low and oversold assets and investment types).

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.