Navigating the world of investing can be tricky, especially for those just starting out on their journey of financial independence. The basic tenets of investing dictate diversification, but how that exactly pans out requires more understanding and even some practice.
We recently took a look at one such investment strategy in Modern Portfolio Theory. Now, we examine an updated version of it with Post-Modern Portfolio Theory. Here’s how it works and how addy can figure into the equation.
What is post-modern portfolio theory?
Post-modern portfolio theory is a product of modern portfolio theory. Both emphasize diversification and analyze risk in order to maximize returns. The key difference between these two theories is how they define risk and how that specific definition of risk influences projected returns. The difference is slight but important:
- MPT measures risk as standard deviation of all returns. Risk is symmetrical.
- PMOT measures risk as standard deviation of negative returns. Risk is asymmetrical.
Modern portfolio theory was first envisioned in the 1950s by economist Harry Markowitz, who would later win a Nobel prize for this work. PMPT emerged in 1991, set forth by software engineers Brian M. Rom and Kathleen Ferguson who believed in flaws in MPT.
Admittedly, this is rather arcane stuff for those not experienced in the intersection of math and business. In a crude example, picture this: MPT sells a bell curve where you are striving for right for the highest point in the middle. Reward and risk increase the farther you get away from the middle, and you don’t want to increase risk. PMPT meanwhile, does not see risk and reward directly correlate – there is no bell curve. Make sense? If not, that’s okay.
Active management vs. passive management
A common way to view these two competing theories is as active management and passive management. Modern portfolio theory falls into the latter category of passive management, where diversification is used to withstand volatility. MPT is commonly practiced today and popular among beginning investors. In a most basic sense, MPT might tell you that adding real estate to your investments is a wise choice because that isn’t necessarily tied to the volatility of the stock market.
PMPT, conversely, involves active management, and ideal for those who are not only investing money, but time and energy as they work towards a more lucrative portfolio. Forecasting, analysis and a slew of quantitative tools are involved in active management.
Portfolio theories and addy
addy crowdfunds real estate to make investing easy and simple. For addy members specifically, it can be a way to earn passive income since members do not involve themselves in the acquisition, management or potential sale of a property. addy members simply invest anywhere from $1 to $1,500 towards a property and then await potential returns.
Modern portfolio theory has long been used in real estate investment, particularly when it comes to REITs. addy notably is not a REIT, but striving for portfolio diversification through real estate falls under the umbrella of MPT. If you invest in stocks and/or crypto, real estate may offset some of the volatility.
The connection between PMPT and addy may be a bit more tenuous, but it still exists, particularly for addy’s accredited investors. While addy provides investment opportunities for those who are young or new to investing, accredited investors can also jump in on deals that they may find particularly attractive and better fit with an actively managed portfolio.
Invest with addy
Whether you’re just starting out on your investment journey or intently managing your own portfolio, addy members have an opportunity to make passive income through online crowdfunding real estate.