As managing partner with PCM Partners, LLC, investment consultant Ed Stavetski offers ultra-high net worth clients a full range of asset allocation and due diligence services. Ed Stavetski has extensive experience in alternative asset classes, from art to farmland, and is a thought leader in his field. He has developed Post Modern Portfolio Theory as a way of addressing major shortcomings in Modern Portfolio Theory (MPT) that were exposed by the worldwide financial crisis.
One of the key deficiencies of MPT involves the complex number of variables taken into consideration, with a portfolio comprised, for example, of 10 holdings involving 65 distinct variables. Even minute discrepancies at the input level result in major output errors. Another drawback of MPT is its focus on relative returns. Portfolios may fall significantly less than the overall market, but this does not negate the fact that investors lose overall revenue. Mr. Stavetski points out that so-called “100-year events,” in which a monthly loss of 12.8 percent occurs, do not happen rarely, but have occurred approximately every four to five years for the past 90 years. The MPT model, which utilizes standard deviation tools in assigning risk, is not applicable to illiquid markets or to real estate and private equity investments. This reflects the fact that mathematical models do not fully take into consideration investor emotions and their reactions to revenue loss. As a result, the MPT approach can disguise overvaluation and speculative bubble risks.