A Very Common Mistake Javier Estrada Do not fear simple approaches - - PDF document

1

• 1. Assets & Products
• Relevant assets
• Financial products
• 2. Reference Portfolios
• 100% equity
• The 60‐40 portfolio
• The permanent portfolio
• Variations of the permanent portfolio
• Aggressive portfolios
• Other portfolios

Winning Investment Strategies

Reference Portfolios

Javier Estrada Winter, 2014

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

A Very Common Mistake

Do not fear ‘simple’ approaches

Simple may still be sophisticated Simple typically implies low cost (Time/$) Simple to understand ≠ Simple to implement

Go

2

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

Assets & Products

Stocks Bonds Cash Gold

∙ iShares MSCI ACWI (ACWI) ∙ Vanguard Total World Stock (VT) ∙ iShares Global Inflation Linked Bond Fund (GTIP) ∙ Money market fund ∙ Bank deposit ∙ iShares Gold Trust (IAU) ∙ SPDR Gold Shares (GLD)

Focus on three (four) assets

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

100% Equity

An ‘aggressive/conservative’ portfolio

Fully invested in stocks / Broadly diversified

3

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The 60‐40 Portfolio

The ‘industry standard’

Blend of the two major asset classes

Go Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The Permanent Portfolio

4

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The Permanent Portfolio

Prosperity Recession Inflation Deflation

∙ Stocks ∙ Cash ∙ Gold ∙ Bonds

Go Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The PP Without Cash

25% in cash?!

Equally‐weighted portfolio of stocks/bonds/gold

5

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The 60‐30‐10 Portfolio

Same three assets as PP without cash

Different weighting (60S ‐ 30B ‐ 10G)

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

Reference Portfolios

(*) Annual rebalancing

6

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

A More Aggressive Portfolio?

Enhancing the return of 100% equity

An investor may need/want a higher return than that expected from the (world) equity market

Core (Neutral position) Satellites (Tilts)

+

‘Core‐satellite’ approach

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

A More Aggressive Portfolio?

Neutral position: World market

(Avoid the ‘home bias’)

Introduce tilts to enhance the return (and risk) of the portfolio Small‐caps Value Emerging markets Frontier markets

iShares MSCI ACWI (0.34%) Vanguard Total World Stock (0.19%)

7

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The KISS Portfolio

Keep It Simple, Saver

US stocks International stocks US Bonds In varying ‘personalized’ proportions Same general idea: Buy / Hold / Rebalance

Go Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The Gone Fishin’ Portfolio

Buy / Hold / Rebalance (60‐30‐10)

Vanguard Total Stock Market Index 15% Vanguard Small‐Cap Index 15% Vanguard European Stock Index 10% Vanguard Pacific Stock Index 10% Vanguard Emerging Markets Index 10% Vanguard Short‐Term Bond Index 10% Vanguard High‐Yield Corporates Fund 10% Vanguard Inflation‐Protected Securities Fund 10% Vanguard REIT Index 5% Vanguard Precious Metals Fund 5%

Go

8

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

Keep In Mind

Simple may be good …

… for you, which is what really matters … and yet difficult to implement … and even better than many (very) costly alternatives offered in the industry

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

In Short

• Simple may be good – and even better than many

very costly alternatives offered in the industry

• Few assets/products are often more than enough

for individual investors

• Always ask: What do I gain by making my portfolio

more complex than some of these simple portfolios?

• Model portfolios
• Are simple and sophisticated at the same time
• Have performed well (though you should ask

whether that is good performance for you)

• Can be implemented at a very low cost
• Consider them only a reference (that may or may not

be appropriate for you)

9

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

Appendix

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

Simple Approaches

Back

10

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The 60‐40 Portfolio

Back Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The Permanent Portfolio

Go

11

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The Permanent Portfolio

Go Back Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The KISS Portfolio

12

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The KISS Portfolio

Back Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2013

The Gone Fishin’ Portfolio

Back Go