The Benefits of a fully Diversified portfolio
Upcoming SlideShare
Loading in...5
×
 

The Benefits of a fully Diversified portfolio

on

  • 182 views

Presentation on the benefits of diversifying into a globally diversified, low-cost portfolio.

Presentation on the benefits of diversifying into a globally diversified, low-cost portfolio.

Statistics

Views

Total Views
182
Views on SlideShare
182
Embed Views
0

Actions

Likes
0
Downloads
3
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

The Benefits of a fully Diversified portfolio The Benefits of a fully Diversified portfolio Presentation Transcript

  • The Benefits of a Fully Diversified Portfolio by Charles R. Korger, CFP®
  • Basic 60/40 Balanced Strategy vs. Company Plans Results of 192 Corporate Pension Funds Annual: 1988–2005 0 2 4 6 8 10 12 14 16 Company1 Company10 Company20 Company30 Company40 Company50 Basic60/40 Company60 Company70 Company80 Company90 Company100 Company110 Company120 Company130 Company140 Company150 Company160 Company170 Company180 Company190 Company192 AnnualAverageReturns(%) Basic 60/40 is 60% S&P 500 Index, 40% Lehman Brothers US Government/Credit Bond Index Intermediate, rebalanced monthly. Source: FutureMetrics (December 2006); all companies with fiscal year ending December, with complete return data from 1988–2005. The S&P data are provided by Standard & Poor’s Index Services Group. Barclays Capital data provided by Barclays.
  • The Basic Institutional Portfolio Annualized Compound Return Annualized Standard Deviation Model Portfolio 1 9.34% 11.14% Barclays US Govt./Credit Bond Index S&P 500 Index Model Portfolio 1 40% 60% Quarterly: 1973–2011 Model Portfolio 1 Barclays Capital data provided by Barclays Bank PLC. The S&P data are provided by Standard & Poor’s Index Services Group. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See cover page for additional information.
  • Does It Pay to Extend Maturities? Extending too far may result in diminishing returns/risk tradeoff • Not all investors define risk as standard deviation. Some investors may seek to hedge long-term liabilities using long- term bonds. • Historically, longer-maturity instruments have higher standard deviations than shorter-maturity instruments. Quarterly: 1964–2011 Source: One-Month US Treasury Bills, Five-Year US Treasury Notes, and Twenty-Year (Long-Term) US Government Bonds provided by Ibbotson Associates. Six-Month US Treasury Bills provided by CRSP (1964–1977) and BofA Merrill Lynch (1978–present). One-Year US Treasury Notes provided by CRSP (1964–May 1991) and BofA Merrill Lynch (June 1991–present). Ibbotson data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). CRSP data provided by the Center for Research in Security Prices, University of Chicago. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Indexes are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. In general, fixed income securities with longer maturities are more sensitive to these price changes and may experience greater fluctuation in returns. 0 2 4 6 8 10 12 14 One-Month US Treasury Bills Six-Month US Treasury Bills One-Year US Treasury Notes Five-Year US Treasury Notes Twenty-Yea Government Annualized Compound Returns Annualized Standard Deviation Maturity One-Month US Treasury Bills Six-Month US Treasury Bills One-Year US Treasury Notes Five-Year US Treasury Notes Twenty-Year US Govt. Bonds Annualized Compound Return (%) 5.33 6.07 6.28 7.32 7.77 Annualized Standard Deviation (%) 1.46 1.80 2.35 6.17 11.51
  • Substituting Short-Term for Long-Term Fixed Income Annualized Compound Return Annualized Standard Deviation Model Portfolio 1 9.34% 11.14% Model Portfolio 2 8.65% 10.27% Barclays US Govt./Credit Bond Index S&P 500 Index BofA Merrill Lynch One-Year US Treasury Note Index Model Portfolio 1 40% 60% Model Portfolio 2 60% 40% Barclays Capital data provided by Barclays Bank PLC. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and so not represent actual investment performance. See cover page for additional information. Quarterly: 1973–2011 Model Portfolio 2
  • History of the Size Effect • The size effect can persist for long periods in either direction. • These long periods can immediately be succeeded by a reversal in the opposite direction. The S&P data are provided by Standard & Poor’s Index Services Group. Market cap decile data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. 0 350 1 S&P 2 3 4 5 6 7 8 9 10 1965–1968 -75 0 1 S&P 2 3 4 5 6 7 8 9 10 1969–1974 0 1,400 1 S&P 2 3 4 5 6 7 8 9 10 1975–1983 -25 175 1 S&P 2 3 4 5 6 7 8 9 10 1984–1990 TotalReturns(%) Market Cap Decile Largest Smallest Smallest Largest Smallest Market Cap Decile Largest Smallest Largest Smallest Market Cap Decile Largest TotalReturns(%)TotalReturns(%)
  • Diversifying a Portfolio into US Small Cap Stocks Quarterly: 1973–2011 Model Portfolio 3 Annualized Compound Return Annualized Standard Deviation Model Portfolio 1 9.34% 11.14% Model Portfolio 2 8.65% 10.27% Model Portfolio 3 9.46% 11.95% Barclays US Govt./Credit Bond Index S&P 500 Index BofA Merrill Lynch One-Year US Treasury Note Index US Small Cap Index Model Portfolio 1 40% 60% Model Portfolio 2 60% 40% Model Portfolio 3 30% 40% 30% Barclays Capital data provided by Barclays Bank PLC. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Dimensional Index data compiled by Dimensional. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See cover page for additional information.
  • Size and Value Effects in the US Annual: 1927–2011 Annualized Compound Returns (%) US Large Capitalization Stocks US Small Capitalization Stocks 11.51 9.75 9.21 14.71 11.47 8.68 Fama/French US Large Value Index S&P 500 Index Fama/French US Large Growth Index Fama/French US Small Value Index CRSP 6-10 Small Neutral Index Fama/French US Small Growth Index Average Return (%) 14.86 11.77 11.22 19.11 15.72 13.29 Standard Deviation (%) 27.02 20.41 20.49 31.73 30.84 33.23 Fama/French data provided by Fama/French. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Small company risk: Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. See cover page for additional information.
  • Diversifying a Portfolio into US Value Stocks Quarterly: 1973–2011 Model Portfolio 4 Annualized Compound Return Annualized Standard Deviation Model Portfolio 1 9.34% 11.14% Model Portfolio 2 8.65% 10.27% Model Portfolio 3 9.46% 11.95% Model Portfolio 4 10.33% 11.94% Barclays US Govt./Credit Bond Index S&P 500 Index BofA Merrill Lynch One-Year US Treasury Note Index US Small Cap Index US Large Value Index Targeted Value Index Model Portfolio 1 40% 60% Model Portfolio 2 60% 40% Model Portfolio 3 30% 40% 30% Model Portfolio 4 15% 40% 15% 15% 15% Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Dimensional Index data compiled by Dimensional. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See cover page for additional information.
  • Size and Value Effects Abroad Annual: 1975–2011 Fama/French International Value Index International Small Cap Index MSCI World ex USA Index Average Annual Return (%) 17.44 18.23 12.07 Standard Deviation (%) 24.81 28.32 21.57 Annual Correlation Coefficient to S&P 500 Index 0.604 0.516 0.660 Annualized Compound Returns (%) 14.69 14.74 10.68 Non-US Developed Markets Stocks Fama/French data provided by Fama/French from Bloomberg and MSCI securities data. International Small Cap Index data compiled by Dimensional from Bloomberg, Style Research, London Business School, and Nomura Securities data. MSCI data copyright MSCI 2012, all rights reserved; see MSCI disclosure page for additional information. The S&P data are provided by Standard & Poor’s Index Services Group. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice.
  • A Fully Diversified Portfolio Barclays US Govt./Credit Bond Index S&P 500 Index BofA Merrill Lynch One-Year US Treasury Note Index US Small Cap Index US Large Value Index Targeted Value Index Intl. Large Index Intl. Small Index Intl. Large Value Index Intl. Small Value Index Emerging Markets Blended Index Model Portfolio 1 40% 60% Model Portfolio 2 60% 40% Model Portfolio 3 30% 40% 30% Model Portfolio 4 15% 40% 15% 15% 15% Model Portfolio 5 7.5% 40% 7.5% 7.5% 7.5% 6% 6% 6% 6% 6% Quarterly: 1973-2011 Model Portfolio 5 Annualized Compound Return Annualized Standard Deviation Model Portfolio 1 9.34% 11.14% Model Portfolio 2 8.65% 10.27% Model Portfolio 3 9.46% 11.95% Model Portfolio 4 10.33% 11.94% Model Portfolio 5 11.15% 11.39% Rebalanced annually. Barclays Capital data provided by Barclays Bank PLC. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Dimensional Index data compiled by Dimensional. Emerging Markets Blended Index consists of 50% Fama/French Emerging Markets Index, 25% Fama/French Emerging Markets Small Cap Index, and 25% Fama/French Emerging Markets Value Index. Fama/French Emerging Markets, Fama/French Emerging Markets Value and Fama/French Emerging Markets Small Cap Index weightings allocated evenly between Dimensional International Small Cap Index and Fama/French International Value Index prior to January 1989 data inception. Dimensional International Small Cap Value Index weighting allocated to International Small Cap Index prior to July 1981 data inception. International Value weighting allocated evenly between International Small Cap and MSCI World ex USA Index prior to January 1975 data inception. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See cover page for additional information.
  • Disclosures This video presentation may include forward-looking statements. All statements other than statements of historical fact are forward- looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.” Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Any information provided by the Adviser regarding historical market performance is for illustrative and educational purposes only. Clients or prospective clients should not assume that their performance will equal or exceed historical market results and/or averages. The client’s gross performance will be reduced by advisory and transaction fees. While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations. Therefore, the Adviser does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether incorporated into or referenced in the video presentation, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance. Specific allocation models and investment strategies are described for illustrative and educational purposes only, may or may not be utilized in portfolios managed by the Adviser and do not necessarily encompass all of allocation models and investment strategies recommended for advisory clients. It should not be assumed that all of Advisers’ accounts have the same allocations, concentrations or performance results.