Tag Archives: portfolio

Why Invest In Chile?

I’ve heard it said that asset allocation means always having something to complain about. A brilliant asset allocation will have long periods when one or more component of the portfolio fails to appreciate. And for investment management a long period of time can be a decade or more. This past year the MSCI Chile Gross Index lost -16.58% as measured in US dollars. Chile is down -50.64% since it peaked at the end of April, 2011 with a 5-year annual return of -13.04%. The longer the downturn for a particular portfolio holding the greater the feeling that we should simply eliminate it from the portfolio. It is “doing nothing but going down” we say because our minds are apt to frame the movement in the present tense rather than the past tense. Our brains are very quick to find short term patterns and project them forward as long term trends. This cognitive ability is useful in many areas, but it is not particularly useful in investment management. Investments are inherently volatile. The rebalancing bonus which comes from having an asset allocation is dependent on two variables: volatility and correlation. The more volatile and less correlated your asset classes are the greater the rebalancing bonus you get from having those components in your portfolio. When you compare Chile to the S&P 500 Total Return since the beginning of 1988 when the Chile Index began, the S&P 500 had a 1,540.25% appreciation, growing $10,000 into $154,669. It averaged 10.28% annually. Even though the S&P 500 had phenomenal growth during the time period, it also experienced an entire decade where it dropped -29.48% and a 30 month period where it dropped -43.75%. Over the same time period, Chile had a 3,585.25% appreciation, growing $10,000 into $368,524. It averaged 13.75% annually. Click to enlarge Having twice as much growth as the S&P 500 over 28 years comes with the price of greater volatility. The standard deviation of annual returns for the S&P 500 was 14.39% while the standard deviation for Chile was 24.21%. This type of volatility is normal for the markets. While you might have had more money putting everything in Chile, we recommend a blended portfolio. Each individual component of a balanced portfolio is more volatile than the portfolio as a whole. Thus, adding a little bit of Chile to your portfolio can boost returns and reduce volatility on account of the rebalancing bonus. In fact, over this time period the mix which had the lowest volatility was 12% Chile and 88% S&P 500. This blended portfolio had an average return of 10.96% and a standard deviation of just 14.25%. This is a boost to annual returns of 0.68%. Over this time period, adding 12% Chile to your portfolio resulted in an extra $29,095 over the S&P 500 alone. Creating a mix of 19% Chile and 81% S&P 500 would have had no more volatility than a portfolio of 100% S&P 500. But this portfolio would have averaged 11.32%, and extra 1.05% annually and earned an additional $46,784. The return of these blended portfolios over long periods of time produce a risk return curve which can help investors find what asset allocation produced the greatest return for a given amount of risk. These blended portfolios are called the efficient frontier and produce curves between moving from 100% S&P 500 to 100% Chile. Click to enlarge Notice that with only these two choices, investing any less than 12% in Chile is not on the efficient frontier because there is a portfolio for which a greater return could have been achieved while experiencing an equal or lower volatility. In actual portfolio construction, there are dozens of components which are being fit together to craft a brilliant investment strategy for long term time horizons. Our current asset allocation model usually invests less than 2% of a portfolio’s value in Chile. Even if Chile were to lose half of its value the portfolio value would only go down 1%. Assuming that Chile doesn’t move in sync with other investments in the portfolio, this is a level of volatility which is acceptable for the potential additional return. As it turns out, the correlation between the monthly returns of Chile and the S&P 500 are low at 0.46. It is always disappointing when an investment category fails to perform as hoped. But after an investment has fallen in price it is often that much more attractive looking forward. Unlike individual stocks, a country index cannot go to zero. If the Chile index approached zero, you would be able to take your pocket change and buy every publicly traded company in Chile. Long before you could do that, people much wealthier than you would notice how low the price was and they would buy every company in Chile. Low prices for a country index is best thought of as the index going on sale. Stocks often move on very light trading as a few sellers push the stock price lower. Market makers who hold all the stocks in the index gradually move the price lower when there are more sellers than buyers. A market maker is forced to buy when there is no one else interested in buying. But at some point the price is low enough to wake up other potential buyers and the movement in price finds resistance. This can cause greater swings of volatility often over long periods of time. As a result, you should not be afraid of an major index. Assuming there were good reasons to be invested in it in the first place , a 3, 5 or even 10 year down turn is not a reason to abandon your brilliant investment strategy.

Ivy Portfolio January Update

The Ivy Portfolio spreadsheet track the 10 month moving average signals for two portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets . Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term moving averages. The Ivy Portfolio spreadsheet tracks both the 5 and 10 ETF Portfolios listed in Faber’s book. When a security is trading below its 10 month simple moving average, the position is listed as “Cash”. When the security is trading above its 10 month simple moving average the positions is listed as “Invested”. The spreadsheet’s signals update once daily (typically in the late evening) using dividend/split adjusted closing price from Yahoo Finance. The 10 month simple moving average is based on the most recent 10 months including the current month’s most recent daily closing price. Even though the signals update daily, it is not an endorsement to check signals daily or trade based on daily updates. It simply gives the spreadsheet more versatility for users to check at his or her convenience. The page also displays the percentage each ETF within the Ivy 10 and Ivy 5 Portfolio is above or below the current 10 month simple moving average, using both adjusted and unadjusted data. If an ETF has paid a dividend or split within the past 10 months, then when comparing the adjusted/unadjusted data you will see differences in the percent an ETF is above/below the 10 month SMA. This could also potentially impact whether an ETF is above or below its 10 month SMA. Regardless of whether you prefer the adjusted or unadjusted data, it is important to remain consistent in your approach. My preference is to use adjusted data when evaluating signals. The current signals based on December 31st’s adjusted closing prices are below. This month (NYSEARCA: VNQ ) is above its moving average and the balance of the ETFs are below their 10 month moving average. The spreadsheet also provides quarterly, half year, and yearly return data courtesy of Finviz. The return data is useful for those interested in overlaying a momentum strategy with the 10 month SMA strategy: (click to enlarge) I also provide a “Commission-Free” Ivy Portfolio spreadsheet as an added bonus. This document tracks the 10 month moving averages for four different portfolios designed for TD Ameritrade, Fidelity, Charles Schwab, and Vanguard commission-free ETF offers. Not all ETFs in each portfolio are commission free, as each broker limits the selection of commission-free ETFs and viable ETFs may not exist in each asset class. Other restrictions and limitations may apply depending on each broker. Below are the 10 month moving average signals (using adjusted price data) for the commission-free portfolios: (click to enlarge) (click to enlarge) Disclosure: None

Closing The Books On 2015

Summary So 2015, how’d you do? Did you beat the market? An advisor, among other things, needs to prevent clients from doing themselves in out of emotion or any other unintentionally self-destructive behavior. An individual investor needs to manage this for themselves, which is doable with a whole lot of self-awareness. By Roger Nusbaum, AdvisorShares ETF Strategist The transition from the old year into the new is always busy for tax reasons, reviewing the old year and game planning for the future. So 2015, how’d you do? Did you beat the market? Those are common questions for this time of year and while those may seem to be important they are less important than the humbler “did you screw anything up beyond repair?” An advisor, among other things needs to prevent clients from doing themselves in out of emotion or any other unintentionally self-destructive behavior. An individual investor needs to manage this for themselves, which is doable with a whole lot of self-awareness. The reason not screwing up is arguably more important than anything else is that the stock market averages 7-8% annualized over long periods of time, but year to year it is a guess as to what the market will do. Seven or 8% can be a sufficient growth rate over long periods of time and of course 7-8% includes all the great years and the terrible years. If nothing else, if an investor doesn’t panic and just holds on to capture most of that 7-8% then they have a good chance of having enough money when they need it. This is essentially the argument for the stock market being less risky over longer periods versus shorter periods which then places more importance on savings rate and lifestyle than market performance… unless there is a major screw-up. In 2015, a major screw-up could have come from chasing yield with too much exposure to MLPs. The space has obviously been decimated in 2015. Someone who had 3-5% in MLPs all the way down had a meaningful portfolio drag but with a properly diversified portfolio could easily be pretty close to the market and pretty close can get the job done. The person who heeded one of the countless articles from a couple of years ago suggesting 15-25% in MLPs has a much bigger problem. In most years, there are market niches that blow up, this year it was MLPs and in the future there will be others. From the advisor’s perspective, explaining why there was an MLP in the portfolio is infinitely easier than explaining why 20% was in MLPs. From the perspective of the individual investor, it becomes an inconvenience as opposed to a now what do I do situation. The idea of not screwing up might seem boring and like a low bar but for most investors boring is exactly what they want even if they don’t realize it and what good is beating the market (huge assumption there by the way) with an inadequate savings rate? Relying on the market to bail out an investment plan is to rely on what is out of the investor’s control and that is a bad bet.