Let's take a closer look at this semi-aggressive 100% stock investment portfolio and adjust the asset class allocation to potentially improve returns while lowering specific risk measures. Click on the following links for the complete story.
COMMODITY TRADING INVOLVES SUBSTANTIAL RISKS DUE IN PART TO THE HIGHLY SPECULATIVE NATURE OF SUCH TRADING. AS A RESULT, AN INVESTMENT IN A COMMODITY TRADING ACCOUNT IS ONLY SUITABLE FOR YOU IF YOU HAVE ADEQUATE MEANS TO PROVIDE FOR YOUR CURRENT NEEDS AND PERSONAL CONTINGENCIES AND YOU CAN BEAR THE ECONOMIC RISK OF LOSING YOUR ENTIRE INVESTMENT.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
100% Stock Investor
Investor Bio:
Name: Carolyn Jacobs
Age: 28
Occupation: Computer Programmer Investment preferences: Carolyn invests in mutual funds that focus primarily on mid/large capitalization stocks found in the S&P 500 Index. A smaller portion of her portfolio is equally invested in large capitalization Dow Jones oriented stocks and aggressive Nasdaq oriented stocks.
Family Status: Single.
Risk Profile:
Semi-aggressive equity investor who is comfortable with stock market volatility primarily associated with large capitalized stocks.
Financial Goals:
Continue to contribute the maximum dollar amount allowable to her 401K plan.
Retire early at the age 55.
Investment Objective:
Maintain a semi-aggessive investment style.
Increase annual profitability.
Increase the level of diversification within the portfolio.
Current Portfolio:
Target Portfolio:
Current Portfolio:
Target Portfolio:
60% Mid/Large capitalization S&P 500 Index oriented stocks.
20% Large capitalization Dow Jones oriented stocks.
20% Aggressive Nasdaq oriented stocks.
50% Mid/Large capitalization S&P 500 Index oriented stocks.
15% Large capitalization Dow Jones oriented stocks.
15% Aggressive Nasdaq oriented stocks
20% Managed futures products.
Portfolio Overview:
This plain-Jane single asset class (i.e. 100% stock investment) portfolio is certainly in need of an update. All to often young investors, new to the work force, place all of their assets in stock oriented funds. They typically invest in their companies 401k attempting to diversify by purchasing a variety of mutual funds. Unfortunately in the case of this investor she has three funds that move virtually in lockstep with one another.
The key here is to introduce a different asset class to provide portfolio diversification while simultaneously maintaining a semi-aggressive investment style. By reducing the equity portion of the portfolio from 100% to 80% (50% S&P 500, 15% Dow Jones and 15% Nasdaq) allows 20% of the capital to be redirected to a managed futures product. This portfolio adjustment can effectively lower the portfolio's volatility while subsequently increasing its annual return.
This section provides an historic comparison between the current portfolio and target portfolio which includes Managed Futures products. The test period for this evaluation runs from January 1985 - April 2003 for a total of over 200 months. The net improvement to the target portfolio was an increase in return and a reduction to annualized monthly volatility. The portfolio adjustment column, in the table below, reflects the true percentage improvement made in each of the portfolios risk and reward measurers.
100% Stock Investor
Portfolio Comparison: Test Period 1/85 - 4/03 (202 months of data)
Current Portfolio
60% S&P 500
20% Dow Jones
20% Nasdaq
The chart below illustrates the effect true diversification can have on a portfolio. Adding Managed Futures products into the portfolio mixture improved our target portfolio by increasing profitability (Compounded Annual Return) and lowering volatility (Annualized Std. Dev. Of Monthly ROR). It's the best of both worlds; more reward with less risk.
Chart 1a:
COMMODITY TRADING INVOLVES SUBSTANTIAL RISKS DUE IN PART TO THE HIGHLY SPECULATIVE NATURE OF SUCH TRADING. AS A RESULT, AN INVESTMENT IN A COMMODITY TRADING ACCOUNT IS ONLY SUITABLE FOR YOU IF YOU HAVE ADEQUATE MEANS TO PROVIDE FOR YOUR CURRENT NEEDS AND PERSONAL CONTINGENCIES AND YOU CAN BEAR THE ECONOMIC RISK OF LOSING YOUR ENTIRE INVESTMENT.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
