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Asset Allocation ... 100% Stock Portfolio w/International Equities

Aggressive Stock Portfolio

Let's take a closer look at this 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 including International Equities

Investor Bio:

Name: Jack Anderson

Age: 46

Occupation: Entrepreneur.

Investment preferences: Invest 100% of his assets in equity oriented mutual funds believing that he can't go wrong long-term with stocks.

Family Status: Divorced single father with two boys ages 15 and 12.

Risk Profile:

Aggressive growth investor who is very comfortable with stock market volatility.

Financial Goals:

Pay college expenses for his two children.

Maintain current lifestyle in retirement.

Investment Objective:

Maximize the portfolios compounded annual return.

Current Portfolio:

Target Portfolio:

Current Portfolio: Target Portfolio:
  • 75% Domestic Equities (60% Nasdaq and 15% Dow Jones).
  • 25% International Equities (MSCI World Index).
  • 55% Domestic Equities (40% Nasdaq and 15% Dow Jones).
  • 20% International Equities (MSCI World Index).
  • 25% Managed futures products.

Portfolio Overview:

Mr. Anderson is aggressive by nature with 100% of his portfolio allocated to the stock market. He has attempted to diversify his holding with Large Cap, Small Cap, and International Equities. In general Mr. Anderson’s portfolio is similar to the NASDAQ. As the NASDAQ markets go, so goes Mr. Anderson’s portfolio. Mr. Anderson is totally reliant on the stock market to grow his portfolio over time. Table 1 above, demonstrates how Mr. Anderson can transition his current portfolio into one that has the potential to improve returns while, at the same time, reduce risk and volatility.

The key here is to maintain the aggressive posture of Mr. Anderson’s current portfolio while adding balance by including an additional asset class. By reducing the portfolio’s domestic equity portion from 75% to 55% (40% Nasdaq and 15% Dow Jones) and the international equity portion from 25% to 20% (20% MSCI World Index), we will enable 25% of the capital to be invested in Managed Futures (MAR Index). Research supports the idea that re-weighting this type of stock portfolio to include Managed Futures potentially achieves improved stability of returns while simultaneously increasing profitability.

>>> Click for a complete portfolio comparison of trading performance.


Performance Comparison:

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 including International Equities

Portfolio Comparison: Test Period 1/85 - 4/03 (202 months of data)
 

Current Portfolio
60% Nasdaq
15% Dow Jones
25% MSCI Wld. Index

Target Portfolio
40% Nasdaq
15% Dow Jones
20% MSCI Wld. Index
25% Managed Futures
Portfolio Adjustment
Compounded Annual Return:
10.24%
11.33%
10.64% Improvement in annualized profitability.
Annualized Std. Dev. Of Monthly ROR:
19.58%
14.46%
26.15% Decrease in annualized monthly volatility.
Sharpe Ratio:
0.42
0.65
54.76% Improvement to the portfolio's stability.
Average Monthly ROR:
0.98%
1.02%
4.08% Increase in monthly profitability.
Monthly Standard Deviation:
5.65%
4.17%
26.19% Decrease in monthly volatility.

 

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 3a:

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.

>>> Click to review other asset allocation portfolios.