A misguided portfolio based on asset classes can maximize returns for investors

A misguided portfolio based on asset classes can maximize returns for investors – Mail Bonus

To protect portfolios from the vulnerability of extreme price changes, portfolio diversification should prove to be better as global stock diversification appears to disappear when needed most.

The reason is that as globalization progressed, economies became more complex and stock markets around the world increased.

A mismatched portfolio can be created by distributing capital between asset classes to maximize returns subject to investor risk and cash flow constraints.

Exhibit 1: Results of a calendar year in asset class and sub-asset class


Exhibit 2: Table of Index & Vanilla Hybrid Fund

Hetero 2Agencies

Exhibit 2A & 2B: Index & Hybrid Fund Profitability & Fluctuations

Hetero 3Agencies

Investors can conclude from Exhibit 1 that no asset class is consistently better than the other in the short term, and 10-year CAGR interprets that investing over a longer horizon will mix wealth.

Exhibit 2 explains that even a vanilla blend fund can maximize returns and reduce volatility due to the risk taken. Assumptions that asset classes are asset classes, with a few exceptions, tend to be inconsistent with macroeconomic events that yield better risk-returns.

The appropriate proportion of capital to be allocated to assets is crucial to building an optimal portfolio. If not, investors are exposed to inappropriate risks. For example, if an investor were to invest 100 percent of his capital in the index as shown above, he would be subject to unnecessary fluctuations.

On the other hand, tactical asset allocation will integrate capital market expectations with the desired level of investor risk, and long-term limitations where exposures are based on measurable systemic risk for each asset class, thereby providing the maximum return for the venture investor that can be sustained.

The rapid pace of market change and landscape development for sectors could propel investors to time the market and take risks from the developing sectors. However, market timing remains an ingenious concept for most people, and gaining a differential advantage is far more difficult than one might think.

The Buffett & Yardeni models can act as indicators of when a price moves beyond a normal valuation range.

Buffet Indicator Model

The total market value of shares traded on the general market in a country divided by GDP or GDP is a broad way of indicating the relative position of the domestic stock market.

In general, if the indicator is above the long-term average, stocks are overvalued and vice versa.

The Yardeni model

Derivatives of the well-known Fed model are used to estimate the position of markets based on valuation.

The Fed model indicates overestimation if the stock index yield is below the 10-year G-sec yield. The Yardeni model corrects the central bank’s shortcomings by incorporating expected revenue growth. If the indicator is above the long-term average, it points towards an overestimation of the stock market and vice versa.

EY = BY – (k * LTEG)

EY: Income return

BY: Moody’s “A” corporate bond yield

LTEG: Long-term income growth of the index

K: Constantly allocated to economic growth

We believe that it is possible to limit more than 90 percent of the deviation in returns by asset allocation. An important factor in times like these is to be disciplined and resilient, as the asset allocation that underlies the investment philosophy will prove to be successful as it has stood the test of time.

(Author is the founder and fund manager – Right Horizons PMS)

(Disclaimer: Advice, suggestions, opinions and opinions given by experts are their own. This does not represent the views of the Economic Times)

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