In this week’s digest, explore alternative approaches to portfolio analysis and find out how they can be used to more accurately measure performance and reduce risk.
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Benchmarking: The Art of the Science |
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By Craig L. Israelsen, Ph.D.
There can be a serious disconnect between investors and the indexes they reference to judge their performance—which can lead to a great deal of benchmarking confusion. While most investors have diversified multi-asset portfolios, there is a lack of multi-asset, broadly diversified indexes to serve as appropriate performance benchmarks. In the article, Benchmarking: The Art of the Science, author Craig Israelsen discusses why the performance of the S&P 500 index (or any other index that measures the performance of only one asset class) may not be the best benchmark for a portfolio that includes a variety of asset classes.
Some of the topics covered in the article include:
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Why performance benchmarking can be misleading
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What multi-asset indexes are available
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Appropriate indexes for various types of portfolios
Israelsen explains how comparing a multi-asset portfolio against only one of its “ingredients” is not helpful, valid or even logical. The primary reason it’s often done is because of habit and because it’s easy to track the performance of an index that is publicized as broadly as the S&P 500. However, habit and ease are seldom the hallmarks of “best practice.”
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Factors Allow Investors to Think Differently About Diversification |
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By Larry Swedroe
A factor is a characteristic or set of characteristics common across a broad set of securities that both explains performance and provides a premium (or above-market return). By “tilting” a portfolio across certain factors, investors can increase returns while at the same time reduce risk. The factors examined in this article include market beta, size, value, momentum, profitability and quality. In this article, you’ll find highlights on how you can use factors to further diversify your portfolio and reduce risk.
Some of the highlights of the article include:
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Factor-based investing
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What factors are worth being considered
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Incorporating Sharpe ratios in your diversification strategy
As author Larry Swedroe states in the article, “It’s been said that diversification is the only free lunch in investing. Thus, I recommend you eat as much of it as you can.” Although every investor has a different approach to diversification, we hope this article sheds light on a strategy that you may not have been previously familiar with.
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AAII e-book: Portfolio Building |
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 “Easier said than done” is a common saying that applies well to developing an overall strategy for your investment portfolio. The basic concepts are relatively easy, but they become more complex and less clear-cut when it comes to applying them to real-world situations. This e-book, available exclusively to AAII members, is designed to bridge the gap between theory and practice.
Asset allocation concepts are explained in clear language and cover not only making the basic decisions but also how to adjust your allocation based on major changes in your life. The e-book shows how to implement your strategy if starting from scratch and lists what exactly to count as part of your portfolio. Maintenance tasks such as measuring the performance of your portfolio as a whole as well as the separate components are described using real-life examples. The unavoidable math is presented through well-defined calculations that anyone can perform. The final chapters are devoted to fine-tuning your portfolio during your working years and keeping it balanced during retirement.
Be sure to take advantage of the Portfolio Building e-book as one of your many benefits of AAII membership. More » |
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