I finally got around to buying Smart Portfolios by Robert Carver. I wish I had done so much closer to its 2017 publication date, but que sera. More on it further below, but if you fancy yourself as (or simply enjoy) stock picking and/or are less enamoured with diversification, it's probably less useful to you. Conversely, if your view is more top down (as opposed to bottom up) and/or you're relatively more skeptical about the ability of yourself or fund managers to beat the market, then it will likely suit.
Some background first. My/our investing has gone through some clear phases
- 1. Company pension mandatory contributions complemented by regular savings into single product investment trusts
2. The single product investment trusts morphed into simple broking accounts (with II) holding a 60% or so residual of the investment trust and a 40% holding in a bond investment trusts
3. The "discovery" of ETF's and splitting those equity and bonds holdings 50% passive (ETF) and 50% active (investment trust) within
4. Calibrating the above 60/40 ratio a little, moving towards around 80/20 (E/B) for the kids JISA's and around 70/30 for the our ISA's and SIPP's
So, I am now on the verge of a "5th generation" further calibration, where there are some key pages and concepts in this book that are relevant.
Concept A (p40): (approximately) Geometric Mean = Arithmetic Mean - (0.5 * Standard Deviation)
If anyone can tell me a free online source when I can get at least two of the above three for a listed stock or ETF, I would be grateful (as it will help me tailor some upcoming calibrations even more accurately). Note, by Geometric/Arithmetic Mean above, the intent is Geometric/Arithmetic Mean Total Return.
Concept B (p201): There are various implied cash weightings (derived from suggested risk weightings) for various asset classes and degrees of portfolio complexity (e.g. do you include alternative investments as well as equities and bonds). However, in its simplest form, which mine approximates (i.e. global and diverse, but only equities and bonds), if you
- Want to optimise Geometric Mean, your split should be 78%/22%
Want to optimise your Sharpe Ratio, your split should be 29%/71%
Want a suggested compromise suited for many, your split might be 48%/52%
This forum contains many members advocating 100% equities. I'll leave you to conduct your own analysis (or read the book) of why Carver asserts that any more than about 80% increases only risk but not (geometric mean total) return*, but to me the basis is fairly self-evident - start by considering the effect of periodic large drops in equities (and what a 20% bond holding going into those might allow) even if they later fully recover and more.
Concept C (p283): Internal bond weightings for UK investors. In short, he suggests 75%/25% split between developed emerging markets. Within developed, he suggests 90%/10% normal/inflation linked. With "normal", the most relevant to me, he suggests 40%/30%/30% government/corporate/high yield risk weighting, which critically translates to circa 44.4%/30.7%/25.0% cash weightings.
So, what does this all mean for me?
My instinctive equity/bond ratios appear to have been reasonable - the kids were very close to the optimal for return. I'm probably now going to calibrate an age based reduction from optimal geometric mean to then compromise ratio, assume 100 years, (i.e. at birth, investments would have been 78% equities and if and when we turn 100, investments would remain 48% equities). If I can get better risk (volatility) information as mentioned earlier, I might tweak the VWRL/VWRP vs MWY/ATST/FCIT ratios, most likely leading to a slightly higher ratio from the former group.
The current active vs passive bond ratios (risk) materially over-weights the actives, so I need to correct that. This is something that I knew in my heart, but it's good to have positive statistical confirmation.
There's a lot more in the book, but I hope the above is a useful summary. If you buy from Harriman House, you get the e-book free as well. However, you'll pay rack rate by default - so wait until one of the sales days (I bought it recently on World Book Day for 25% off and free delivery).
Regards, Newroad
* If you have another preference, that's fine and down to you - and out of the scope of this discussion.