Nov 29
Searching for “Holy Grail” Portfolio
What does a “perfect” portfolio look like? Yesterday, I spent a number of hours searching for a combination of ETFs and stocks that would yield a portfolio of modest goals. A modest portfolio would have a projected annual return of 10%, a standard deviation (SD) no greater than 12%, and a diversification metric (DM) greater than 50%. It was not long before I was raising the SD to 15% and lowering the DM into the 40% range. A reasonable question to ask is – why is it so difficult to come up with such a portfolio? The simple answer is, a deep and volatile bear market. The database for coming up with the projected results pivots off the last three years of information and this was an erratic market giving rise to higher SD values. With the current market in the tank, despite the rise this week, projected returns are not all that high.
Suppose we begin with a basic portfolio of 60% equities and 40% bonds. What return, risk, and diversification do we see from such a basic portfolio? Take a look at this “movie” and then see what happens when additional ETFs are added. You will begin to appreciate the problems that arise when trying to construct a portfolio from scratch. Improved portfolios are available via Premium content.
Lowell Herr
Photograph: Elan Gallery – West Linn, OR
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