How a Second Grader Beats Wall Street by Allan S. Roth

Author:Allan S. Roth
Language: eng
Format: epub
Publisher: Wiley
Published: 2011-01-10T16:00:00+00:00

The Sophisticated Portfolio I Couldn’t Convince Kevin to Buy

With this lesson, I drastically complicated matters by adding two new funds to the three-fund portfolio. I admit that this is a 67 percent increase in the number of funds, but it still presents a relatively simple portfolio (Exhibit 6.6). I also admit that it’s not for everyone.

Exhibit 6.6 Five-Fund Portfolio

Note that this portfolio has only five holdings for the high-risk investor. As mentioned earlier, I am not recommending precious metals stock funds for anyone other than those who are willing to accept a high level of risk and have the fortitude to hold this security for at least a couple of decades. Thus, only the high-risk investor will have five funds while the rest can only have four.

Is the five-fund portfolio really better than Kevin’s? There are a few answers to this question.

My answer is that it is theoretically superior because the majority of real estate and precious metals funds are not represented in the public equity markets. Overweighting these two asset classes versus the stock market actually produces a portfolio more representative of total global wealth. Because these two asset classes have low correlations to the U.S. stock market, we end up with a portfolio with a slightly higher risk-adjusted return. Remember that investing takes on higher risk only for the expectation of higher returns. Risk without higher returns is merely speculation or gambling.

That’s one answer, but how have the two portfolios actually performed? There is some evidence that, over this time period, the REIT and the Precious Metals fund did help performance. (Exhibit 6.7)

Exhibit 6.7 Annual Returns of the Second-Grader Portfolio

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.