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August 2018 - Park and Elm

Park + Elm Investing Principle #6: Practice Smart Diversification

By | August 28th, 2018|Markets|

PRINCIPLE #6 IS HERE!

PRACTICE SMART DIVERSIFICATION!

Download the rest of our Ebook Here to get all 10 principles!!

It’s not enough to diversify by security. Deeper diversification involves geographic and asset class diversity. Holding a global portfolio helps to lower concentration in individual securities and increase diversification.

Over long periods of time, investors can benefit from consistent exposure in their portfolios to both US and non-US equities. While both asset classes offer the potential to earn positive expected returns in the long term, they may perform quite differently over shorter cycles. The performance of different countries and asset classes will vary over time, and there is no reliable evidence that performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide both diversification benefits as well as potentially higher expected returns.

The global equity market is large and represents a world of investment opportunities. Nearly half of the investment opportunities in global equity markets lie outside the United States. Non US stocks including developed and emerging markets, account for 47% of world market cap and represent more than 10,000 companies in over 40 countries. A portfolio investing solely within the US would not be exposed to the performance of those markets.

However, when Americans talk about the stock market, they’re generally referring to the Standard & Poor’s 500 index or the Dow Jones industrial average. But these indices represent only one part of the available investing universe. The total U.S. stock market makes up only about 53% of global market capitalization. Yet, on average, U.S. mutual fund investors possess a home bias, with a disproportionate amount of their portfolio invested in the United States. If their portfolios were balanced according to world market capitalization, about half of their assets would reside in non-U.S. stocks. This “home bias” leads to less diversification, and as a result, greater volatility with lower returns.

It’s well know that concentrating in one stock exposes you to unnecessary risks, and diversifying can reduce the impact of any one company’s performance on your wealth. From year to year, you never know which markets will outperform, and attempting to identify future winners is a guessing game. Diversification improves the odds of holding the best performers, and by holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

Put very simply, DIVERSIFICATION:

· Helps you capture what global markets offer

· Reduces risks that have no expected return

· May prevent you from missing opportunity

· Smooths out some of the bumps

· Helps take the guesswork out of investing

There is no single perfect portfolio. There are an infinite number of possibilities for allocation based on the needs and risk profile of each individual. The most important question investors should ask… “IS MY PORTFOLIO GLOBALLY DIVERSIFIED?”

Today’s Video: How Much Should You Save For Retirement?

By | August 17th, 2018|Markets|

So many investors search for the answer to this question! This video discusses important factors that can help you meet your goals – like determining your savings rate, monitoring your progress, and making adjustments over time.

CHECK IT OUT!!

Park + Elm Investing Principle #5: Consider the Drivers of Returns

By | August 8th, 2018|Markets|

dimensions

Principle #5 is HERE!

Consider the Drivers of Returns!

Download the rest of our Ebook Here to get all 10 principles!!

Throughout history, many of the greatest advancements in finance have come from Academia. Our investment philosophy has been shaped by decades of research by leading academics. We structure portfolios on the principles that markets are efficient; that returns are determined by asset allocation decisions, and that portfolios can be structured around dimensions of expected returns identified through academic research. It is through our strategic partnership with Dimensional Fund Advisors, a leading global investment firm that has been translating academic research into practical investment solutions since 1981, that we can pursue dimensions of higher expected returns through advanced portfolio design, management, and trading.
Much of what we have learned about expected returns in the equity and fixed income markets can be summarized in these dimensions.

  • Stocks have higher expected returns than bonds – it has been well documented over time that stocks outperform bonds, and that risk = reward
  • Among stocks, expected return differences are largely driven by company size – small companies have higher expected returns than large companies.

 

chart1

  • Relative price – low relative price “value” companies have higher expected returns than high relative price “growth companies.

chart2

  • Profitability – companies with high profitability have higher expected returns than companies with low profitability.

chart3

Since 1981, Dimensional has incorporated rigorous academic research on the capital markets into the design, management, and trading of clients’ portfolios. Some of the major milestones in academic research shown in the chart below have had a profound effect on our investment philosophy.

picture7

 

Our enduring philosophy and deep working relationships with Dimensional and the academic community underpin our approach to investing. Over a long period of time, Academics have been able to identify dimensions of higher expected returns, and with Dimensional, we can structure portfolios around these dimensions in a very cost-effective manner.

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