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My favorite discoveries on this board are RPHYX and RSIVX.
If your goal for a certain % of your portfolio was absolute returns with almost zero probability of loss, how would you construct that portfolio? Something like RPHYX will give u 2.5-4% in just about any market not named 2008 or 1929.
Your question: "If your goal for a certain % of your portfolio was absolute returns with almost zero probability of loss?
Probably not on many portfolio construction lists today; surprise, surprise:
TIP.....
TIP is +2.1% YTD. Over the years there are some managed TIPs fund that have performed better, but TIP (e.r. = .2%) and other etf relatives are a cheap way to participate.
TIP annual return average for the past 5 years to this date = 5.45%.
Note: all inflation bond active managed funds are not twins, depending upon where the duration is placed. Hopefully, managed funds have all pieces of the pie. --- LTPZ = 5.5% YTD --- STPZ = .4% YTD
'Course, some investment grade/gov't. bond(s) action is reflected with the retreat from the equity markets globally; and perhaps pension funds and related stocking up on bonds for their long term portfolios. Perhaps the current run won't last long.
How about noncorrelated assets, properly allocated across a matrix of over bought and oversold assets classes and martket conditions?
The best way to squizze rewards out of your portfolio is to take profits often...I use a 10% trigger. The best way to diversify risk in your portfolio is to spread it across noncorrelated assets classes. Profits from one assets class can also be used to reallocate into underperforming assets.
For me, risk is just another way of saying "opportunity", so maybe another way to pose your question might be:
"How can I create a set of opportunities (risks) for a successful (rewards) portfolio?"
Here's a charts of 2 noncorrelated assets which I find harder and harder to find these days, EDV (LT Treasuries) and VTI (Total US Market). I Included a fund like VBINX in this chart to help determine which ETF is out performing.
If your goal for a certain % of your portfolio was absolute returns with almost zero probability of loss, how would you construct that portfolio?
Treasuries held to maturity is about the only asset class that can provide a return without capitol loss assuming political stability of the US.
What is the goal of such a portfolio? Capital preservation? Lower volatility? There are extremely few goals where such a portfolio or part of makes sense. And then there is the issue of how much to allocate. If you allocate just a tiny bit, it makes no difference relative to cash but OK for indulging in fund collection as a hobby. If you allocate a lot then the portfolio returns would be severely affected. Just trying to understand the goals.
"Almost zero probability of loss" --- I can't imagine where such an asset would exist. Everything has risks. Even bonds issued by sovereign nations are subject to possible default or de facto confiscation through changes in tax laws. (U.S. came close to default only recently.) Perhaps more worrisome, most bonds are subject to loss through diminished purchasing power should the CPI outdistance their coupon rate (normally locked-in). TIPS reduce that risk, but do not completely negate it.
The danger in your proposition is that many assets can give the illusion of being risk free for very long periods of time. Witness the old cliche that you can't go wrong owning a home or buying real estate. That seemed generally true from the 1950s until 2007. But tell that to those who bought near the top in 2005-2006. Many who bought in Florida 5-10 years ago are likely still "upside-down" (owing more on their mortgage than what their homes are worth). Stocks, bonds, precious metals - even cash (or cash-like instruments) at seemingly competitive rates - can all provide a false illusion of safety and stability for decade-long periods. Hence, I see a danger in perceiving any investment as risk free.
A good income-oriented highly diversified hybrid fund from a good fund house might come close to what you seek. It would have exposure to interest bearing bonds of varying maturities, limited exposure to dividend-paying equities, natural resource exposure (through commodities, producers, or debt instruments) and also some exposure to foreign currencies for protection against dollar devaluation. That's pretty close to a sleep-well fund that might possibly return 4-6% yearly (under current conditions) with minimal risk of loss and keep you somewhat ahead of inflation over the years.
if you get 8% in the stock market (including dividends) and you can find investments that can make you 3-6% with way less risk, with the low risk/cash part of the portfolio it makes a lot of sense.
Reply to @MikeM: True. That is a good case assuming the fund or portfolio can deliver consistently.
A bond fund or a fixed income dominated portfolio is more likely to do that then any equity based fund or alternative strategies fund. The latter have some very strange melt down modes to depend on it for income.
Comments
Your question: "If your goal for a certain % of your portfolio was absolute returns with almost zero probability of loss?
Probably not on many portfolio construction lists today; surprise, surprise:
TIP.....
TIP is +2.1% YTD. Over the years there are some managed TIPs fund that have performed better, but TIP (e.r. = .2%) and other etf relatives are a cheap way to participate.
TIP annual return average for the past 5 years to this date = 5.45%.
Note: all inflation bond active managed funds are not twins, depending upon where the duration is placed. Hopefully, managed funds have all pieces of the pie.
--- LTPZ = 5.5% YTD
--- STPZ = .4% YTD
'Course, some investment grade/gov't. bond(s) action is reflected with the retreat from the equity markets globally; and perhaps pension funds and related stocking up on bonds for their long term portfolios. Perhaps the current run won't last long.
My inflation adjusted 2 cents worth.
Catch
The best way to squizze rewards out of your portfolio is to take profits often...I use a 10% trigger. The best way to diversify risk in your portfolio is to spread it across noncorrelated assets classes. Profits from one assets class can also be used to reallocate into underperforming assets.
For me, risk is just another way of saying "opportunity", so maybe another way to pose your question might be:
"How can I create a set of opportunities (risks) for a successful (rewards) portfolio?"
Here's a charts of 2 noncorrelated assets which I find harder and harder to find these days, EDV (LT Treasuries) and VTI (Total US Market). I Included a fund like VBINX in this chart to help determine which ETF is out performing.
What is the goal of such a portfolio? Capital preservation? Lower volatility? There are extremely few goals where such a portfolio or part of makes sense. And then there is the issue of how much to allocate. If you allocate just a tiny bit, it makes no difference relative to cash but OK for indulging in fund collection as a hobby. If you allocate a lot then the portfolio returns would be severely affected. Just trying to understand the goals.
The danger in your proposition is that many assets can give the illusion of being risk free for very long periods of time. Witness the old cliche that you can't go wrong owning a home or buying real estate. That seemed generally true from the 1950s until 2007. But tell that to those who bought near the top in 2005-2006. Many who bought in Florida 5-10 years ago are likely still "upside-down" (owing more on their mortgage than what their homes are worth). Stocks, bonds, precious metals - even cash (or cash-like instruments) at seemingly competitive rates - can all provide a false illusion of safety and stability for decade-long periods. Hence, I see a danger in perceiving any investment as risk free.
A good income-oriented highly diversified hybrid fund from a good fund house might come close to what you seek. It would have exposure to interest bearing bonds of varying maturities, limited exposure to dividend-paying equities, natural resource exposure (through commodities, producers, or debt instruments) and also some exposure to foreign currencies for protection against dollar devaluation. That's pretty close to a sleep-well fund that might possibly return 4-6% yearly (under current conditions) with minimal risk of loss and keep you somewhat ahead of inflation over the years.
let's look back @ SPY and RSIVX in 5 yrs.
A bond fund or a fixed income dominated portfolio is more likely to do that then any equity based fund or alternative strategies fund. The latter have some very strange melt down modes to depend on it for income.