In this whitepaper, we describe a total portfolio solution—a comprehensive approach to building resilient investment portfolios for individual investors.
Modern portfolio theory (MPT) tell us it is possible to construct optimal portfolios offering the maximum possible expected return for a given level of risk. We believe it is important to emphasize that risk is an inherent part of higher reward. You can’t get something for nothing, the saying goes. The price for higher returns is greater risk. However, we believe investors can mitigate risk by sticking to a common-sense discipline.
The Total Portfolio Solution, which is viewed as “Enhanced MPT,” builds on conventional MPT in two significant ways:
• First, we consider an additional asset class: liquid alternatives. Institutional investors have used alternatives for decades to diversify and stabilize their portfolios’ returns. Today, all investors have access to a broad array of diverse alternative investments via exchange traded funds (ETFs) and mutual funds.
• Second, we test strategic asset allocation shifts or “strategic tilts” among the three asset categories by overweighting equities when they are inexpensively priced and underweighting equities when they are expensively priced. Is it wise to commit aggressively to the stock market when it is overvalued by historical standards? Our research shows that when equity valuations are high, risk is highest and subsequent 10-year annualized returns are lowest. Conversely, when equity valuations are low, risk is lowest and the returns that follow are highest.