Complex non-US portfolios
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|This page contains details specific to non-US investors. It does not apply to United States (US) investors, or to US citizens and US permanent residents living outside the US.|
More sophisticated investors may wish to move beyond simple three, four or five-component portfolios and either include additional components; slice and dice existing components; or purchase individual stocks and bonds. The resulting portfolios may contain numerous asset classes and subclasses, and can be very individual in nature. This allows tailoring to meet the goals of an individual investor, but at the cost of additional complexity and, if security selection is performed, more frequent monitoring. Another potential issue with complex portfolios is the "urge to tinker": it can be tempting to change one's asset allocation too frequently, etc.
One popular addition to simple portfolios for some investors is dividend growth investing. Other investors may seek to diversify into further asset classes such as emerging market funds or ETFs, real estate investment trusts (REITs), high yield bonds, inflation-indexed bonds, or even gold or commodities.
In fixed income, one could wish to include:
- Inflation-indexed bonds, to protect against unexpected inflation
- High yield bonds, which promise additional returns but have equity-like risks
- Currency-hedged foreign bonds from developed or emerging markets, to provide additional diversification in bond-heavy portfolios
In equities, possible additions include:
- Real estate investment trusts (REITs), which are often presented as portfolios diversifiers
- Preferred shares, which are taxed-advantaged in non-registered accounts relative to bonds
An investor might also consider:
- Gold, which can be held as coins or ETFs
- Other commodities
Slicing and dicing
Slicing and dicing refers to:
...dividing allocations within a given unitary asset class, such as stocks. Adding additional asset classes to a portfolio (bonds, gold, commodities) is asset allocation, not slicing and dicing.
In fixed income, nominal investment-grade bonds can be decomposed into:
- Short term, medium term, and long term
- Government vs. corporate bonds
- Within government bonds: country vs regional vs municipal
In equities, possibilities include:
- Separating global equities into US, EAFE and emerging market equities, if not already done
- Tilting the portfolio toward value stocks and/or "small-cap" stocks
Tilting is sometimes associated with slice and dice, as both approaches overweight small cap and/or value stocks compared to the total stock market. However, tilting and slice and dice are completely different concepts.
Tilting does require allocation according to a slice and dice model. However, tilting addresses the question of what the allocation across asset classes is, while slice and dice only specifies that the asset classes are managed explicitly and are fixed.
Tilting means a preference for some asset classes or for some factor loading that is different from the total market of whatever asset population one is working in. Multi-factor (multi-factor) investing uses this approach.
Individual bonds can be purchased instead of bond funds to better control the income stream, maturities, credit ratings, etc. in a bond portfolio. In some non-US markets the purchase of individual bonds can be difficult and in addition the disposal of bonds can be more difficult than for ordinary stocks.
Stock picking can be performed in the hope of "beating the market", creating more income (obtaining a higher dividend yield), and/or diversifying between sectors in a different way than the appropriate index does. One popular stock picking strategy is dividend growth investing.
Financial theorist and author William Bernstein provides some insight into the scale of stocks needed for diversification.
“If you think that you can do an adequate job of minimising portfolio risk with 15 or 30 stocks, then you are imperilling your financial future and the future of those who depend on you,” he writes. Even 200 stocks are not enough; only by owning the whole market can investors “truly minimise the risks of stock ownership”.
- Coffee House Investor
- Cowards Portfolio
- Vanguard Target Retirement Funds (UK)
- Vanguard Stocks and shares ISA
- Vanguard Life Strategy Products
- iShares Product List