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Seeking Real Portfolio Diversification?

White paper — Diver­si­fy­ing with the Defined Risk Strat­e­gy

(full ver­sion)

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Swan Research — Innovative Thought Leadership

As investors seek port­fo­lio diver­si­fi­ca­tion in an era of index invest­ing, a num­ber of indices are often con­sid­ered when con­sid­er­ing expo­sure dif­fer­ent asset class­es. The first ques­tion is which indices or asset class­es are appro­pri­ate. But a deep­er ques­tion lingers, are the indices diver­si­fied them­selves?

The Dow Jones Indus­tri­al 30 aver­age, with its numer­ous short­com­ings is used less and less as a broad proxy for the over­all mar­ket. The­se days the go-to bench­mark for stock mar­ket per­for­mance is the S&P 500 index. But how much of “the stock mar­ket” does the S&P 500 real­ly cov­er?

The S&P 500 is a mar­ket-cap­i­tal­iza­tion weight­ed index of 500 U.S. based com­pa­nies, select­ed by a com­mit­tee to broad­ly rep­re­sent the U.S. econ­o­my. Since the index is cap-weight­ed there is def­i­nite­ly a large-cap bias to it. The top 10 names out of 500 make up 17.61% and the top 25 names equate to 32.53% (Source: Morn­ingstar Direct.  As of 12/29/2015). By design, the S&P 500 does not include small cap com­pa­nies or non-U.S. based firms.

Does that mat­ter?

Cer­tain­ly from a port­fo­lio con­struc­tion stand­point it seems log­i­cal that an investor would desire to have as many “tools in the tool­box” as pos­si­ble. Inten­tion­al­ly lim­it­ing one’s oppor­tu­ni­ty set to only large cap U.S. invest­ments seems nar­row-mind­ed and self-defeat­ing.

The next ques­tion becomes, how best to invest across dif­fer­ent asset class­es and indices?

With that in mind, Swan Glob­al Invest­ments is bring­ing the Defined Risk Strat­e­gy to small cap and inter­na­tion­al stocks.

Expanding the Tool Set — Portfolio Diversification Across Multiple Asset Classes

Expanding the Opportunity Set - A Unique Strategy to Invest Across Multiple Asset Classes | Swan Blog

Swan Glob­al Invest­ments has been man­ag­ing the Defined Risk Strat­e­gy (“DRS”) for over 18 years. With the DRS, Swan believes it has an excel­lent invest­ment solu­tion that is trans­par­ent, repeat­able, and scal­able.This solu­tion seeks to active­ly address the biggest threat investors of all types have in meet­ing their goals, name­ly, the dev­as­tat­ing impact that bear mar­ket sell-offs have on an investor’s wealth. Tra­di­tion­al­ly applied to U.S. Large Cap stocks, the DRS suc­cess­ful­ly nav­i­gat­ed two major bear mar­kets and numer­ous short-term cor­rec­tions since 1997. 

In order to provide a more com­plete solu­tion, Swan is look­ing to apply the ben­e­fits of the DRS to a wide range of addi­tion­al assets.

This paper explores that ini­tia­tive. It starts with a review of the exist­ing DRS’s goals, track record, and method­ol­o­gy. Once estab­lished, both the log­ic of apply­ing the DRS to addi­tion­al assets and the prac­ti­cal impli­ca­tions of such an effort are dis­cussed.

 

 

 

Sug­gest­ed Con­tent:

Blog Post — Expand­ing the Oppor­tu­ni­ty Set