Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Engineer Your
Portfolio with ETFs
By the end of November 2011, there
 were more than 1,400 different
  exchange traded funds (ETFs)
        accounting for o...
You’ve heard a lot about ETFs. They’re an easy and
convenient way to “diversify your portfolio,” but how
about the real qu...
Harry Markowitz, PhD
Why not ask a Nobel     Modern Portfolio Theory (1952)
                        Nobel Prize (1990)
Pri...
Harry Markowitz, PhD
                      Modern Portfolio Theory (1952)
                      Nobel Prize (1990)

  I in...
A Quick Lesson in Modern Portfolio Theory

                  Every investment has an expected return
                  and...
A Quick Lesson in Modern Portfolio Theory

                  Every investment has an expected return
                  and...
A Quick Lesson in Modern Portfolio Theory

                  Every investment has an expected return
                  and...
A Quick Lesson in Modern Portfolio Theory

                  You can mix investments to get different
                  co...
A Quick Lesson in Modern Portfolio Theory

                  There are an unlimited number of
                  investment...
A Quick Lesson in Modern Portfolio Theory

                  There is a theoretical maximum expected
                  ret...
A Quick Lesson in Modern Portfolio Theory

                  The best combinations of investments form
                  a...
A Quick Lesson in Modern Portfolio Theory

                  The only way to get to the efficient frontier
               ...
Modern Portfolio Theory
If you synthesize the recommendations of experts and look at the
practices of the best institution...
Modern Portfolio Theory
Expected Return




                                                                              ...
Modern Portfolio Theory
Expected Return




                                                                              ...
Modern Portfolio Theory
Expected Return




                                                                              ...
To find your risk tolerance, you need to measure your
  subjective willingness and your objective ability to take risk.

 ...
Subjective Risk Tolerance


Take a risk questionnaire to identify
your comfort with the risks of
investing.



Note: Most ...
Objective Risk Tolerance


Use a financial planning tool to
ensure you’ll have more investment
income than spending needs ...
Your Overall Risk Tolerance Score is the minimum of your
      subjective and objective risk scores. Using this score to h...
Plot Your Risk Level
Expected Return




                                                                                 ...
Back to choosing ETFs…

We need to pick ETFs that represent each of the 6 core
asset classes and buy them in percentages d...
Selecting ETFs


                 Filtering the universe of all ETFs only
                 to candidates that represent th...
Selecting ETFs
                   Three Important Characteristics

                   Low Costs – favorable expenses

   ...
That’s how we got to our current recommendations:
( which you can also find at www.wealthfront.com )




                 ...
Risk Level 5
	
  
Harry Markowitz, PhD
               Modern Portfolio Theory (1952)
               Nobel Prize (1990)




               Da...
Rebalancing
The value of your investments will naturally drift over time as the
market moves.

                           ...
Rebalancing
The new mix of asset classes will have a different risk and
expected return.

                                ...
Rebalancing
Rebalance your portfolio to get back to your desired risk level with
the highest expected return.
Expected Ret...
Rebalancing   Time-based or Threshold-based

              You can rebalance based on a variety of
              criteria....
Rebalancing Considerations


                        Keep in mind…

                          Tax implications

         ...
To Recap:

  Construct the Efficient Frontier

      Allocate to the six core asset classes, select low-cost ETFs, and
  ...
Want us to do this for you?


Visit         .com to get started.
Disclosures
Nothing in this presentation should be construed as a solicitation or offer, or
recommendation, to buy or sell...
You’ve finished this document.
Download and read it offline.
Upcoming SlideShare
Wealthfront Equity Plan
Next
Upcoming SlideShare
Wealthfront Equity Plan
Next
Download to read offline and view in fullscreen.

68

Share

Engineer Your Portfolio with ETFs

Download to read offline

ETFs are the low-cost way to invest. But how do you know which ones to buy and in what proportions? Here's a guide.

Related Books

Free with a 30 day trial from Scribd

See all

Related Audiobooks

Free with a 30 day trial from Scribd

See all

Engineer Your Portfolio with ETFs

  1. Engineer Your Portfolio with ETFs
  2. By the end of November 2011, there were more than 1,400 different exchange traded funds (ETFs) accounting for over $1 trillion dollars invested.
  3. You’ve heard a lot about ETFs. They’re an easy and convenient way to “diversify your portfolio,” but how about the real questions… Which should I buy and how much?
  4. Harry Markowitz, PhD Why not ask a Nobel Modern Portfolio Theory (1952) Nobel Prize (1990) Prize winner? David Swensen, PhD … and the Chief Yale Endowment CIO (1985-present) Unconventional Success (2005) Investment Officer at Pioneering Portfolio Management (2009) Yale University?
  5. Harry Markowitz, PhD Modern Portfolio Theory (1952) Nobel Prize (1990) I invented it. Use Modern Portfolio Theory David Swensen, PhD Yale Endowment CIO (1985-present) Unconventional Success (2005) I wrote the Pioneering Portfolio Management (2009) book on it.
  6. A Quick Lesson in Modern Portfolio Theory Every investment has an expected return and some level of risk. Expected Return Risk
  7. A Quick Lesson in Modern Portfolio Theory Every investment has an expected return and some level of risk. Expected Return Stocks   Risk
  8. A Quick Lesson in Modern Portfolio Theory Every investment has an expected return and some level of risk. Expected Return Stocks   Bonds   Risk
  9. A Quick Lesson in Modern Portfolio Theory You can mix investments to get different combinations of expected return vs. risk. Expected Return Stocks   A  mix  of  Stocks   &  Bonds   Bonds   Risk
  10. A Quick Lesson in Modern Portfolio Theory There are an unlimited number of investments and combinations. Expected Return Risk
  11. A Quick Lesson in Modern Portfolio Theory There is a theoretical maximum expected return for each level of risk. Expected Return Risk
  12. A Quick Lesson in Modern Portfolio Theory The best combinations of investments form a curve known as the Efficient Frontier. Expected Return Risk
  13. A Quick Lesson in Modern Portfolio Theory The only way to get to the efficient frontier is by mixing uncorrelated asset classes. Expected Return Risk
  14. Modern Portfolio Theory If you synthesize the recommendations of experts and look at the practices of the best institutions, you come up with 6 core asset classes that are publicly accessible.   US Stocks   Natural Resources   Foreign Developed   Real Estate   Emerging Markets   Bonds Why not more? More asset classes don’t materially add more expected return with less risk for the effort. Additionally, they may not be uncorrelated or may have too much volatility.
  15. Modern Portfolio Theory Expected Return Risk Using Mean-Variance Optimization with the 6 asset classes allows you to find the optimal portfolio for each level of risk.
  16. Modern Portfolio Theory Expected Return Risk Bonds   US  Stock   Emerging  Markets   Foreign  Developed   Real  Estate   Natural  Resources   100% 90% 80% 70% 60% Which gives us an asset allocation for 50% 40% each point along the Efficient Frontier. 30% 20% 10% 0%
  17. Modern Portfolio Theory Expected Return ? Risk Bonds   US  Stock   Emerging  Markets   Foreign  Developed   Real  Estate   Natural  Resources   100% 90% 80% 70% Now, find the 60% 50% portfolio that has 40% the right amount of 30% 20% risk for you. 10% 0% 0 1 2 3 4 5 6 7 8 9 10 Less More Overall Risk
  18. To find your risk tolerance, you need to measure your subjective willingness and your objective ability to take risk. Using tools on the internet, map your risk tolerance to any scale you choose. Also, lower your score if you find yourself providing answers that conflict with each other. Subjective Score 0 1 2 3 4 5 6 7 8 9 10 Less Risk More Risk Objective Score 0 1 2 3 4 5 6 7 8 9 10 Less Risk More Risk
  19. Subjective Risk Tolerance Take a risk questionnaire to identify your comfort with the risks of investing. Note: Most questionnaires will likely end with a portfolio recommendation with a different set of asset classes than we recommend. Your real goal is to figure out where in the risk spectrum you fall so you can map it back to the Efficient Frontier. Subjective Score 0 1 2 3 4 5 6 7 8 9 10 Less Risk More Risk Examples https://personal.vanguard.com/us/funds/tools/recommendation http://www.schwabmoneywise.com/public/moneywise/calculators_tools/questionnaire
  20. Objective Risk Tolerance Use a financial planning tool to ensure you’ll have more investment income than spending needs when you retire. The lower your investment income relative to your spending needs, the less risk you can take. Objective Score 0 1 2 3 4 5 6 7 8 9 10 Less Risk More Risk Example http://www.smartmoney.com/retirement/planner/
  21. Your Overall Risk Tolerance Score is the minimum of your subjective and objective risk scores. Using this score to help design your portfolio will help you avoid risk that you are unwilling or unable to take. Subjective Score 0 1 2 3 4 5 6 7 8 9 10 Less Risk More Risk Objective Score 0 1 2 3 4 5 6 7 8 9 10 Less Risk More Risk Overall Score 0 1 2 3 4 5 6 7 8 9 10 Less Risk More Risk
  22. Plot Your Risk Level Expected Return You are here. Risk Bonds   US  Stock   Emerging  Markets   Foreign  Developed   Real  Estate   Natural  Resources   100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 1 2 3 4 5 6 7 8 9 10 Less More Overall Risk
  23. Back to choosing ETFs… We need to pick ETFs that represent each of the 6 core asset classes and buy them in percentages dictated by your risk tolerance. Now which ETFs should I buy?
  24. Selecting ETFs Filtering the universe of all ETFs only to candidates that represent the core asset classes gives you about 100 to choose from. The rest will be ranked by three important characteristics.
  25. Selecting ETFs Three Important Characteristics   Low Costs – favorable expenses   Minimal Tracking Error – matches the underlying index closely   Market Liquidity – can be traded quickly and easily Many investors look at expenses but neglect to look at tracking error and liquidity.
  26. That’s how we got to our current recommendations: ( which you can also find at www.wealthfront.com )   US Stocks – VTI   Foreign Stocks – VEA   Emerging Markets – VWO   Real Estate – VNQ   Natural Resources – DJP   Bonds – BND Wealthfront regularly surveys the ETF landscape and ranks ETFs in each asset class using the criteria described in the prior slide. Vanguard ETFs often come out on top. Wealthfront receives no compensation for recommending Vanguard products or any other ETFs.
  27. Risk Level 5  
  28. Harry Markowitz, PhD Modern Portfolio Theory (1952) Nobel Prize (1990) David Swensen, PhD Yale Endowment CIO (1985-present) Now you Unconventional Success (2005) Pioneering Portfolio Management (2009) have to maintain it!
  29. Rebalancing The value of your investments will naturally drift over time as the market moves. 2012 Expected Return 2011 Example •  Green increases in value. •  Yellow decreases in value. •  Blue stays the same. Risk
  30. Rebalancing The new mix of asset classes will have a different risk and expected return. 2012 Expected Return 2011 Additional Risk Risk
  31. Rebalancing Rebalance your portfolio to get back to your desired risk level with the highest expected return. Expected Return Rebalance Risk
  32. Rebalancing Time-based or Threshold-based You can rebalance based on a variety of criteria. Some choose to rebalance after a predefined duration. We recommend rebalancing whenever any asset class deviates from a portfolio’s allocation by more than a certain percentage, depending on the type of account.   For tax-deferred accounts: 4-6%   For taxable account: 6-10% … but with the following caveats
  33. Rebalancing Considerations Keep in mind…   Tax implications   Impact of commissions   Changes in your risk profile Most individual investors don’t rebalance because they struggle with these issues.
  34. To Recap:   Construct the Efficient Frontier Allocate to the six core asset classes, select low-cost ETFs, and allocate optimally   Place your portfolio on the Efficient Frontier Understand your subjective willingness and objective ability to take risk and find the portfolio that’s right for you   Keep your portfolio on the Efficient Frontier Rebalance your portfolio weighing taxes, commissions and changes in your risk profile
  35. Want us to do this for you? Visit .com to get started.
  36. Disclosures Nothing in this presentation should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Photographs do not depict actual Wealthfront clients. Financial advisory services are only provided to investors who become Wealthfront clients pursuant to a written agreement, which investors are urged to read and carefully consider in determining whether such agreement is suitable for their individual facts and circumstances. Past performance is no guarantee of future results, and any hypothetical returns, expected returns, or probability projections may not reflect actual future performance. Investors should review Wealthfront’s website for additional information about advisory services.
  • IvanPerkovic1

    Apr. 2, 2019
  • ssuserc416e2

    May. 1, 2018
  • AaronBates15

    Jan. 8, 2018
  • StefanPopa3

    Sep. 12, 2017
  • ritu2102

    Aug. 6, 2017
  • ViolaPoppe

    Jun. 12, 2017
  • ctcome

    Apr. 12, 2017
  • kjam43

    Jan. 15, 2017
  • YaseenAlmosawy

    Jan. 7, 2017
  • MarioAriasGallego

    Nov. 5, 2016
  • coniglra

    Sep. 26, 2016
  • ShiguangWang

    Aug. 25, 2016
  • choeungjin

    Aug. 25, 2016
  • DavidRFeig

    Jun. 5, 2016
  • sangslee3

    Apr. 20, 2016
  • KetanPatel106

    Apr. 16, 2016
  • KaushalVyas7

    Apr. 13, 2016
  • philherrera

    Feb. 20, 2016
  • gustaf

    Feb. 16, 2016
  • IanDunlap1

    Jan. 13, 2016

ETFs are the low-cost way to invest. But how do you know which ones to buy and in what proportions? Here's a guide.

Views

Total views

156,827

On Slideshare

0

From embeds

0

Number of embeds

6,890

Actions

Downloads

850

Shares

0

Comments

0

Likes

68

×