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WinningInvestmentStrategiesAGlobalVision
JavierEstradaWinter,2014
1.ALookBack• Bringingitalltogether
2.ALookAhead• Somefinalthoughts
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
AssetClasses Itisusefultothinkofthreemajorassetclasses Stocks
• Essentialinalmostallportfolios/Provideupside• Itmaybebesttoinvestindiversifiedgroups ofstocks
Bonds• Essentialinalmostallportfolios/Provideprotection• Riskandreturnarerelativelyeasytoassess• Canalsobeinvestedindiversifiedgroups
Alternatives(Others)• Donotusethemforshort‐termspeculativebets• Usethemfortheirdiversificationbenefits
Thestrategicdecisiondeterminesmostoftheportfolio’sriskandreturn
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinancialProducts Importantdistinctions Absolute performance(Nobenchmark)
• Activemanagement(Absolutereturnfunds/HFs)• Highercoststhanrelativeperformance• Theirbenefitsforinvestorsarefarfromclear
Relative performance(Thereisabenchmark)• Activemanagement(Mutualfunds) Itisfarfromclearthattheyreachtheirgoalconsistently
• Passivemanagement(Indexfunds/ETFs) Largelyachievetheirgoal Lowercoststhanactivemanagement
Itiscritical tothinkabout(theabsolute/relativeperformanceand)theactive/passivemanagementproportionsintheportfolio
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
Essential/UnderratedIssuesCosts Themostunderratedvariableininvesting Theycanbevisibleor‘hidden’ Determineobserved andexpected return Lowercostsaretiedtohigherreturnandlowerrisk Shouldbeatopcriteriawhenchoosingfunds
Theholdingperiod Determinestheriskoftheassetsintheportfolio Allelseequal,thelongertheholdingperiod,themorelikelyisthatahigherexposuretoriskwillturnintoahigherreturn Allelseequal,thelongertheholdingperiod,thehighershouldbetheexposuretorisk
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
Complementary/Important IssuesAlphaandbeta Alphaiswhatactivemanagersshoulddeliver Alphaiselusiveandexpensive,betaischeap Payverylittleforbeta,onlypayforalpha
Thefallacyofgrowth Growthisonlypartoftheinvestmentstory ValuationplaysacriticalroleinthisstoryHigh(low)growthmayresultinabad(good)investment(Focusonhowmuchyoupayforgrowth)
Twowell‐known(aggressive)tilts Thesizeandvalueeffectsarepervasive Sizeandvaluetiltscanbeusedtoincreaseaportfolio’sexpectedreturn(andrisk)
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
PortfolioChoice&RebalancingFocusontwo/threemajorassetclasses Theallocationtostocksandbondsiscritical Liquiditydecisionsare‘exogenous’
KeyvariablesHoldingperiodandrisktolerance
Tools Assessyourabilitytotoleratelosses Assetallocationtable Performanceofsomebenchmarkportfolios Onlinequestionnaires
Rebalancing A waytocontroltherisk oftheportfolio Rebalancingonceortwiceayearwitha5%tolerancebandisenough
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
ReferencePortfoliosSomewell‐known,easy‐to‐implementportfolios Discussionofobservedperformance Nospecificrecommendationtoinvestinthem
Why,then? Toconsiderpossible,easy‐to‐implementportfolios Toraisetheissueofwhether that(observedandexpected)performanceisappropriateforyou Allmodelportfoliosarenotonlyeasytoimplementbutalsohavelowcosts• Fees:TheycanbeimplementedwithETFs• Time:Annualrebalancing
Q:Doesmyportfoliohave tobe‘complicated’?Ifso,why?Howisitbetterthanasimple(r)portfolio?
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
BehavioralInsightsThebottomlineWemakemistakesbothinlifeandwheninvesting Thosemistakescanbeidentified(Psychology) Thenegativeconsequencesofthosemistakescanbepredicted(Finance) Strategiescanbedevisedtoovercomethenegativeimpactonperformanceofthosemistakes
Inshort Knowthatyouarenotwiredtobeagoodinvestor Knowthatyoucan(andwill)makemistakes Putyourselfonaleash!
Andremember,pickupaBehavioralFinancebooktolearnmoreaboutthisissue
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts
Managingyour savingsrequires…
commonsense
andeven‘folk wisdom’
Setrealisticgoals
Observedeviationsandcorrect
Bepatient Bedisciplined
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts– WarrenBuffett
“If they’re not going to be an activeinvestor, and very few should try that,then they should just stay with indexfunds. Any low-cost index fund. Andthey should buy it over time. They’renot going to be able to pick the right
price and the right time.”
(Fortune,2008)
What advicewouldyougivetoindividual investors?
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts– WarrenBuffett
“By periodically investing in an index fund … the know-nothing investor can actually outperform most investment professionals.
Paradoxically, when ‘dumb’ money acknowledges its limitations, it
ceases to be dumb.”
(LettertoShareholders,1993)
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts
Professionalathletes…
havetwocritical lessons forinvestors
Theroadtosuccesscanbeprettybumpy,prettyoften,andforaprettylongtime
Losingisaninevitable partofinvesting
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts
The‘sad truths’offinancialmarkets
(1) Thehighertherequired return,thehighershouldbetheexposuretorisk
(2) Thehighertheexposuretorisk,the longershouldbetheholdingperiod
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts– CarlRichards
“When it comes to investing, risk and reward are related. It’s as close as we get to a
fundamental law in finance.If you want or need a greater expected return, you’ll have to
accept more risk.”
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts
Implications(More‘sad truths’)
(1) Thehighertheexposuretorisk,themorepatience theinvestorshouldhave
(2) Thehighertheexposuretorisk,themorediscipline theinvestor shouldhave
Thinkhowyouseriously gethealthyandingoodshape
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts– CarlRichards
“We often resist simple solutions because they require us to change our behavior. And so we
spend $40 billion a year on weight-loss programs and products rather than take the
simple, do-it-yourself approach: consume fewer calories, burn more calories with
exercise, or do both. We'd rather look for the magic bullet: something to save us from the day-to-day grind of simply doing the work
that needs doing.”
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts
AChecklist
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts
The8EssentialSteps
1. Defineyourgoal
2. Determineyourholdingperiod
3. Assessyourrisktolerance
4. Chooseyourassetallocation
5. Targetannualfees
6. Chooseactive/passiveproportions
7. Selectfinancialproducts
8. Forgetuntilperiodicrebalancing
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts– RichardBranson
“There’s really nothing to it. Start as a billionaire and
then buy an airline.”
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts– JohnBogle
“I wish I could assure you that the investment strategy outlined
... is the best strategy ever devised ... I can't promise that. But I can assure you that the number of strategies that are
worse is infinite.”
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
WININVWinter,2014
FinalThoughts
Good Bad
Good
Bad
Outcome
Process Deserved
SuccessBadBreak
DumbLuck
PoeticJustice
DeservedSuccess
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JavierEstradaWinter,2014
WinningInvestmentStrategies
Thankyou!