Complex non-US portfolios
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 you to tailor your portfolio, perhaps to specific goals, but at the cost of additional complexity and, if you use individual stocks, more frequent monitoring. Another potential issue with complex portfolios is the "urge to tinker". For example, it can be tempting to change your asset allocation too frequently.
One popular addition to simple portfolios for some investors is dividend growth investing. Other investors may diversify into further asset classes, such as emerging market funds or ETFs, real estate investment trusts (REITs), high yield bonds, inflation-indexed bonds, or gold and commodities.
Adding components
Fixed income
In fixed income, you might 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
Equities
In equities, possible additions include:
- Real estate investment trusts (REITs), which are often presented as portfolio diversifiers, see below
- Preferred shares, which are taxed-advantaged in non-registered accounts relative to bonds
REITs
Some investors seek to add diversification to their portfolios by including property as an asset class. You can use REITs for this. For more, see: Real estate investment trusts for non-US investors.
Other
If you wish to hold gold, you can use coins or ETFs. ETFs are probably the simplest way to hold other commodities.
Slicing and dicing
Slice and dice is dividing your allocations within a given asset class, such as stocks. Adding additional asset classes to a portfolio (for example bonds, gold, and commodities) is asset allocation, but it is not slicing and dicing.
Fixed income
In fixed income, nominal investment-grade bonds are:
- Short term, medium term, and long term
- Government vs. corporate bonds
- Within government bonds: country vs regional vs municipal
Equities
In equities, the 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
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 alters the allocation across asset classes, whereas slice and dice only breaks an asset class into smaller pieces.
Tilting means a preference for some asset classes or for some factor loading that is different from the total market. Multi-factor investing uses this approach.
Individual securities
Fixed income
You can use individual bonds instead of bond funds to better control the income stream, maturities, credit ratings, and so on, of your bond portfolio. In some non-US markets, buying individual bonds can be difficult, and in addition selling individual bonds can be more difficult than for stocks.
Equities
You might try stock picking in the hope of "beating the market", creating more income (obtaining a higher dividend yield), or diversifying between sectors in a different way than the appropriate index does. Dividend growth investing is one popular stock picking strategy.
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."
— William Bernstein
See also
- Lazy Portfolios
- Slice and Dice
- Value tilting - stock
- Real estate investment trusts for non-US investors
External links
- Finiki
- Coffee House Investor
- Cowards Portfolio
- Vanguard Target Retirement Funds (UK)
- Vanguard Stocks and shares ISA
- Vanguard Life Strategy Products
- iShares Product List