Two chapters are spent on building a sample portfolio and then examining whether the portfolio is well diversified. Easily digested charts and tables illustrate how to rebalance allocations annually (starting with the conventional asset allocation of 60% stocks/40%bonds).
They then demonstrate “how the portfolio’s performance could have been made more efficient by increasing its diversification across asset classes.’’ But diversification should go beyond number, weighting, asset classes and geographic regions, they say: “We want you to also think about diversification in terms of exposure to the factors that determine the risk and return of a portfolio.’’
Charts, research numbers and hypothetical scenarios follow.
Chapters on alternative investments discuss technology-based lending platforms to consumers, small businesses and student loans; reinsurance (insurance purchased by insurance companies for risk management and to diversify risk); variance risk premiums (an expected payout and a “risk premium to compensate the seller for the uncertain nature of any payout’’); and the AQR Style Premia Alternative Fund.
In the book’s appendices, the authors discuss Monte Carlo simulations; momentum (including profitability, quality and carry factors); real estate investment trusts; how to evaluate index and passive funds, and, they include a list of funds that has been approved by the investment policy committee at Buckingham Strategic Wealth, with the usual disclaimers about risk and investment objectives.
They also include an appendix entitled, “Enough,’’ which the author of the book’s foreword, Stone Ridge Asset Management Founder Ross L. Stevens, recommends be read first. In “Enough,’’ Swedroe and Grogan talk about identifying desires (“nice-to-haves’’) versus needs (“must-haves’’).
Having the knowledge to know that you have enough, they write, could have saved already wealthy investors who have experienced devastating losses.
“Does the name Madoff ring a bell?’’ they ask.
Reducing the Risk of Black Swans, by Larry Swedroe and Kevin Grogan. BAM Alliance Press. 179 pages. $9.99.
Eleanor O’Sullivan is an award-winning journalist who writes for Financial Advisor.