a very low risk capacity â€” in general, someone with a short investment time horizon and current liquidity needs. An example of this type of investor would be an older retiree. To really simplify the matching of people and portfolios, investors could match their age to the allocation of bonds in an index portfolio. The highest risk capacity Index Portfolio 100 may be suitable for either a very young investor just starting out or someone who fluently speaks riskese, and will not need to liquidate his investments for a minimum of 15 years, has a high net worth and net income, and a strong stomach for volatility. The higher risk Index Portfolios 75 and 100 have a high stock market exposure and a considerable tilt toward small and value indexes. The increased volatility of these higher risk index portfolios had higher returns over the 35-year period from January 1, 1979 to December 31, 2013, relative to the less volatile Index Portfolios 25 and 50. As Figure 11-2 shows, an individual who invested $1 in a lower risk Index Portfolio 25 would have grown his investment to $14.00 in the 35-year period. However that same dollar invested in a higher risk Index Portfolio 100 would have grown to $83. This example provides evidence for the importance of establishing the efficient asset allocation that is best matched to an investorâ€™s risk capacity.
Index Portfolio Implementation Once investors identify the asset allocation that matches their risk capacity, they have a choice to make as to how to best implement that asset allocation. A handful of passively managed fund providers offer asset class indexes, namely Vanguard and
Published on Jun 1, 2015
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...