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BOND
A security, generally issued by a corporation or by a federal or local government entity in order to borrow money. An issuer of a bond promises to pay a specified sum of money on a future date at a fixed rate of interest. Of the three major asset classes of stocks, bonds and cash, bonds generally fall in between stocks and cash in terms of historic risk and return.
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CASH
Highly liquid and very safe investments, such as Treasury Bills and money market funds, that can be easily converted into cash. Cash has the lowest historic risk and return of the three major asset classes of stocks, bonds and cash.
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DIVERSIFICATION
The allocation of investment money among multiple investments to spread risk and ultimately reduce the effects on an investor of a decline in one or a few of the investments.
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RISK
While there are many kinds of investment risk, the risk referred to here is volatility.
Volatility is inherent in any investment vehicle that returns more than cash or short-term bond returns. All charts and reports shown herein use Standard Deviation as the measure of risk. Annualized Standard Deviation is a measure that is effectively the average amount that an investment return in any single year differed or "deviated" (above or below)from its average return over some time period.
The measure "semi-variance" which effectively measures the average deviation below the average return is actually used in optimizing risk allocations.
Higher risk are historically associated with higher return, in a properly diversified liquid portfolio, over long periods of time.
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RETURN
The earnings on an investment, expressed as a percentage.
For Example:
Initial investment in year 1 - $100
Investment after interest and appreciation in year 2 - $110
110/100 =1.10
1.10 - 1 = .10 or 10% return
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RELATIVE RISK PORTFOLIO INDEXES
Each of the Relative Risk Portfolio Indexes attempt to constantly maintain one of five levels of risk relative to the risk of the Stock CMAC. They are rebalanced monthly to percentages of the semi-variance of the Stock CMAC over the previous 36 months.
The five levels are:
Conservative Portfolio Index - 20% of the Risk of the Stock CMAC
Moderately Conservative Portfolio Index - 40% of the Risk of the Stock CMAC
Moderate Portfolio Index - 60% of the Risk of the Stock CMAC
Moderately Aggressive Portfolio Index - 80% of the Risk of the Stock CMAC
The Aggressive Portfolio Index is identical to, and therefore takes 100% of the Risk of, the Stock CMAC.
Example:
If the Semi-Variance of the Stock CMAC over the last 36 months was 10 then:
The Conservative Portfolio Index would be rebalanced to the allocation with the highest stock and bond allocation that had a semi-variance of 2 or 20% of the Stock CMAC semi-variance.
The Moderately Conservative Portfolio index would be rebalanced to a semi-variance of 4 or 40%.
The Moderate Portfolio Index would be rebalanced to 6 or 60%.
The Moderately Aggressive Portfolio index would be rebalanced to a semi-variance of 8 or 80% of the semi-variance of the Stock CMAC.
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TARGET DATE PORTFOLIO INDEXES
The risk of the Target Date Portfolio indexes changes over time. They are monthly rebalanced to a quantitatively assigned percentage of the Stock CMAC risk. The risk of the Target portfolio indexes begins at 90 % of the semi-variance of the Stock CMAC. For example: If the Semi-Variance of the Stock CMAC over the last 36 months was 10 then this portfolio would be rebalanced to 9. For the first five years each new Target Portfolio Index will be rebalanced monthly to 90% of Stock CMAC Risk. When there are 35 years (420 months) remaining until maturity (Dec 31st of the Target year) the risk will begin to be reduced. Risk is reduced monthly at a rate that corresponds to a cosine curve spread over the remaining life of the index. Risk reduction continues until 20% of the risk of the Stock CMAC is reached at maturity The indexes then become "Today" target date indexes where they will continue to take 20% of the Stock CMAC risk.
Example:
With 419 months remaining to expiration the index will be optimized to 89.9% of the semi-variance of the Stock CMAC and in month 418 the index will be optimized to 89.8% of the risk.
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COMPOSITE MAJOR ASSET CLASSES (CMACs)
Each Composite Major Asset Class is a combination of smaller discrete asset classes represented by various Dow Jones Indexes. Although these underlying indexes are individually float weighted they are equally represented in the CMACs in order to maintain a literal form of neutral asset allocation. |
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Adjusting Risk
Portfolio Indexes DO NOT use fixed allocations to the stock, bond, and cash CMACs to control Risk. |
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| Target Date Portfolio Indexes Relative Risk Portfolio Indexes |
COMPOSITE MAJOR ASSET CLASSES (CMACs)
Each Composite Major Asset Class is a combination of smaller discrete asset classes represented by various Dow Jones Indexes. Although these underlying indexes are individually float weighted they are equally represented in the CMACs in order to maintain a literal form of neutral asset allocation. |
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Adjusting Risk
Portfolio Indexes DO NOT use fixed allocations to the stock, bond, and cash CMACs to control Risk. |
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| Target Date Portfolio Indexes Relative Risk Portfolio Indexes |
REASONABLE RETURN FOR THE RISK TAKEN
The portfolio index returns can be considered reasonable because of their broad diversification and neutral asset allocation structure.
Here you see examples of reasonable historic returns that were available in the global marketplace without actively managing the portfolio outside of adjusting the overall levels of Stocks, bonds and Cash in the portfolio to target specific levels of risk. Returns do not include any management fees or trading costs that might be incurred in an actual investment portfolio. All returns assume reinvestment of dividends.
Note: The charts below reflect Global Asset Allocations
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(ANNUALIZED) STANDARD DEVIATION
A statistical measure of risk calculated as the average amount that returns on an investment "deviate" during a time period above or below its average return or the extent to which numbers are spread around their average.
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SEMIVARIANCE
A measure of risk that indicates how far below the mean any single return might normally be. It effectively measures the average deviation below the average return and is used in optimizing risk allocations.
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STOCKS
A security, typically issued by a corporation, that represents part ownership of the issuer. Of the three major asset classes of stocks, bonds and cash, stocks have the highest historic risk and return.
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VARIANCE
A statistical measure developed from a string of historic investment returns. It measures the sum of the squares of the average distance between each set of points and their mean value, above and below the mean.
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VOLATILITY
is inherent in any investment vehicle that returns more than cash or short-term bond returns. All charts and reports shown herein use Standard Deviation as the measure of risk. Annualized Standard Deviation is a measure that is effectively the average amount that an investment return in any single year differed or "deviated" (above or below) from its average return over some time period. The measure "semi-variance" which effectively measures the average deviation below the average return is actually used in optimizing risk allocations. Higher risk are historically associated with higher return, in a properly diversified liquid portfolio, over long periods of time.
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