Ensure your best player gets the proper credit
Every year, football fans debate over who should be the Most Valuable Player of the NFL.
Some argue it’s the player who had the best season. Others say is it the star player on the team who wins the Super Bowl. Another camp would argue the award should go to the player who was most valuable to his team long-term, throughout the season and the playoffs.
Carlson Capital's Double Black Diamond Fund posted a return of 3.3% net of fees in August, according to a copy of the fund's letter, which ValueWalk has been able to review. Q3 2021 hedge fund letters, conferences and more Following this performance, for the year to the end of August, the fund has produced a Read More
As another winter ends and a new investment year begins, you might be asking the same question about your portfolio: who’s your MVP? You own stocks (offensive players) that had a great year, bonds (defensive players) that did OK and alternatives (special teams) whose value was hard to see. But you need these portfolio players to deliver more than just one season. They need to play well together over the course of many years to reach your financial goals.
If you base your evaluation on who had the best season in 2016, then stocks would be your MVP. But when you consider what is truly the most valuable component of your portfolio throughout each game and the playoffs – the performance that really makes a difference year over year – you might hand the award to a different player.
Which player is toughest to replace?
One way to determine true value is to look at the results if you take each player away. We know that a properly diversified portfolio works as a team with a meaningful allocation to stocks, bonds and true diversifiers. When you compare the results of a truly balanced portfolio you can see that it outperforms a 60/40 in every statistic that matters. We used common indexes to dive into the details (see the disclosures section for more detail on our methodology).
Let’s look what happens when you take away your star offensive player stocks:
Not that big of a difference, and a bit of a mixed bag, but stocks added some value to the team.
How about you add in your offensive stocks and then do without your defense – in this case, bonds:
All right. Bonds were a bit of a drag on performance, but they helped control risk. Still not that big a change when you consider the results that matter.
Finally, what happens when you remove your special teams players, here represented by the true diversifier managed futures:
Here’s a summary of all four options:
Did you think your special teams just punted and moved around a bit, mostly just costing you money? A lot of people would agree until they see that removing them lowers returns, ups fear-inducing volatility and adds to your maximum drawdowns.
And then you wonder why you and so many other investors undercut themselves every year when it comes to not just their stock and bond portfolios, but also their alternatives allocations.
What makes a real portfolio MVP?
For investors seeking portfolio balance, the truth is there is no portfolio MVP. By focusing on each player’s contribution to the team, rather than their individual statistics, you will have a better understanding of how your actions today affect your chances of success on the investment field—no matter how you define value.
Article by Longboard Funds