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Why Invest In Chile?

I’ve heard it said that asset allocation means always having something to complain about. A brilliant asset allocation will have long periods when one or more component of the portfolio fails to appreciate. And for investment management a long period of time can be a decade or more. This past year the MSCI Chile Gross Index lost -16.58% as measured in US dollars. Chile is down -50.64% since it peaked at the end of April, 2011 with a 5-year annual return of -13.04%. The longer the downturn for a particular portfolio holding the greater the feeling that we should simply eliminate it from the portfolio. It is “doing nothing but going down” we say because our minds are apt to frame the movement in the present tense rather than the past tense. Our brains are very quick to find short term patterns and project them forward as long term trends. This cognitive ability is useful in many areas, but it is not particularly useful in investment management. Investments are inherently volatile. The rebalancing bonus which comes from having an asset allocation is dependent on two variables: volatility and correlation. The more volatile and less correlated your asset classes are the greater the rebalancing bonus you get from having those components in your portfolio. When you compare Chile to the S&P 500 Total Return since the beginning of 1988 when the Chile Index began, the S&P 500 had a 1,540.25% appreciation, growing $10,000 into $154,669. It averaged 10.28% annually. Even though the S&P 500 had phenomenal growth during the time period, it also experienced an entire decade where it dropped -29.48% and a 30 month period where it dropped -43.75%. Over the same time period, Chile had a 3,585.25% appreciation, growing $10,000 into $368,524. It averaged 13.75% annually. Click to enlarge Having twice as much growth as the S&P 500 over 28 years comes with the price of greater volatility. The standard deviation of annual returns for the S&P 500 was 14.39% while the standard deviation for Chile was 24.21%. This type of volatility is normal for the markets. While you might have had more money putting everything in Chile, we recommend a blended portfolio. Each individual component of a balanced portfolio is more volatile than the portfolio as a whole. Thus, adding a little bit of Chile to your portfolio can boost returns and reduce volatility on account of the rebalancing bonus. In fact, over this time period the mix which had the lowest volatility was 12% Chile and 88% S&P 500. This blended portfolio had an average return of 10.96% and a standard deviation of just 14.25%. This is a boost to annual returns of 0.68%. Over this time period, adding 12% Chile to your portfolio resulted in an extra $29,095 over the S&P 500 alone. Creating a mix of 19% Chile and 81% S&P 500 would have had no more volatility than a portfolio of 100% S&P 500. But this portfolio would have averaged 11.32%, and extra 1.05% annually and earned an additional $46,784. The return of these blended portfolios over long periods of time produce a risk return curve which can help investors find what asset allocation produced the greatest return for a given amount of risk. These blended portfolios are called the efficient frontier and produce curves between moving from 100% S&P 500 to 100% Chile. Click to enlarge Notice that with only these two choices, investing any less than 12% in Chile is not on the efficient frontier because there is a portfolio for which a greater return could have been achieved while experiencing an equal or lower volatility. In actual portfolio construction, there are dozens of components which are being fit together to craft a brilliant investment strategy for long term time horizons. Our current asset allocation model usually invests less than 2% of a portfolio’s value in Chile. Even if Chile were to lose half of its value the portfolio value would only go down 1%. Assuming that Chile doesn’t move in sync with other investments in the portfolio, this is a level of volatility which is acceptable for the potential additional return. As it turns out, the correlation between the monthly returns of Chile and the S&P 500 are low at 0.46. It is always disappointing when an investment category fails to perform as hoped. But after an investment has fallen in price it is often that much more attractive looking forward. Unlike individual stocks, a country index cannot go to zero. If the Chile index approached zero, you would be able to take your pocket change and buy every publicly traded company in Chile. Long before you could do that, people much wealthier than you would notice how low the price was and they would buy every company in Chile. Low prices for a country index is best thought of as the index going on sale. Stocks often move on very light trading as a few sellers push the stock price lower. Market makers who hold all the stocks in the index gradually move the price lower when there are more sellers than buyers. A market maker is forced to buy when there is no one else interested in buying. But at some point the price is low enough to wake up other potential buyers and the movement in price finds resistance. This can cause greater swings of volatility often over long periods of time. As a result, you should not be afraid of an major index. Assuming there were good reasons to be invested in it in the first place , a 3, 5 or even 10 year down turn is not a reason to abandon your brilliant investment strategy.

The Antidote To Fear And Greed: Risk Management

What does last week’s market slide across most of the major asset classes imply for investing? A lot…or maybe nothing. The decision to adjust a portfolio, or not, depends on the risk-management strategy. Every portfolio needs a clear-eyed plan for dealing with risk – it’s the financial brain that controls the investment body and provides the map for navigating rough financial seas. With that in mind, now’s a good time to review and reaffirm the first principles of enlightened risk management in the care and feeding of conventional investment portfolios. 1. Develop a plan. Yes, that’s obvious, but it’s easily overlooked. Many investors have a general appreciation of the merits for managing risk (as opposed to chasing return) but don’t have a proper plan in place. Vague notions of what you may or may not do don’t pass muster. You needn’t be a slave to rules, but there should be a clear path for traversing periods of chaos as well as calm through time. This includes a methodology for regularly collecting and analyzing relevant data that’s integral to your plan. 2. Recognize that a successful risk-management strategy will be multi-faceted. There are no simple solutions or silver bullets. Instead, there’s a zoo of possibility in terms of risk factors from which you’ll selectively choose for assembling a customized plan. That said, there are two concepts that typically form the backbone of risk management: asset allocation and rebalancing. 3. Notice the limits of asset allocation. Like any one aspect of risk management, this one has flaws. This implies that you should add techniques that compliment AA’s deficiencies. 4. Choose weights for asset allocation that match your goals and risk profile. For what should be obvious reasons, there are no one-size-fits-all solutions here. But there’s an obvious place to start: market-value weights, which offer useful reference points on the customizing journey. 5. Rebalance. Plan on adjusting the portfolio mix on a periodic basis. The details will vary, depending on your specific goals, expectations, and other factors. Unless you’re an institution with an effective time horizon that’s infinite, embrace the practical reality that every allocation requires oversight and tweaking. 6. Design rebalancing rules that are appropriate for you. Any number of inputs will inform your choice. For instance, how much drawdown can you tolerate? Every portfolio needs to be rebalanced on a periodic basis. The details on how and when offer the potential for greatness-and trouble. Proceed cautiously. The standard strategy: systematically return the portfolio to the target weights every year or two. The crucial question: Should you instead deploy an opportunistic plan based on monitoring a set of tactical signals? If so, note the following: 7. Juicing the standard rebalancing rules by adding tactical components to the risk-management plan – integrating moving averages, factors such as value and momentum, etc. into the rebalancing rules – can be productive. But careful planning and oversight are essential. Given the zero-sum reality of markets with respect to benchmark-beating results, most efforts on this front will deliver mediocrity or worse, particularly for return-boosting efforts on an after-tax/cost basis. By contrast, lowering risk is a more reasonable expectation. In either case, a fair amount of R&D is critical. 8. Manage expectations. No risk management plan is perfect and so there will be times when results are disappointing. Meanwhile, align your expectations with the target outcome of your risk-management techniques. A strategy that’s focused on limiting the downside, for instance, may look unimpressive before adjusting for risk.

Can Grain ETFs Sustain The Recent Rally?

Taking the market by surprise, grain prices and the related investments popped lately. This is perhaps the sole good news in the investing world to start 2016 as the broader market has seen choppy trading so far. And as far as commodities are concerned, nobody knows when and where their prolonged rout will end. Lower estimates for U.S. crops showered these unexpected gains on grains. Lately, USDA reduced its numbers for the 2015 corn and soybean harvests and sharply cut winter wheat planted acreage to 36.61 million acres, which was “the smallest winter crop in six years.” The figure exceeded analysts’ expectation of a decline of 141,000 acres. Per USDA, corn harvest is presently at 13.6 billion bushels, lower than USDA’s December reading of 13.654 billion. The soybean produce was recorded at 3.93 billion while USDA’s latest reading was similar to the 2014 levels. While many agricultural commodities advanced, wheat prices soared the most in two months. As a result, the Teucrium Wheat ETF (NYSEARCA: WEAT ) , the iPath DJ-UBS Grains Total Return Sub-Index ETN (NYSEARCA: JJG ) , the Teucrium Soybean Fund (NYSEARCA: SOYB ) and the Teucrium Corn ETF (NYSEARCA: CORN ) added about 2.1%, 1.8%, 1.4% and 1%, respectively, on January 12 (read: Invest in America with These 4 ETFs ). Can the Positive Momentum Sustain? Per Bloomberg, while U.S. output may moderate, global supplies of wheat remain ample thanks to solid output in Russia, Pakistan and the European Union. On the other hand, the demand scenario is as sluggish as it has been in recent times. Global growth worries mainly in most of the developed economies and in some emerging economies too resulted in softer demand for food. USDA also pointed to this issue with “a small reduction in domestic usage and a cut to exports.” USDA lowered the export numbers for corn and soybean to 1.7 billion bushels from its previous 1.75 billion and to 1.69 billion from 1.715 billion, respectively. Still, there are a few agro-based products which could deliver decent gains to investors despite the broad-based gloom. Below we highlight those products in detail (read: 3 Commodity ETFs Defying Weakness in 2015 ). iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) The sugar prices are expected to remain steady though most of the other commodities are finding the going tough. This is because; supply glut is an easing issue in the global market due to adverse weather. SGG tracks the Dow Jones-UBS Sugar Subindex Total Return Index, which provides returns that are in an investment in the futures contracts on the commodity of sugar. The note has garnered nearly $53.2 million in assets. It charges 75 bps in annual fees. The note was up 1.1% in the last five days (as of January 13, 2016). iPath Dow Jones-UBS Cotton Total Return Sub-Index ETN (BAL Notably, cotton price is also showing hopes on higher purchase from the spinners and exporters. Also, in India, a key grower of cotton, the central government’s move to intervene in the pricing of cotton might help in shoring up the commodity. The product has amassed about $17 million in assets and charges 75 bps in fees. BAL gained 1% in the last five days (as of January 13, 2015). iPath Dow Jones-UBS Softs Total Return Sub-Index ETN (NYSEARCA: JJS ) The note looks to provide the returns that are available through an investment in the futures contracts on the softs sector of the commodity world. Components currently include sugar, coffee, and cotton. This $2.6-million ETF charges 75 bps in fees. Though the product lost 2% in the last five days, it added about 1.5% on January 13. Link to the original article on Zacks.com