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WinningInvestmentStrategiesAGlobalVision

JavierEstradaWinter,2014

1.ALookBack• Bringingitalltogether

2.ALookAhead• Somefinalthoughts

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

AssetClasses Itisusefultothinkofthreemajorassetclasses Stocks

• Essentialinalmostallportfolios/Provideupside• Itmaybebesttoinvestindiversifiedgroups ofstocks

Bonds• Essentialinalmostallportfolios/Provideprotection• Riskandreturnarerelativelyeasytoassess• Canalsobeinvestedindiversifiedgroups

Alternatives(Others)• Donotusethemforshort‐termspeculativebets• Usethemfortheirdiversificationbenefits

Thestrategicdecisiondeterminesmostoftheportfolio’sriskandreturn

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinancialProducts Importantdistinctions Absolute performance(Nobenchmark)

• Activemanagement(Absolutereturnfunds/HFs)• Highercoststhanrelativeperformance• Theirbenefitsforinvestorsarefarfromclear

Relative performance(Thereisabenchmark)• Activemanagement(Mutualfunds) Itisfarfromclearthattheyreachtheirgoalconsistently

• Passivemanagement(Indexfunds/ETFs) Largelyachievetheirgoal Lowercoststhanactivemanagement

Itiscritical tothinkabout(theabsolute/relativeperformanceand)theactive/passivemanagementproportionsintheportfolio

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

Essential/UnderratedIssuesCosts Themostunderratedvariableininvesting Theycanbevisibleor‘hidden’ Determineobserved andexpected return Lowercostsaretiedtohigherreturnandlowerrisk Shouldbeatopcriteriawhenchoosingfunds

Theholdingperiod Determinestheriskoftheassetsintheportfolio Allelseequal,thelongertheholdingperiod,themorelikelyisthatahigherexposuretoriskwillturnintoahigherreturn Allelseequal,thelongertheholdingperiod,thehighershouldbetheexposuretorisk

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

Complementary/Important IssuesAlphaandbeta Alphaiswhatactivemanagersshoulddeliver Alphaiselusiveandexpensive,betaischeap Payverylittleforbeta,onlypayforalpha

Thefallacyofgrowth Growthisonlypartoftheinvestmentstory ValuationplaysacriticalroleinthisstoryHigh(low)growthmayresultinabad(good)investment(Focusonhowmuchyoupayforgrowth)

Twowell‐known(aggressive)tilts Thesizeandvalueeffectsarepervasive Sizeandvaluetiltscanbeusedtoincreaseaportfolio’sexpectedreturn(andrisk)

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

PortfolioChoice&RebalancingFocusontwo/threemajorassetclasses Theallocationtostocksandbondsiscritical Liquiditydecisionsare‘exogenous’

KeyvariablesHoldingperiodandrisktolerance

Tools Assessyourabilitytotoleratelosses Assetallocationtable Performanceofsomebenchmarkportfolios Onlinequestionnaires

Rebalancing A waytocontroltherisk oftheportfolio Rebalancingonceortwiceayearwitha5%tolerancebandisenough

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

ReferencePortfoliosSomewell‐known,easy‐to‐implementportfolios Discussionofobservedperformance Nospecificrecommendationtoinvestinthem

Why,then? Toconsiderpossible,easy‐to‐implementportfolios Toraisetheissueofwhether that(observedandexpected)performanceisappropriateforyou Allmodelportfoliosarenotonlyeasytoimplementbutalsohavelowcosts• Fees:TheycanbeimplementedwithETFs• Time:Annualrebalancing

Q:Doesmyportfoliohave tobe‘complicated’?Ifso,why?Howisitbetterthanasimple(r)portfolio?

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

BehavioralInsightsThebottomlineWemakemistakesbothinlifeandwheninvesting Thosemistakescanbeidentified(Psychology) Thenegativeconsequencesofthosemistakescanbepredicted(Finance) Strategiescanbedevisedtoovercomethenegativeimpactonperformanceofthosemistakes

Inshort Knowthatyouarenotwiredtobeagoodinvestor Knowthatyoucan(andwill)makemistakes Putyourselfonaleash!

Andremember,pickupaBehavioralFinancebooktolearnmoreaboutthisissue

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts

Managingyour savingsrequires…

commonsense

andeven‘folk wisdom’

Setrealisticgoals

Observedeviationsandcorrect

Bepatient Bedisciplined

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts– WarrenBuffett

“If they’re not going to be an activeinvestor, and very few should try that,then they should just stay with indexfunds. Any low-cost index fund. Andthey should buy it over time. They’renot going to be able to pick the right

price and the right time.”

(Fortune,2008)

What advicewouldyougivetoindividual investors?

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts– WarrenBuffett

“By periodically investing in an index fund … the know-nothing investor can actually outperform most investment professionals.

Paradoxically, when ‘dumb’ money acknowledges its limitations, it

ceases to be dumb.”

(LettertoShareholders,1993)

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts

Professionalathletes…

havetwocritical lessons forinvestors

Theroadtosuccesscanbeprettybumpy,prettyoften,andforaprettylongtime

Losingisaninevitable partofinvesting

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts

The‘sad truths’offinancialmarkets

(1) Thehighertherequired return,thehighershouldbetheexposuretorisk

(2) Thehighertheexposuretorisk,the longershouldbetheholdingperiod

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts– CarlRichards

“When it comes to investing, risk and reward are related. It’s as close as we get to a

fundamental law in finance.If you want or need a greater expected return, you’ll have to

accept more risk.”

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts

Implications(More‘sad truths’)

(1) Thehighertheexposuretorisk,themorepatience theinvestorshouldhave

(2) Thehighertheexposuretorisk,themorediscipline theinvestor shouldhave

Thinkhowyouseriously gethealthyandingoodshape

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts– CarlRichards

“We often resist simple solutions because they require us to change our behavior. And so we

spend $40 billion a year on weight-loss programs and products rather than take the

simple, do-it-yourself approach: consume fewer calories, burn more calories with

exercise, or do both. We'd rather look for the magic bullet: something to save us from the day-to-day grind of simply doing the work

that needs doing.”

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts

AChecklist

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts

The8EssentialSteps

1. Defineyourgoal

2. Determineyourholdingperiod

3. Assessyourrisktolerance

4. Chooseyourassetallocation

5. Targetannualfees

6. Chooseactive/passiveproportions

7. Selectfinancialproducts

8. Forgetuntilperiodicrebalancing

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts– RichardBranson

“There’s really nothing to it. Start as a billionaire and

then buy an airline.”

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts– JohnBogle

“I wish I could assure you that the investment strategy outlined

... is the best strategy ever devised ... I can't promise that. But I can assure you that the number of strategies that are

worse is infinite.”

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

WININVWinter,2014

FinalThoughts

Good Bad

Good

Bad

Outcome

Process Deserved

SuccessBadBreak

DumbLuck

PoeticJustice

DeservedSuccess

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JavierEstradaWinter,2014

WinningInvestmentStrategies

Thankyou!