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How to Build a Portfolio: Have Investors Been Doing It Wrong?

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  • (0:40) - Portfolio Construction: Efficient Frontier
  • (2:45) - New Frontier Advisors: How Do They Optimize Portfolios?
  • (5:40) - ETF Importance to Portfolio Construction
  • (9:15) - New Frontier Advisors: Bond Breakdown          
  • (11:20) - Long-term vs. Short-Term, Asset Correlation and Diversification   
  • (16:45) - Overview of New Frontier Advisors Portfolios
  • (19:15) - Episode Roundup:

Building a portfolio along the so-called ‘efficient frontier’ was a popular way for investors to allocate assets. However, this approach has fallen out of favor in recent years as many assumed that this sound theory didn’t really work out in practice.

But is there a way to take these principles and get a better outcome that will satisfy investors?

Today’s guest for the Dutram Report—Robert Michaud, the CIO of New Frontier Advisors—believes that he has cracked the code to portfolio optimization, and he discusses his technique with us in this week’s podcast. The approach goes beyond the traditional systems and arguably offers investors a more realistic and useful way to allocate capital among various asset classes.

The Approach

Basically, Robert and his team utilize what they call a ‘Michaud optimization’ which looks at hundreds of different efficient frontiers, putting the data through a Monte Carlo simulation. The results consider a number of possible outcomes and give a more nuanced portfolio which could be a better way to tackle portfolio construction for many out there.

That is because a traditional system might just put—for example—75% into equities and 25% into bonds, with bonds allocated among short, intermediate, and long-term fixed income holdings. A Michaud system might have, on the other hand, the same breakdown in asset classes, but a bond portfolio that allocates between the trio of short, intermediate, and long, but also Mortgage-Backed, High Yield, and even international securities.

In other words, the Michaud system believes that it is not just the asset class, but the type of asset that is being purchased that matters. That seems to make a lot of sense to me, and it is no surprise that the team has seen success with this approach either.

Approach in Practice

In the real world, this process is used to create portfolios of ETFs, and Robert walks us through the construction process and how proper ETFs are picked for to build the best portfolio in the podcast. We also talk about some of the component securities in the various portfolios and how these are selected.

Choices go beyond the usual suspects of SPY, AGG, or BND, and end up diving deeper into market segments. This includes products like TLT, USMV, and EMB to name a few. We also discuss some country specific options, and if hedged products like HEDJ make their way into the portfolios too.

We also talk about some of the portfolio options that Robert and his team are building at and why areas like multi-asset and tax-sensitive are more popular these days. Make sure to listen to the podcast for Robert’s thoughts on these topics, and more, in this week’s Dutram Report!

Bottom Line

But what do you think about the Michaud system? Make sure to write us in at podcast @ or find me on Twitter @EricDutram to give us your thoughts on this, or anything else in the fund market.

But for more news and discussion regarding the world of investing, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!

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