Any investment strategy should be designed from outset to deliver the investment objective, within the constraints imposed by the risk assessment, with the minimum possible chance of failure.
To do this, the portfolio designer must have a reasonable idea of the returns available from the investments that are purchased, a reasonable idea of the risks associated with each investment, and an idea of how various holdings within the portfolio react with each other. When dealing with asset classes, it is possible to reach conclusions on these parameters. When dealing with individual shares, it is not.
Return and Volatility Assumptions
Asset Class
Expected Return
Standard Deviation
Ftse All Share
6.5%
13%
Hoare Govett UK Smaller Cos
6.8%
14.5%
FTSE World – Europe ex UK
6.5%
12%
S&P 500
6.5%
13%
Russell 2000 (US Small Cap)
6.8%
15.5%
FTSE World Asia Pacific ex Japan
7.5%
17%
Japan Topix
6.5%
13%
MSCI EMF (Emerging Markets)
7.5%
17%
Conventional Government Bonds
4.5%
8.5%
Index Linked Government Bonds
4.5%
8.5%
Corporate Bond
5.2%
9.5%
Citigroup World Gvt Bond Index
4.0%
9.5%
Commercial Property
5%
12%
Gold
7.5%
12%
Fund of Hedge Funds
5%
11%
No one can actually predict how an asset class is going to perform in the future. However, these are my assumptions of future anticipated returns and volatility over the long term only.
Deviation equates to One Standard Deviation from the Mean. This is a way of measuring statistical dispersion, ie how spread out (above or below) the values are away from the mean or average return.
These assumptions are derived from my conversations with leading fund managers, economists, and any appropriate research material.
In line with my conservative investment approach, I try to err on the side of caution and not give potentially over-inflated (and potentially misleading) estimates for the asset classes.
The most important factor to consider, is the relationship between the numbers rather than the estimates themselves, as this is crucial in building optimal portfolios.
