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PortfolioStrategy

Portfolio Strategy

Why Does Portfolio Construction Matter?

There are many asset classes available to investors these days, but choosing the right ones for your portfolio can be difficult. Learn more about why portfolio construction matters below.

Investment Strategy
Investors Typically Own What Is Most Familiar To Them

Many investors rely on a limited number of assets as they build their portfolios. They tend to think that accessing a range of equity styles - "style box" investing - represents diversification. We believe that the style box approach does not go far enough. The historical returns of many equity style pairs have often been similar to one another.

To see historical results over time, select two styles and see the growth of $10,000.

ASSET CLASS
ANNUALIZED PERFORMANCE
ANNUALIZED VOLATILITY
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Value
Blend
Growth
 
Large
Mid
Small
The historical returns of many equity style pairs have often been similar to one another
To see this performance effect across other styles go back and select two more.
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Portfolio Construction

Track Historical Asset Class Performance

US Large Cap Equity
US Aggregate Bonds
Untitled
Bank Loans
Commodities
Emerging Market Debt
Emerging Market Equity
Hedge Funds
High Yield Bonds
International Equity
International Real Estate
International Small Cap Equity
US Aggregate Bonds
US Large Cap Equity
US Real Estate
US Small Cap Equity

Source: Bloomberg, Barclays, and GSAM (as of 12/31/2015)

HIDE ASSET CLASS INDEXES

Emotional Investing

Average Fund Returns (2012-2016)

HIGH SHORTFALL
3.4%
AVERAGE
1.7%
LOW SHORTFALL
1.1%
Source: Bloomberg, Barclays, and GSAM (as of 12/31/2016). Asset class return, represented by the Morningstar category return, is the arithmetic average of net returns for each fund in a particular Morningstar asset class. Investor return is the average money-weighted return of funds in a particular Morningstar asset class.

Potential Effect of Investor Lag

AMOUNT INVESTED
YEARS INVESTED
HIGH SHORTFALL
(3.4% Investor Lag)
AVERAGE
(1.7% Investor Lag)
LOW SHORTFALL
(1.1% Investor Lag)
Source: Bloomberg, Barclays, and GSAM (as of 12/31/2015)

Past performance does not guarantee future results, which may vary. Shortfall, in this context, is defined as the difference in performance between the Morningstar category return and the asset-weighted investor return.

Risk Managed Investing

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Optimizing Return

Hypothetical Returns of a $1 Million Portfolio (past 17 years)

Traditional
TOTAL RETURN
$2,053,981
VOLATILITY
11.1%
Diversified
TOTAL RETURN
$2,336,461
VOLATILITY
9.5%
Optimized
TOTAL RETURN
$2,389,170
VOLATILITY
8.4%
Source: Bloomberg, Barclays and GSAM (as of 12/31/2014)
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What Tools May Help Diversify Portfolios?

With US equities at or near all-time highs, and global interest rates at or near all-time lows, we believe now is a particularly important time to consider diversifying these portions of traditional portfolios. Although specific allocations may vary over time, we view diversification as a long-term effort. Today, for many investors, this may be easier to accomplish than ever. Investors can access a number of diversifying and alternative strategies in broadly available investment tools such as mutual funds and exchange-traded funds.

Home-Country Bias

Diversifying Strategies

Diversifying Investments: A Primary Tool

There are many tools that can potentially be used to diversify a portfolio. A "diversifier" is defined as a complement to an investor's traditional, or core, portfolio. Their risks have tended to diverge from the risks of core equities. Incorporating diversifiers into a well-balanced portfolio potentially enables investors to access several different sources of risk and return.

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Core Strategies

Seek to potentially provide exposure to asset classes that are broadly representative of the market

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Diversifying Strategies

Have the potential to deliver higher returns derived from skilled active management

Result

More efficient portfolio construction with higher return potential and increased diversification

Diversifiers Explained

Diversifiers are asset classes with attractive return potential and historically lower correlations when compared to core investments such as investment grade fixed income and most equities of developed markets. We believe the diversifiers below can be deployed in search of improved returns or lowered risk, and may help build more balanced portfolios.

Diversification does not protect an investor from market risk and does not ensure a profit. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

See How Diversifying Strategies Might Affect Your Portfolio

Use this tool to explore the potential benefits of adding diversifiers to a hypothetical portfolio.

DAT

Alternative Investments

An Effective Tool for Risk

Alternatives are an additional tool that can potentially be used to diversify a portfolio. Alternative strategies may complement an investor’s traditional portfolio by employing tools such as shorting and/or leverage. Incorporating alternatives into a well-diversified portfolio potentially enables investors to access a differentiated source of return, lower the overall risk of their portfolios, and provide shallower drawdowns during market crises.

Traditional
RETURNS
7.5%
VOLATILITY
10.7%
With Alternatives
RETURNS
6.8%
VOLATILITY
8.4%
Median returns and volatilities for 10-year rolling periods from January 1, 1990 to December 31, 2016
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See How Alternative Strategies Might Affect Your Portfolio

Use this tool to explore the potential benefits of adding alternatives to a hypothetical portfolio.

LAT

Pursuing Your Investment Goals

Learn about how to use the investment tools available to meet your investment goals.

Improving Returns

Where Should I Look to Improve My Long-Term Returns?

We believe one of the most effective ways to build portfolios and aim to achieve long-term objectives is through “core” and “diversifier” portfolio construction. “Core” investments provide a broad foundation comprising of US stocks, large cap international stocks, and global investment grade bonds, while “diversifier” investments, such as emerging markets stocks and high yield bonds, can offer diversification and the potential for higher return.

Source: Goldman Sachs Asset Management/Strategic Advisory Solutions Portfolio Strategy. Past performance does not guarantee future results, which may vary.

Reducing Uncertainty

What Can I Do to Improve the Chances of Meeting My Goals?

We believe risk, or uncertainty, can be interpreted as the variety of events that can occur instead of the expected outcome. Increasing levels of risk have the potential to expose portfolios to more significant losses, and can affect how long a portfolio may take to achieve a desired outcome. Given an investor’s understandable desire to avoid losses, we believe alternative strategies and their potential effects on portfolio risk and return are worth understanding.

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