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Jonathan Pinsler is senior vice-president, portfolio manager, of TD Wealth Private Investment Advice.

What has worked in the domain of portfolio construction since the global financial crisis a decade ago is not apt to work for the next three to five years. Essentially, the traditional portfolio of stocks and bonds will likely be ruptured with a less than optimal outcome.

Why?

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The U.S. Federal Reserve has prescribed a delicious high-fat doughnut that has kept interest rates at all-time lows; its implementation of quantitative easing has suppressed long-term yields and kept stock market volatility at historic lows. This inflated everything from bonds, real estate and equities.

This scrumptious high-calorie delight is being unwound in many global jurisdictions (not always for the same reasons). The shift to normalize interest rates in North America was initiated in 2017 and it will likely continue for years to come.

The easy money in real estate has been made. Stocks should have higher bouts of volatility with fuller valuations priced into the global stock market because of the substantial earnings growth that has taken place in most of the developed world since the financial crisis.

In general, public companies have been delivering growth on the earnings in the commonly used price-to-earnings valuation ratio. Every time levels reach new highs, earnings have come to the rescue of lowering this metric. No doubt the unprecedented U.S. corporate taxes cuts have been helpful this year in the American market. The big concern now is sustainability of earnings and liquidity (interest rates and availability of credit). Uncertainty surrounding a trade war and trade-agreement adjustments is not constructive. Neither is the real potential of much higher inflation.

What does this have to do with portfolio construction? Everything.

We are in the midst of a generational pivot in the financial markets. What’s necessary is a more modern version of portfolio construction that focuses on the risk/return characteristics of investments, rather than traditional asset labels. This helps control risk better and is what most individual investors in the current environment need today and for years to come.

Institutional investors have long adopted this form of investment thought; it has been put in action for more than 25 years. However, this is something the majority of investors have yet to adopt. Frankly, it has not been needed because traditional portfolios have done a credible job of getting respectable returns since the crisis.

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Portfolio construction 2.0 incorporates correlations of various asset categories to ultimately help to lower risk and optimize returns. Depending on what an investor’s objectives are, what’s required is up to 15 per cent in alternative investment strategies combined with traditional asset categories.

What are alternative investment strategies for the affluent investor?

  • Asset-based lending/factoring is a loan or a revolving line of credit that is secured using a company’s assets, equipment, real estate, inventory as collateral;
  • Long/short credit strategies that use several investing techniques such as leverage, derivatives and short positions;
  • Isolated credit strategies that remove interest rate risk to counter rising yields;
  • Arbitrage strategies that profit by exploiting price differences of identical or similar financial instruments on different markets or forms.

Getting market timing consistently correct is a mug’s game. The modern version of portfolio construction starts by creating thoughtfully designed portfolios that are structured to help achieve better risk adjusted results to traverse our new environment. A different way of thinking, a touch of humbleness and open-mindedness are all required to help you be successful.

A new way of looking at

portfolio construction

By focusing on the risk/return characteristics of investments rather than traditional asset labels, investors may be able to optimize returns

Traditional portfolio

Asset allocation

Cash

10%

Equities

50%

Fixed

income

40%

Enhanced portfolio 2.0

Enhanced risk factor allocation

Multi-

factors

11%

Real

assets

11%

Equities

11%

Private debt

11%

Absolute

returns

11%

Unconstrained

funds

11%

Private

equity

11%

Absolute

returns

11%

Bonds

11%

THE GLOBE AND MAIL, SOURCE: Jonathan R. Pinsler,

TD Wealth Private Investment Advice

A new way of looking at portfolio

construction

By focusing on the risk/return characteristics of investments rather than traditional asset labels, investors may be able to optimize returns

Traditional portfolio

Asset allocation

Cash

10%

Equities

50%

Fixed

income

40%

Enhanced portfolio 2.0

Enhanced risk factor allocation

Multi-

factors

11%

Real

assets

11%

Equities

11%

Private debt

11%

Absolute

returns

11%

Unconstrained

funds

11%

Private

equity

11%

Absolute

returns

11%

Bonds

11%

THE GLOBE AND MAIL, SOURCE: Jonathan R. Pinsler,

TD Wealth Private Investment Advice

A new way of looking at portfolio construction

By focusing on the risk/return characteristics of investments rather than traditional asset labels, investors may be able to optimize returns

Enhanced portfolio 2.0

Enhanced risk factor allocation

Traditional portfolio

Asset allocation

Multi-

factors

11%

Real

assets

11%

Equities

11%

Private debt

11%

Cash

10%

Equities

50%

Absolute

returns

11%

Unconstrained

funds

11%

Fixed

income

40%

Private

equity

11%

Absolute

returns

11%

Bonds

11%

THE GLOBE AND MAIL, SOURCE: Jonathan R. Pinsler, TD Wealth Private Investment Advice

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