Understanding the Smart Stack Approach™

16 Aug, 20223 mins read
Understanding the Smart Stack Approach™

Stack aims to deliver a service that simplifies and automates investing. Stack’s philosophy is actualized by our investing principles. The returns you get from investing are roughly proportional to the risk you take. Consequently, the more risk you allocate to diversifying assets, the higher your return-to-risk ratio will be. The passive low-cost diversified portfolios we curate aim to outperform active investors with low-fees mutual funds over high-fees active funds.

The Smart Stack Approach™

  1. Asset Class Selection to allocate risk.
  2. Select the most appropriate Mutual Funds to represent each asset class.
  3. Apply Modern Portfolio Theory i.e. maximize the expected post-tax return for each level of portfolio risk.
  4. Determine your risk tolerance to select the allocation that is most appropriate for you.
  5. Monitor and periodically rebalance your portfolio.
Multi Asset Portfolio

Research consistently has found the best way to maximize returns across every level of risk is to combine asset classes rather than individual securities. We consider each asset class’s long-term historical behaviour, risk-return relationship conceptualized in asset pricing theories and expected behaviour based on long-term secular trends and the macroeconomic environment. Asset classes fall under three broad categories: Equities, Fixed Income and Commodities.

Investment Portfolio

Historically, equities exhibit a high degree of volatility but provide some degree of inflation protection. Developed market equities remain a core part of any asset allocation aimed at achieving positive returns as over the long term they have outperformed bonds on a risk-adjusted basis. Fixed income remains a positive way to dial down the overall risk of a portfolio. To leverage various risk and reward tradeoffs associated with different kinds of bonds, we include a variety of them in our portfolios. Commodities (such as Gold, Silver, etc.) provide inflation protection and diversification.

Stack uses low-cost, mutual funds to represent each asset class. We periodically review the entire population of mutual funds to identify the most appropriate ones for use in our portfolio construction. We attempt to choose the mutual funds with the lowest expense ratios and are expected to have sufficient liquidity to allow purchases and sales at any time.

Stack determines the optimal mix of our chosen asset classes by using Mean-Variance Optimization (Markowitz, 1952), the foundation of Modern Portfolio Theory. The output of the optimization is a collection of portfolios that generate the maximum return at each level of targeted risk, or equivalently, minimize the level of risk for a specific expected return.

Balanced Portfolio

We ask prospective clients questions to evaluate both their objective capacity to take risks and subjective willingness to take risks through a risk questionnaire and combine this with behavioural economics research to simplify our risk identification process. Our overall Risk Score combines subjective and objective risk tolerance, with a heavier weighting to whichever component is more risk averse.

Stack monitors the portfolios and periodically rebalances each portfolio when a deposit or withdrawal has been made, or if market movements in their relative allocations justify a change while continuously monitoring and periodically rebalancing our clients’ portfolios to maximize returns while maintaining their calculated risk tolerance. We believe following this process will lead to outstanding long-term financial outcomes for our clients.

disclaimer: the information provided in this blog is for general informational purposes only. it should not be considered as personalised investment advice. each investor should do their due diligence before making any decision that may impact their financial situation and should have an investment strategy that reflects their risk profile and goals. the examples provided are for illustrative purposes. past performance does not guarantee future results. data shared from third parties is obtained from what are considered reliable sources; however, it cannot be guaranteed. any articles, daily news, analysis, and/or other information contained in the blog should not be relied upon for investment purposes. the content provided is neither an offer to sell nor purchase any security. opinions, news, research, analysis, prices, or other information contained on our blog services, or emailed to you, are provided as general market commentary. stack does not warrant that the information is accurate, reliable or complete. any third-party information provided does not reflect the views of stack. stack shall not be liable for any losses arising directly or indirectly from misuse of information. each decision as to whether a self-directed investment is appropriate or proper is an independent decision by the reader. all investing is subject to risk, including the possible loss of the money invested.

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