《現(xiàn)代金融市場概論》教學(xué)課件Portfolio-Thoery

ChapterOne

IntroductionofPortfolioTheoryPartOneTheassetclassesBasicprinciplesTherearemanyassetclassesandmanyofthemareusefultoinvestors.Someassetclassesarenotedfortheirlongtermstability(lowrisk),othersfortheirhighreturns.Generallyspeaking,thehighertherewardyouareafter,themoreriskyou’llneedtotake.Portfolioscanbeconstructedthatexhibitsuperiorriskandreturnrelationshipstoanysingleasset,becauseonecansignificantlyreduceriskbydiversification.WhyriskandreturnarelinkedWhentwoinvestmentsappeartoofferidenticalrisk,investorswillprefertobuythehigherreturningone.Ifthemarketispeopledbyreasonablywellinformedinvestors,theresimplywon’tbeanyhighreturninglowriskinvestmentsleftandnobodywillbuyhighriskassetswithalowexpectedreturn.Inaportfolioconstructioncontext“risk”isusuallymeasuredwithsomesortofmeasureofpricevolatility.Thereareotherrisksofcoursethatneedtobetakenintoaccount.Inflationriskisamajorproblemwiththemore“conservative”assetclassessuchasfixedinterestandcash.Manypensionersfindtotheirhorrorthattheycannolongerliveofftheirsavings,despitetheconservatismoftheirstrategy,simplybecauseinflationdevaluedtheirmoneyandtheportfoliodidgrowenoughtokeepup.Itisnecessaryforallbutthemostshorttermorientedinvestorstoconsideratleastsomeexposuretogrowthassetslikesharesandproperty,justtofightinflation.Majorassetclasses:sharesSharesarepartinterestsinbusinesses.Howgoodareturnyougetonyoursharedependstoalargeextentonthefundamentalbusinessdevelopmentsofthecompanyitselfandonthepriceyoupaidfortheshare.Averagedoutovermanycompanies,sharesasanassetclasstendtorespondtointerestratesandtheeconomy.Althoughinthelastfewyearsmanymarketshavefallensubstantially,sharesarestillthehighestperformingassetclassoverthelongterm.Sharesgenerallygoupinpriceoverthelongtermbecausebusinessesdon’tpayout100%oftheirprofitsasdividends,theykeepsometogrowthevalueofthebusinessitself.Overthelongterm,shareshavebeateninflation.Majorassetclasses:propertyTherearemanytypesofpropertytoinvestin,eacharedifferent.Thehighestincomeyieldcomesgenerallyfromcommercialandindustrialproperty.Majorassetclasses:fixedinterestA“fixedinterest”investmentisadebtthatcanbeboughtandsold.Theborrowersareusuallygovernmentsandcompanies.Atypicalfixedinterestinvestmentpaysaregular“coupon”(interestpayment)andwillrepaytheprincipleonmaturity.Somefixedinterestsecuritieshaveamaturityofseveraldecades,othersareshorterterm.Theactualpriceofafixedinterestinvestmentwillfluctuateinresponsetomanythings,mostparticularlyinterestrates.Ifgeneralinterestratesfall,thepriceofalongtermfixedinterestsecuritywillusuallyrisesuchthatthe“yieldtomaturity”issimilartothoseofotherinvestmentswithasimilarrisk.Ontheotherhand,ifinterestratesrise,fixedinterestinvestmentsfall.Majorassetclasses:cash“Cash”maymeancurrency,butinaninvestmentcontextcashisjustareallyshorttermhighlyliquidfixedinterestinvestment.Longertermfixedinterestinvestmentsareusuallycalled“bonds”,shortertermfixedinterestinvestmentsmaybecalled“notes”andreallyshorttermonesareoftencalled“bills”.Cashmanagementtrustsusuallyinvestinaportfolioofhighqualityshorttermfixedinterestinvestments.Becauseoftheshortmaturity,thesefixedinterestinvestmentsarenotassensitivetointerestratechangesandthusdon’thaveagreatdealofcapitalvolatility.OtherassetclassesShares,property,bondsandcasharethemajorassetclasses,buttherearemanyotherstochoosefrom.Hedgefundsaresometimescalledadistinctassetclassastheypursueunconventionalstrategiesthatgivethemperformanceverydifferenttotheassetclassesthattheyinvestin.“Privateequity”isbasicallyasharesinvestment,butincompaniesnotlistedonastockexchange.Agribusinessesareagriculturalinvestmentsinthingsliketreefarmsandvineyards.Somepeoplealsoconsidercommoditieslikegoldtobeanassetclassofitsown,andmanypeopleconsidercollectibles,racehorsesandfinewinestobeusefulalternativeinvestmentassetclasses.ThepointofportfolioconstructionAportfolioisoftenmorethanthesumofitsparts.Becausenotallassetclassesperformthesamewayovertheshortterm,aportfolioofmanyassetclassesusuallyoffersasuperioroverallrelationshipbetweenriskandreturntoanysingleassetAportfolioconsistingonlyofshareswouldhavedonebadlyinthelastfewyearssincethemarketcrashed,butpropertyhasperformedverywell.Thisisquitetypical,more“defensive”assetclassesoftendowellwhenequitiesarefalling.Adiversifiedportfoliohasareasonablelongtermgrowthratebecauseovertimeallassetclassesofferapositivereturn,butbeinginvestedacrossdifferentassetclassessmoothsoutreturnsandoffersamorepredictablegrowthrate.PartTwoCreatingdiversifiedportfoliosHowdiversificationreducesriskTherearetwomechanismsbywhichdiversificationreducesrisk:dilutionandinterference.Dilutioniseasytounderstand,ifyouswaphalfyoursharesforcashthenyoulosehalfyourequityexposureandthereforehalfyourequityrisk.Ifthemarketcrashedtomorrowyou’donlylosehalfasmuch“Interference”iswherenegativemovementsinsomeassetsarepartlycancelledbypositiveonesinotherassets.Agoodexampleiswithpropertyvs.shares,intherecentbearmarketinsharespropertydidverywellwhilesharesdidbadly,theoppositemaybetrueinthenextfewyears.Interferenceandcorrelation“Correlation”isthewordgiventotheextenttowhichassetsmovetogether,thisismeasuredwithstatisticalformulae.Correlationscanrangefrom-1(perfectlynegativelycorrelated)throughto+1(perfectlypositivelycorrelated).IfassetBtendstomoveintheoppositedirectiontoassetAthenthesetwoassetsaresaidtohave“negativecorrelation”,andtheycanbehighlyeffectiveatcancellingouteachother’svolatility.Iftheassetsbothtrendupwardsoverthelongertermacombinationofthemwillhaveareturnequaltotheaverageofthetwoassets’returnsbutwithsubstantiallyreducedvolatility.thegreatestNegativelycorrelatedassetscancelmostamountofeachother’svolatility.

Negativecorrelationisn’tessentialAssetsdon’tneedtobenegativelycorrelatedtohavesomevolatilitysmoothing.Aslongasthecorrelationislessthan+1theassetswillbeatleastalittlebitdifferentandatleastsomevolatilitywillbecancelled.Mostrealworldassetsarepositivelycorrelatedbecausemostpricesarerelatedsomehowtoimportant“macro”

factorslikeglobaleconomicgrowth,interestrates,oilpricesetc.Evenifnegativecorrelationsarerare,substantialvolatilityreductionispossiblebyusingassetswithalowpositivecorrelation.The“efficientfrontier”isthenamegiventothelinethatjoinsallportfoliosthathaveachievedamaximumreturnforagivenlevelofrisk(portfoliosthatare“efficient”).Ifyoucharteverypossibleportfoliothatcouldbeconstructedoutofagroupofassetsandplottedapointonariskvs.returnchart,theresultingplotusuallylooksmuchlikethechartinnextslide.Thetopofthecurveistheefficientfrontier,anythingbelowthatcurveisan“inefficient”portfolio,anythingactuallyonthecurve,orclosetoit,isan“efficient”portfolioEfficientvs.inefficientportfoliosItisimpossibletopredictinadvancewhichportfolioswillbethemostefficientasthiswouldrequireknowinginadvanceassetclassperformanceandcorrelationsAportfoliothathasbeendiversifiedintoavarietyofassetclassesshouldbeclosetoefficientoverthelongerterm,provideditisrebalancedregularly.RebalancingRebalancingaportfolioistheprocessofadjustingaportfoliotobringitbacktoitsoriginalassetallocation.Sinceassetsperformdifferentlyatdifferenttimes,theportfolioislikelytodriftfromyourdesiredassetallocation.Failuretorebalancemeansthataportfoliocanchangeriskprofileovertimeandmaynolongerbeappropriate.AfewsimplerulesofportfolioconstructionIfyouhavetwoassetswithroughlyequalexpectedreturns,putting50%intoeachisawaytohedgeone’sbets(andspreadtherisk)withoutcompromisingexpectedreturnatall.Thelowerthecorrelationofthoseassets,themoretheriskwillbereducedIf1

MeanofX1MeanofX2WhereP=?[X1]+?[X2]1,21/21+1/22If=1

ThenalltheportfoliosarehereIf1

ThenalltheportfoliosarehereThisMeansthe“boundary”

ofthepossibleportfolios

lookslikethis

StandardDeviationMeanMaximizesUtilityCombinewithRiskyAssets

MeanStandardDeviationRiskyAssetsRiskFreeAsset?

MeanStandardDeviationRiskFreeAssetActually,thisholdstruewithagreaternumberofinvestments.Ifyouhave5,10or1,000assetsThereissuchathingas“diversifiable”risk,asyouaddextraassetstotheportfoliothevolatilitytendstodecrease–butonlyuptoapoint.Whenaportfolioreachesacertainlevelofdiversificationtheonlywaytoreduceriskistoaddlowerriskassetswhichwillreducevolatilitybydilution,thisusuallyreducesthereturnDiversificationcanalsoincreasereturnsAhigherreturnmayoftenbeobtainedfromrebalancingtheportfolioasaresultof“reversiontothemean”.Ifyoubelievethatatsomepointinthefuturetwoassetswillgivethesamecumulativereturnthenitwouldmakesensetoinvestintheassetclasswiththeworstrecentperformanceandselltheonewiththebestperformance!Rebalancingdoespreciselythis,althoughitisnormallyseenonlyasariskmanagementtechnique.Thisiswhythediversifiedportfoliodidalittlebetterthanallthreecomponentassetclasses.Asmall“rebalancingpremium”isquitecommonbecauselastyear’sworstperformingassetclassoftenoutperformslastyear’sbestperformingassetclassthisyear.PushingouttheefficientfrontierInvestorsdesirehigherreturnswithlowerrisk.Thereishoweveralimittowhatcanbeachievedwithaparticularsetofassets,thatlimitisdrawnonchartsastheefficientfrontier.Byaddingmoreassetswecanchangetheshapeoftheefficientfrontier.Assetscarrytwoitemsofinteresttous,theirreturnsandtheircorrelationwiththerestoftheportfolio.RefiningourassetallocationThereiswideacceptancethatso-called“value”stocksoutperform“growth”stocks,and“smallcompanies”tendtooutperform“l(fā)argecompanies”,atleastoverthelongertermTheirhigherlongtermperformanceisveryinteresting,butsotooisthefactthattheyoftenhavealowcorrelationtolargegrowthcompanies,thedominantstocksinthemarket.Theyprovidewhatassetallocationisindependentsourceofriskandreturn.Thismayenableustoimprovetheefficientfrontier.Thestockmarketisdominatedbywhatwouldbeclassifiedas“l(fā)argegrowthcompanies”,alsoknownas“bluechips”.藍(lán)籌Asaportionofmarketcapitalisation,theverylargestcompaniesdominatethemarketandsoanexposureinmarketweightingstendstohaveaverysmallamountofsmallcompanyandvalueexposureManyassetallocatorsbelieveaportfolioshouldhavemoresmallcompanyandvalueexposurethanthemarketgives.Althoughsmallcompaniesmightonlymakeup5%ofthemarketbycapitalisation,theymakeupthevastmajorityoflistedcompaniesbynumber,despitethetinymarketweighting,assetallocatorsoftenallocatealargeramountof10to20%tosmallcaps.Anon-technicalapproachgoesbacktothebasics–trytobuildyourportfoliofrommany“independentsourcesofriskandreturn”.Thissimplymeansyoushoulddiversifyintomanydifferentassetclasseshowdoyougoabout

constructingaportfolio?Theusefulnessofhistoricalcorrelationsandreturnsisusuallyoverstated,butcanformacrudeguideaslongaswedon’ttakethemtooseriously.Don’tgettoohunguponquantitativedata,buttrytofindassetsthatareverydifferent(i.e.propertyvs.shares.)DecisionsActivefundsorpassive/indexfunds?Howmuchtogrowthassets,howmuchtoincomeassets?Balanceofvaluestockstogrowthstocks?Howmuchlargecapshares,howmuchsmallcaps?Howmuchmoneytoputindevelopedmarketsvs.emergingmarkets?Listedorunlistedproperty?Shortorlongmaturityfixedinterest?Riskyassetsvs.riskyportfolios.Itisimportanttothinkaboutriskinaportfoliocontext,notanassetcontext.Smallpercentageallocationstoriskierassetslikeemergingmarkets,privateequity,commodities,hedgefundsandagribusinesscanactuallyreducetheriskoftheoverallportfoliobecausetheydon’toperateonthesamecyclesasmajorassetclasses.Smallallocationstosuchassetscanhaveagreatimpactontheefficientfrontier.Areriskyassetslikeemergingmarketstooriskyforconservativeportfolios?Emergingmarketsarebythemselvesaveryriskyassetclass,theirmonthlyvolatilityisabout50%higherthangloballargecompanies.Ontheotherhand,theircorrelationwiththegloballargecapsindexesisquitelow.Despitethehighvolatilityofemergingmarkets,theirlowcorrelationwithgloballargecapequitiesmeansasmallpercentageallocationofemergingmarketstoaglobalportfoliocanactuallyreducethevolatilityofaportfoliowhilepotentiallyincreasingreturns.AlittlevolatilitycangoalongwayInasense,thehighvolatilityoftheriskierassetclassesisoneoftheirmostvaluableattributesforaportfolio.Thehighvolatilityofassetclasseslikeemergingmarketsandcommoditiesmeanstheydowellabovetheirweightincontributingriskandreturntotheportfolio.SomenotesObviouslysomeassetclasseshavebeenmoreefficientthanothersoverthistimeframe,butwhichassetclasseswillbebestoverthenext10yearsisanothermatterentirely.Therereallyisnowaytoforecastwhichassetsaregoingtooutperform,althoughitdoesn’tstoppeoplefromtrying!AddingconservativeassetsSofarwe’veonlyshownwhathappenswhengrowthassetsofthevariousflavoursofsharesandpropertyareaddedtogether.Althoughwecansubstantiallyimproveonlargecapgrowthshareportfoliosintermsofriskandreturntherearelimitstohowconservativeaportfolioofgrowthassetscanbe,topushtheefficientfrontiermoretowardlowerriskstheincomeassetclasses(bonds,cash,mortgages)willneedtobeadded.Wehavetoacceptthatoverthelongertermthiswillprobablycosttheinvestormoneyduetoalowerexpectedreturn,buttheriskreductionpotentialistremendousandthismaybemoresuitableforconservativeinvestors.Halftheriskdoesn’tmeanhalfthereturn!Risktorewardratiosgetmorefavourableforconservativeportfolios.Puttinghalfashareportfoliointocashwillbasicallyhalvetherisk,butsincecashdoesn’treturn0%youwon’thalvethereturn.Ifyougearaportfoliothoughyoudodoubleyourrisk(ifyouuse50%gearing),butbecauseyouhavetopayinterestontheloanyouwon’tdoubleyourreturn.Conservativeportfoliosthereforecangreatlyreduceriskwithoutnecessarilyhavingthesameamountofreductioninthereturn.Thiscanbeseenontheefficientfrontier,whichisusuallycurvedinsteadofstraight.PartThreeRiskprofilingandportfoliodesignwhynotalwaysuseamediumriskportfolio?Ifdiversificationmakesitrelativelyeasytosubstantiallyreduceriskforonlyasmallcostinreturn,whynotdoitallthetime?Theanswerliesincompoundinginterest.Overalongperiodasmallincreaseinreturnsmakesabigdifferencetothefinalportfoliovalue.Thedifferencebetweenaportfoliothatreturns8%over20yearsandaportfoliothatreturns10%over20yearsisverysubstantial.Tenthousanddollarsinvestedat8%for20yearswillgrowto$46,610,onethousandinvestedat10%for20yearswillgrowto$67,275-averysignificantdifference!Ifyouareyoungthenyourtimeframeonretirementassetsislikelytobe30yearsormore.Overashortperiodoftimethereisverylittledifferencesoitmaynotbeworthtakingarisk,butifyoudohavealongtermhorizonthenseriousthoughtshouldbeputintowaystogetanextrapercentagepointortwooutoftheportfolio.Anextrapointofriskisoftenhardtonotice,butanextrapointofreturnmakesaverybigdifferenceinthelongterm!Riskisimportantbutbeingoverlyconservativecanbeacostlymistakeoverthelongterm.Choosingalevelofriskvs.return“Riskprofiling”isatrickybusinessthatdependsonthetimehorizon,risktoleranceandreturnrequirementsofaninvestor.Somemodelportfolioswithdifferentlevelsofriskandtheirrisk/returnprofilesareshownonthenextfewslides.Threedimensionalapproachtoriskprofiling

Mostadvisorsdiscussrisktoleranceintermsofpotentialvolatilityonly,oftenusingshortmulti-choicequestionnaires.Inmyopinion,thisisinadequateanddoesn’treallyaddresstheclient’sneeds.thereareactuallythreedimensionstoriskprofiling:Timeframe–whenisthemoneyrequired?Volatilitytolerance–howmuchvolatility?Conventionality–giventhedifferentcyclesofvalueandsmallcapsharesandthattheymayunderperformlargegrowthcompaniesforextendedperiodsoftime,howmuchofavalueandsmallcaptiltisacceptable?Designingaportfolio–risktoleranceExaminingdatafrommodelportfoliosandaddingonamarginofsafety,decidehowmuchdownsideriskoverthattimeframethatyoucanaccept.First,determinethetimeframeoftheinvestment.Remember,theconsequenceofriskismoreimportantthantheprobabilityofrisk.Riskshouldbeassessedintermsofhowmuchdamageitwoulddotoyourabilitytopayforsomethingyouneedatsometimeinthefuture.Don’tgettooobsessedaboutdaily,weekly,monthlyorevenannualvolatilityifyourinvestmenthorizonis20or30years!Ofcourseifyourinvestmenthorizonisquiteshortterm,youprobablyshouldbeobsessedaboutshorttermvolatility!Designingaportfolio–valuevs.growthValuestocksandsmallcompaniestendtooutperformlargecapgrowthcompaniesoverthelongertermbuttheydohaverisksoftheirown.Valuestocksoutperformedbyahugemarginduringthe“bearmarket”ofthelastfewyears.Thetroublethoughisthatduringthe“techboom”ofthelate1990s,valuestockslaggedbyalargemargin.Weknowwithhindsightthiswasabubble,andmostofthosegainswerelost,butthiswasn’tthateasytospotatthetime.Thenewspaperswerealltoutingthe“neweconomy”,andvalueinvestorsseemedliketheywereobsolete.Asadimensiontoriskprofiling,thisoneisabouthowwillingyouaretoignoreunderperformanceandtheprognosticationsofexperters.Somepeoplearehappytohaveaverystrongtilttowardvaluestocks,butnoteveryonefeelsthatway.Thenumbersforvaluevs.growthstronglyfavourvalueformorethanhalfacenturyintheUSandmanyothermarketswheredataisavailable,thetrackrecordofvalueisimpressive.Buthowmanyyearswillyoupersistwithvalueinvestingifitunderperformsthegeneralmarket?Howdoyouknowthereisn’treallya“newparadigm”andmarketshaven’treallychangedMostpeopleprefertohedgetheirbets,allocatingsomebutnotalloftheirportfoliotovaluestocks,buyinggrowthstocksandhavinga“balanced”exposure.Thismaynotbethehighestreturningstrategyfortheverylongterm,butitseemsmoreconservativeformostpeople.Isvaluemoreriskythangrowth?Manyacademicsarguethattheoutperformanceofvaluestocksvs.growthstocksisa“riskpremium”,i.e.thatinvestorsaremerelybeingrewardedfortakingonmorerisk.Otherswhodon’tbelieveinthe“efficientmarkethypothesis”thinkthattheoutperformanceofvalueiscausedbesystematicerrorsmadebyanalystswhooverestimatethefutureprofitsof“growthstocks”andunderestimatethefutureprofitsof“valuestocks”,thiswouldbean“inefficiency”,anopportunitytoearnahigherreturnwithouthigherrisk.Variouspeoplehaveputforwardvarioustheoriesabouttheextrariskofvalue,butoneofthemostobvioustroublesinthevalue=riskytheoryisthatvaluebasedportfoliostendtobelessvolatile,notmore.RiskofvaluestocksThemainreasonwhymanyacademicssayvaluestocksaremoreriskyisbecauseintheorytheywouldhavetobemoreriskyfortheefficientmarketshypothesistoremainvalid.Manyexplanationsaregiven,butsometendtobealmostmetaphysical,claimingthattheriskcan’tbemeasuredbutistheresomehowandsomewhereInterestingly,priortoacademicsdiscoveringthe“valuepremium”,nobodyclaimedvaluestocksweremorerisky,thisclaimwasmadebyefficientmarketsupportersonlyafterthehigherreturnsweredocumented.Itisaninterestingissue,butfromapersonalinvestor’spointofviewitisaquestionofwhetherthevaluepremiumislikelytopersistforeverandwhethertheyarewillingtotolerateperiodsofunderperformancewheregrowthdoesbetterthanvalue.Valuevs.growthInthelate1990s,growthstocksoutperformedvaluestocks.Ifyouhadswitchedoutofvalueandintogrowthfollowingthatperiodofoutperformanceyouwouldhavebeenhurtbadlybythebearmarketthatfollowed,wherevaluestocksoutperformedgrowthbyabigmargin.Growthstocksoftenoutperforminrisingmarkets,especiallyinthelateststagesofbullmarketswhenmostpeopleinvestthemostmoney.Typically,valuestocksoffermoreconsistentperformance.Ifyoucan’ttolerateunderperformingthemarketordon’twanttobetonavaluepremiumcontinuing,stickwithnormallargecap“bluechip”shares.Stronglytiltedvalueandsmallcapportfoliosaren’tsuitableforeveryone.PartFourStartingandmanagingaportfolioTheimportanceofrebalancingRebalancingconsistsofregularlyadjustingtheportfoliotore-establishtheoriginalassetallocation.Ifyoudon’trebalance,periodsofhighperformanceforsomeassetsand/orlowperformanceforotherswillmessuptheassetallocation.Ifthemarketreversesthensuchaportfoliomightexperiencegreaterlossesorbelessexposedtotherecoveryinunderperformingassets.Apartfromanythingelse,ifyoudon’trebalancethentheportfoliowilldrifttowardsotherriskprofiles,resultinginadifferentriskandreturnprofiletowhatitwasintendedfor.Abalancedportfoliowillbecomehighgrowthbytheendofabullmarket,ahighgrowthportfoliowillbecomeabalancedportfolionearthemarketbottom–theoppositeofwhatoneshouldbedoing.RebalancingandcapitalgainstaxObviouslyanytimeonesellsanassetataprofitacapitalgainstaxliabilitywillbecreated.Ifyouarerebalancingthenitisquitelikelythatahigherthannormalproportionofcapitalgainswillberealisedbecausewearenecessarilysellingthebestperformingassets.Fortaxreasonsitisusuallyagoodideatoimplementrebalancingfirstbybuyingunderperformingassetclasseswithnewcontributionsandreinvestmentofincome,thusminimizingsales.ApproachingretirementThecloseronegetstoretirement,themoreappropriateitistostartimplementingaconservativeinvestmentstrategysincewithdrawalswillstartsoon.Thisneednotalwaysinvolvesellinghighgrowthassets.Overanumberofyearsonecanturnaportfoliofrom“highgrowth”into“conservative”bysimplyinvestingnewcontributionsanddistributionsintoconservativeincomeassetsIftheportfolioisproducing5%padistributions,thensimplybyreinvestingdistributionsintoincomeproducingassetstheportfoliocandropariskprofilecategory(HighGrowth->Growth->Balanced->LowGrowth->Conservative)abouteverythreeyears.Withnewcontributionsonecanchangetheportfoliomorequickly.Itisbettertograduallytransitiontheportfolioasyouapproachretirementthantomakeasuddenchangebecauseotherwiseretirementincomescanbehighlysusceptibletothebehaviourofthemarketintheyearortwopriortoretirement.AfterretirementAsixtyyearoldusuallyhasatleastanother20yearsoflifeexpectancysounlessyouareplanningonspendingyourallmoneywithinafewyearsatleastsomeofyourfundswillhaveatimehorizonexceedingadecade.FourwaystostartaportfolioContributelumpsumsatyourdiscretionDollarcostaverageContributeasinglelumpsumValueaverageContributeasinglelumpsumIfyouhavemoneytoinvest,singlelumpsuminvestinggetsthatmoneytoworkimmediatelyinthemarket.Thetroublethoughisthatyouneverknowwhatthemarketisabouttodoandyouriskmakingamajorinvestmentjustbeforeamarketfall.LumpsuminvestmentsatyourdiscretionManypeopleprefertospreadouttheirinvestmentintoseveralparcels,butincorporatemarkettimingintotheirdecisions.Greatcautionshouldbeexercisedwiththisapproach,variousstudieshaveshownthatpeoplearebadmarkettimers.DollarcostaveragingIfyouhavetroublepullingthetriggerwhenitcomestimetobuyingloomandsellinboom,considerusingamechanicalapproachtoremoveemotionfromtheequation.Ifyouinvestregularamountseverymonth(orquarter)withoutfail,irrespectiveofwhatthemarketdoesandnotvaryingtheamountinvested,timingmistakesareavoidedDollarcostaveragingasinsuranceDollarcostaveragingisawaytoprovideaninsurancepolicyagainstshorttermvolatilityfollowingtheinitialinvestment.Ifthemarketfallsafteryoustartyourinvestmentsthenyourcontinuingregularinvestmentswilltakeadvantageofthosefalls.DollarcostaveraginginavolatilemarketToanextent,dollarcostaveragingisawaytobenefitfrommarketfalls.Ifthepricedrops,thenyourregularmonthlycontributionwillbuyyoumoreshares.Infact,ifyouaredollarcostaveragingthebestkindofmarketisonewherethestockmarketonlygoessidewaysorevendownforsometime.Aslongasstockseventuallygoup(andeventuallytheywill),bearmarketsarebestseenasawelcomebuyingopportunity,notadisaster.Specialneedsofapensionportfolioonecouldconstructapensionportfoliowithshortterm,mediumter