Investment strategy: Equity and real estate quota

In the last Flash 19 we explained why we do not use portfolio optimization for portfolio composition. Without an optimizer, however, one is left rather exposed when deciding on the portfolio structure and must rely on sound economic common sense.

As the building blocks for our Economico standard portfolios, we limit ourselves to the asset classes cash CHF, bonds CHF, Swiss equities, global equities and Swiss real estate. Not particularly exciting, but effective. In the coming Flashes we will also explain why other asset classes are missing.

The first step is determining the ratio of real assets to nominal assets. Setting this ratio is THE pivotal decision in portfolio construction. No other decision has a greater influence on the resulting return and risk profile of the overall portfolio. The tangible asset ratio is the sum of equities and real estate categories. The level of this ratio directly determines the risk level embedded in a portfolio. This risk level must match the investor’s individual risk profile: an investor with high risk capacity and high loss tolerance can also afford a high tangible asset ratio — and vice versa.

The chart of the week illustrates how we assign the level of the tangible asset ratio to the investor’s individual risk profile in Economico standard portfolios and how the return and risk potential of the portfolio increases as the tangible asset ratio rises.

We also address the determination of the real estate share within the tangible asset ratio. This decision can be approached pragmatically: anyone who owns property already has a significant concentration of wealth in this asset class. The diversification principle therefore suggests that homeowners should refrain from adding real estate securities to their portfolio and instead implement the tangible asset ratio exclusively with equities. For this reason, we have added an option to the Economico Marketplace that allows the real estate asset class to be excluded or “clicked away” in standard portfolios.