Intelligent Investor Portfolios
Complete Guide to Smart Portfolios
A term that you will often hear in conjunction with robo advisors, are the terms smart portfolios or intelligent investor portfolios. These phrases are not referring to the brain power of the investor themselves!
Instead, smart portfolios or intelligent investor portfolios are typically fully managed, broadly diversified portfolios with exposure to a number of global markets such as fixed income/bonds, and equity, as well as alternative investments such as gold and real estate. They are built for an investor and managed automatically at a low cost since all of the management is done online.
The most common type of service offering smart portfolios are robo advisors. Robo advisor firms offer fully automated and managed portfolios using complex algorithms and software. The investor gets access to these portfolios via an online support model that cuts out a lot of the costs, allowing them to offer professional level portfolio management at a fraction of the cost of traditional investment management services.
In this article, we are going to provide the complete guide to these smart portfolios; all the things you need to consider when investing with robo advisors or other services offering intelligent investor portfolios.
What are the Typical Characteristics of Intelligent Investor Portfolios?
Companies that provide access to smart portfolios share a number of things in common. When reviewing firms that you might want to invest with, these traits all must be there at a minimum. If not, then you should probably look elsewhere as you will not be getting a full suite of services for the fees charged by that company.
In the following table, we list the smart portfolio traits that all smart portfolios or intelligent investing portfolios should include.
Required Smart Portfolio Trait Description
Low Fees Since intelligence investor portfolios use technology to create and manage the asset allocation, the fees should be lower than traditional investment management firms. It is important to look for the lowest fees possible, as high fees can greatly impact investment performance over the long-term.
Global Diversification: Smart portfolios must provide global diversification to multiple fixed income / bonds and equity markets as well as alternative investments such as gold and real estate. By getting global diversification, an investor gets the benefits of gaining access to multiple markets that can enhance returns and greatly reduce risk.
Fractional Shares: In order to take advantage of the power of compound growth, robo advisor firms should allow the investor to hold fractional shares. Fractional shares means that rather than just holding whole shares, you can hold shares up to multiple decimal places. For example, rather than holding 23 shares of an exchange traded fund, you should be able to hold 23.4567 shares of that same ETF.
Instant Access: Intelligent investor portfolios / smart portfolios MUST provide the ability for the investor to add more money to their account at any time, as well as withdrawal funds when required. There should be no lock in period limiting access to the funds within the account.
Absolute Transparency: Robo advisors also need to provide a full look at how the portfolio is performing, what it is holding, and when transactions are done. The client needs to be able to access this type of information 24 hours per day so that they can ensure that their money is being invested according to plan and the performance levels are what s generally expected.
Strong Security and Support: Finally, all online services offering smart portfolios must have strong security and support to both protect customer data as well as provide help when required. They also should make sure that the funds held by the firm on the customer’s behalf is insured and uses proper custodian services.
Smart Portfolio Examples
As part of the complete guide to intelligent investor portfolios, we would be remis if we did not review examples of different smart portfolios. Although the asset allocations provided by different firms will differ, most robo advisors utilize modern portfolio theory to build efficient portfolios that effectively balance risk with reward.
At the risk of getting too technical, modern portfolio theory is an investment theory based on the concept that investors who are risk-averse can build portfolios to maximize a portfolio’s expected return based on a specific level of market risk. It recognizes that to get higher returns, additional risk must be taken. However, there is a point where the possibility of extra ordinary returns is not worth the additional risk. The image below, supplied by Fischer Investment Strategies, explains the concept of modern portfolio theory.
As you can see, the risk is reduced as the number of stocks is included in a portfolio, to a specific point. Adding more diversification is not required beyond a specific point, and smart portfolios build their portfolios by making sure global diversification exists so reduce the market risk and individual asset risks.
In addition, some asset types are riskier in nature. For example, small cap stocks are riskier than large blue chip stocks but also offer higher return potential. Take the following chart from Investopedia as an example:
As you can see, mid cap equities offer a higher return percentage with more risk than investment grade corporate bonds.
What are some examples of efficient portfolios? Here are a few based on specific risk profiles, including a conservative risk profile, a balanced risk profile, a growth risk profile, and a aggressive risk profile.
Conservative Investor Smart Portfolios
A conservative investor is more concerned with protecting their capital over stronger investment returns. They are still after growth, but are comfortable with less growth since they are focused on not losing capital. Here is an example of a good conservative portfolio; notice the higher percentage of money invested into fixed income and bonds.
Fixed Income / Bonds: 75% of total assets
UK Large-Cap Equities: 7% of total assets
US Large-Cap Equities: 7% of total assets
Global Large-Cap Equities: (excluding UK and US) 6% of total assets
Cash: 5% of total assets
Total: 100%
Balanced Investor Smart Portfolios
A balanced intelligent investor portfolio looks for higher returns, at the expense of higher risk. However, they are not overly aggressive and are still looking for protection of capital. Notice that the fixed income / bond portion of the portfolio is slightly lower, with the equity portion being slightly higher.
Asset Type Percentage of Portfolio
Fixed Income/Bonds: 50% of total assets
UK Large-Cap Equities: 15% of total assets
US Large-Cap Equities: 15% of total assets
Global Large-Cap Equities: (excluding UK and US) 15% of total assets
Cash: 5% of total assets
Total:100%
Growth Investor Smart Portfolios
Growth smart portfolios are obviously looking for increased returns. As a result of this drive for growth, the portfolio’s asset allocation is riskier and holds more in equities, including starting to branch out into small and mid cap stocks as well as commodities and real estate. Here is what a growth orientated portfolio could look like:
Fixed Income/Bonds: 25% of total assets
UK Large-Cap Equities: 15% of total assets
UK Small-Cap Equities: 5% of total assets
US Large-Cap Equities: 15% of total assets
US Small-Cap Equities: 5% of total assets
Global Total Market Equities (excluding UK and US): 20% of total assets
Commodities Exchange Traded Funds: 5% of total assets
Real Estate Trusts: 5% of total assets
Cash: 5% of total assets
Total: 100%
Aggressive Investor Smart Portfolios
Finally, intelligent investor portfolios that are aggressive take a very risky stance. Investors using an aggressive portfolio must be comfortable with wild swings in the value of the portfolio. Since they are exposed to high levels of equities, they are much more volatile. Over the ling term (at least five years), the returns tend to be higher however the swings can be dramatic.
Investors who use aggressive smart portfolios tend to be younger, with time on their side or investors who do not get emotional about their portfolio and can let it bounce up and down without selling. The worst thing and investor can do who is invested in an aggressive portfolio is sell when the market is crashing. Instead, they need to be able to just sit on their hands, and let the market recover.
Here is what an aggressive portfolio will look like:
Fixed Income/Bonds: 10% of total assets
UK Large-Cap Equities: 20% of total assets
UK Small-Cap Equities: 5% of total assets
US Large-Cap Equities: 20% of total assets
US Small-Cap Equities: 5% of total assets
Global Total Market Equities (excluding UK and US): 25% of total assets
Commodities Exchange Traded Funds: 5% of total assets
Real Estate Trusts: 5% of total assets
Cash: 5% of total assets
Total: 100%
Robo Advisor Intelligent Investor Portfolios Maintain the Asset Allocation
Robo advisors that use a smart portfolio methodology (and most of them do), will do the work setting up the right portfolio. Depending on the answers to the questions in the account opening questionnaire, they will determine your risk profile (conservative, balanced, growth, or aggressive) as well as your investment time horizon and set up the right portfolio.
Once that portfolio has been set up, the robo advisors will then continue to maintain the portfolio. Due to the nature of investment assets, some assets will rise and some will fall all within the same time period. This means that at certain time parts of your portfolio will be above the target asset allocation and some will be below it.
For example, if the global stock market is performing better than the U.S. market then the percentage of the portfolio in global equities will be higher while the U.S. will be lower. The robo advisor service will then adjust the smart portfolio by selling some of the global assets and distributing that back into more U.S. equities. This will ensure that the intelligent investor portfolios always keep the target asset allocation which also keeps the risk profile of the portfolio right where it needs to be.
That is all done automatically for investors who use robo advisors.
Robo Advisors that Use Smart Intelligent Investor Portfolios
If you are looking for robo advisors that utilize smart portfolios, we track them here at Investoo. The following table lists the most common robo advisors available to investors. If you are looking for the best options to help you build intelligent investor portfolios, this list is a great place to start.
This list is a good starting point for investors looking to use intelligent investor portfolios. They are some of the most popular robo advisors available today. Depending on your country and requirements, they are worth reviewing to see if they will fit your needs.
