Portfolio Design – choosing the right mix of assets appropriate to a particular investor – is the key to successful investing. It can help you accumulate wealth over time, while cushioning the blow of possible economic downturns. But in order to successfully achieve this goal, you need to be familiar with all of the major asset classes that go into modern portfolios and learn how much they add to portfolio diversification. Thoughtful asset allocation provides discipline to the investment process and gives you the best chance of building and safeguarding wealth. Wharton Professor Richard C. Marston, 2014 recipient of the Investment Management Consultants Association’s  prestigious Matthew R. McArthur Award, will guide you through the major decisions that need to be made when designing a portfolio and will put you in the best position to balance the risk-reward relationship that is part of this endeavor.  Portfolio Design is to be read by investment advisors. The book is rich in information about individual asset classes, including both traditional assets like stocks and bonds as well as alternative assets such as hedge funds, private equity, real estate, and commodities. So it should appeal to all sophisticated advisors whether or not they are trying to qualify for one of the major investment designations. In fact, the book is designed to be read by any advisor who is as fascinated as Marston by the investment process.

Table of Contents:
Preface xiii Acknowledgements xv About the Author xvii About the Book xix Disclaimers xxi CHAPTER 1 Asset Allocation 1 Ingredients of Asset Allocation 3 Lessons of the Recent Downturn 6 So Are Bonds the Place to Invest? 10 So What Happens When the Economy Turns Up? 13 Some Necessary Tools for Analysis 15 Appendix: Description of the Statistical Tools 16 CHAPTER 2 Long-Run Returns on Stocks and Bonds 21 Stocks and Bonds Since 1951 22 How Much More Attractive Are Stocks than Bonds? 24 Real Returns 25 Reconsidering Bond Returns 27 Reconsidering Stock Returns 30 Alternative Estimates of Long-Run Stock Returns 32 Upper and Lower Bounds for Equity Returns 35 Appendix: Alternative Estimates of Stock Returns 36 CHAPTER 3 Small-Cap Stocks 41 What Do We Mean by Small-Cap Stocks? 43 Relative Performance of Large-Cap and Small-Cap Stocks—Russell Series 45 Relative Performance of Large-Cap and Small-Cap Stocks—SBBI Series 48 Relative Performance of Large-Cap and Small-Cap Stocks—Broader Analysis 50 Large-Cap and Small-Cap Stocks in a Portfolio Context 52 Summary—Key Features of Small-Cap Stocks 55 CHAPTER 4 Value and Growth Investing 57 Description of the Russell 1000 Indexes 57 Relative Performance of Growth and Value Indexes 59 Value and Growth Indexes for Earlier Periods 64 Relative Performance of Small-Cap Growth and Value Stocks 65 Portfolios with Growth and Value 69 Summary—Key Features of Growth and Value Stocks 71 CHAPTER 5 Foreign Stocks 73 Returns on Foreign and U.S. Stocks 75 Currency Capital Gains and Foreign Stock Returns 79 Diversification Benefits of Foreign Stock Investing 85 Are There Shortcuts to Owning Foreign Stocks? 90 Summary—Key Features of Foreign Stocks 93 CHAPTER 6 Emerging Markets 97 What Is An Emerging Market? 98 Emerging Stock Market Indexes 101 Emerging Stock Market Returns 103 Risks of Investing in Emerging Stock Markets 107 Emerging Market Bonds—A Brief History 113 Returns on Emerging Market Bonds 114 Summary—Key Features of Emerging Market Stocks and Bonds 117 CHAPTER 7 Bonds 121 Treasury Bonds 122 The Wider U.S. Bond Market 127 Returns on U.S. Bonds 131 Bond Markets Outside the United States 133 Summary—Key Features of Bonds 140 CHAPTER 8 Strategic Asset Allocation 143 Expanding the Portfolio to Include Other Bonds and Stocks 145 Expanding the Portfolio to Include Foreign Stocks 147 The Dirty Secret of Optimization 150 Alternative Approaches to Optimization 154 Estimating Portfolio Returns—the Premium Method 155 Portfolios in Practice—Example of MarketWatch.com’s Lazy Portfolios 159 Beyond the Traditional Efficient Frontier 163 CHAPTER 9 Hedge Funds 167 Investment Strategies 169 Hedge Fund Returns 172 Hedge Fund Biases 178 Performance Across Managers 181 Fund of Funds 182 Hedge Funds in a Portfolio 186 Summary—Key Features of Hedge Funds 187 CHAPTER 10 Venture Capital and Private Equity 191 Common Features of Venture Capital and Buyout Funds 192 Venture Capital 195 Returns on Venture Capital 198 Buyout Funds 205 Returns on Buyout Funds 207 Key Features of Private Equity 211 CHAPTER 11 Real Assets—Real Estate 213 Real Estate Investment Trusts 214 Direct Ownership of Real Estate 220 Home Ownership 223 Concluding Remarks 231 CHAPTER 12 Real Assets—Commodities 235 Sources of Return on Commodity Futures 236 Returns on Commodity Futures 239 Performance in a Portfolio 245 Does Gold Belong in the Portfolio? 249 Active Investment in Commodities—Managed Futures 251 Summary—Key Features of Commodity Investments 253 CHAPTER 13 Asset Allocation with Alternative Investments 257 Diversifying into Real Estate—Alternatives for Ordinary Investors 258 Expanding the Menu of Alternative Assets 262 High Net Worth (HNW) Portfolios 264 Ultra HNW Portfolios 266 Lessons about Alternatives from the Yale Endowment 269 Lessons about Alternative Investments Learned in the Financial Crisis 277 Verdict on Alternative Investments 280 CHAPTER 14 Investing and Spending by Foundations 285 Spending Rules 286 Estimating Future Bond and Stock Returns 288 Volatility and Uncertainty 288 Portfolios of Stocks and Bonds 290 Description of the Spending Plan 291 Using Historical Returns Since 1951 to Set Spending Rules 292 Effect of Lower Stock Returns on Spending Rules 294 Effects of Different Stock/Bond Allocations 296 Concluding Comments 299 CHAPTER 15 Investing and Spending in Retirement 303 Longevity 306 Spending Rules for Retirement 308 Portfolios of Stocks and Bonds 309 Baseline Case: Can Two Live More Cheaply Than One? 310 Effects of Bequests and Variable Spending Rules 311 How Can I Turn a Defined Contribution Plan into a Defined Benefit Plan? 313 Concluding Comments—Postpone Retirement? 314 CHAPTER 16 The Discipline of Asset Allocation—Rebalancing 319 Rebalancing Defined 320 Rebalancing When Times Are Good 321 Rebalancing When Times Are Bad 323 References 325 Index 331