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One Hundred IFA Index Portfolios:
Information
IFA Index Portfolio 10
IFA Index Portfolio 20
IFA Index Portfolio 30
IFA Index Portfolio 40
IFA Index Portfolio 50
IFA Index Portfolio 60
IFA Index Portfolio 70
IFA Index Portfolio 80
IFA Index Portfolio 90
IFA Index Portfolio 100
Disclosures for Backtested Performance

Step 11: Risk Exposure

Risk Exposure
Analyze your five dimensions of risk exposure

IFA Index Portfolio Overview

The optimal investment is a globally diversified, tax-managed, and small and value tilted, mix of index funds (risk exposure) matched to your unique risk capacity, referred to as CEO Investing: Capacity-Exposure Optimization.

Index funds (either mutual or exchange traded) are funds with clearly defined sets of rules of ownership, that are adhered to regardless of market conditions. There are about 1,000 index funds available to investors. We like many of them, but our current favorite are the index funds or passively managed funds from Dimensional Fund Advisors (DFA).

IFA offers 100 Index Portfolios, which are individualized and indexed. The Index Portfolios are allocated among three broad asset classes: fixed income (bonds); U.S. stocks; and foreign stocks (see a sample of 20 Index Portfolios in Figure 1). The stocks are further divided by size and value (book-to-market ratio).

Figure 1

General Asset Allocation of IFA Index Portfolios


For an explanation as to why asset allocation explains 100% of your long term expected risk and return, please read this article: Investment Policy Explains All. If you are having trouble understanding this article, please call IFA, 888-643-3133.

According to the Financial Economists Roundtable, index portfolios are the best estimates of the principal risk factors that are likely to influence fund risks and returns in the future.

Matching People with Portfolios

Once the above article is understood, the only decision left is where should an investor be on the risk capacity versus risk exposure line. This is very important because returns are optimized when investors are on the line. Risk capacity can be estimated using the Risk Capacity Survey and risk exposure correlates to the 100 Index Portfolios (investment policies or asset allocations of indexes).

Where are you and your investments on the graph in Figure 2. If you do not know, your investments are equivalent to an uninformed guess or speculation. As shown in the chart, Index Portfolios with the lowest expected risk and return have higher allocations toward fixed income with a moderate investment in stocks. Conversely, Index Portfolios with the highest expected risk and return have less fixed income and more stocks and are tilted toward small companies and value companies in the U.S., International and Emerging Market.

Figure 2

Risk Return Scatter Plot of IFA Index Portfolios and IFA Indexes


The Risk Return Table below includes standard deviations for twenty Index Portfolios. Standard deviation expresses the spread of individual observations around the mean or average. A standard deviation is the square root of the variance. Variance is the measure of the spread of variability of quantitative measurements.

In other words, the standard deviation is a statistic measurement that tells you how tightly the various annual returns are clustered around the average. When the annual returns are pretty tightly bunched together the standard deviation is small and the bell-shaped curve is narrow. When the annual returns are spread apart and the bell curve is relatively flat, it tells you that you have a relatively large standard deviation.

The combination of the average and the standard deviation characterize various bell curve shapes and those shapes represent the risk and return of the Index Portfolio. Figure 3 shows you graphically what a standard deviation represents.

Figure 3

Bell-Shaped Curve Showing Standard Deviations



One standard deviation away from the average in either direction on the horizontal axis (the green area on the graph) accounts for somewhere around 68 percent of the annual returns in the time period. Two standard deviations away from the mean (the green and blue areas) account for roughly 95 percent of the annual returns. And three standard deviations (the green, blue and red areas) account for about 99 percent of the annual returns.

Standard Error
Standard Error

The standard error of the mean indicates the degree of uncertainty in calculating an estimate from a sample, like a series of returns data. A standard error can be calculated from the standard deviation by dividing the standard deviation by a square root of the sample size. So with only 3 years of returns data on the S&P 500, the error in the average return is 2.6 times larger than having 20 years of data.

 

The significant benefits associated with capturing the right amount of risk are elegantly displayed in Figure 4, which shows the growth of $1,000 in 100 different Index Portfolios over the 50+ year time period from January 1961 through October 2012. Each of these engineered portfolios is designed with different blends of equities and fixed income. This continuum of risk and return provides investors the opportunity to invest in a targeted asset allocation that matches their risk capacity score between 1 and 100. The chart further validates the value of carefully matching an investor's risk capacity to a corresponding risk exposure, avoiding the rounding up or down of the analysis. As you can see, a small change in risk made a substantial difference in the growth of $1,000 over the 50+ year period. The chart also shows the growth of $1.00 and $100.00 over the same time period.

Figure 4


Risk and Return Tables


Twenty Index Portfolios and S&P 500
Simulated Returns, Growth of a Dollar and Risks (Standard Deviations)
Jan 1928 to Current Month and YTD
See Disclosure for Backtested Performance

Figure 5

2013 Year To Date Returns for IFA Index Portfolios and Indexes

Data as of Market Close 5/24/13


  • Index Portfolios
  • YTD1
  • Value2
  • Risk3
  • IFA Indexes
  • YTD1
  • Value2
  • Risk3


  • Other Indexes
  • YTD1
  • Value2
  • Risk3
  • Sim. S&P 500
  • SP500
  • 16.59%
  • 1,918
  • 18.32
1 When IFA Indexes are shown in Index Portfolios, all returns data reflects a deduction of 0.9% annual investment advisory fee, which is the maximum IFA fee. Your fee may be less depending on assets under management at IFA. Unless indicated otherwise, data shown for each individual IFA Index is shown without a deduction of the IFA advisory fee. It is important to understand that the assumption of annual rebalancing has an impact on the monthly returns reported for the IFA index portfolios in both this Table, Table 11.9 and in the Index Calculator. The reason for this difference is that with annual rebalancing, the monthly returns are calculated by applying the asset class percentages to the year-to-date returns as of the beginning and the end of the month, unlike monthly rebalancing which assumes that the portfolio is perfectly in balance at the beginning of the month. At a month-end or year-end, the returns shown above may differ slightly from the returns shown on IFA's big table due to the different methods used in the calculation of the impact of advisory fees. See ifabt.com.
2 Index Value based on starting value of one, as of Jan 1, 1928. Source: ifabt.com, dfaus.com. & yahoo.com.
3 The risk measure is calculated as the annualized standard deviation of monthly returns for 84 years from 1/1/1928 to 12/31/2012. (See Index Calculator)
Sources, Updates, and Disclosures: ifabt.com
2008 Year End Data | 2009 Year End Data | 2010 Year End Data | 2011 Year End Data | 2012 Year End Data

Figure 6

2013 Year To Date Year To Date Implementations for the IFA Index Portfolios

Data as of Market Close 5/23/13


Level of
Risk		IFA
Index
Portfolios1		Below are methods for implementing each level of risk.
Social1IRA1Core1Sustainable1Taxable1401(k)1Tax Hybrid1Diversified
Indexes1
Port 10013.23%N/A13.09%13.36%N/A13.11%13.09%13.10%13.26%
Port 9513.30%N/A13.19%13.36%N/A13.15%13.19%13.16%13.31%
Port 9013.37%12.79%13.30%13.37%13.99%13.20%13.30%13.21%13.37%
Port 8512.70%12.15%12.63%12.70%13.29%12.54%12.63%12.55%12.71%
Port 8012.03%11.51%11.97%12.04%12.59%11.87%11.97%11.88%12.05%
Port 7511.36%10.87%11.30%11.37%11.88%11.21%11.30%11.21%11.40%
Port 7010.69%10.22%10.63%10.70%11.18%10.55%10.63%10.55%10.75%
Port 6510.02%9.58%9.96%10.04%10.48%9.89%9.96%9.89%10.10%
Port 609.34%8.94%9.30%9.37%9.78%9.22%9.30%9.22%9.44%
Port 558.67%8.30%8.63%8.70%9.08%8.56%8.63%8.56%8.78%
Port 508.00%7.66%7.96%8.03%8.37%7.90%7.96%7.90%8.13%
Port 457.33%7.01%7.29%7.37%7.67%7.24%7.29%7.24%7.48%
Port 406.66%6.37%6.63%6.70%6.97%6.57%6.63%6.57%6.82%
Port 355.99%5.73%5.96%6.03%6.27%5.91%5.96%5.91%6.17%
Port 305.32%5.09%5.29%5.37%5.57%5.25%5.29%5.26%5.52%
Port 254.65%4.44%4.62%4.70%4.86%4.59%4.62%4.59%4.86%
Port 203.98%3.80%3.96%4.03%4.16%3.92%3.96%3.93%4.21%
Port 153.31%3.16%3.29%3.37%3.46%3.26%3.29%3.26%3.55%
Port 102.63%2.52%2.62%2.70%2.76%2.60%2.62%2.59%2.90%
Port 51.96%1.88%1.95%2.03%2.06%1.94%1.95%1.95%2.25%
1 When IFA Indexes are shown in Index Portfolios, all returns data reflects a deduction of 0.9% annual investment advisory fee, which is the maximum IFA fee. Your fee may be less depending on assets under management at IFA. Unless indicated otherwise, data shown for each individual IFA Index is shown without a deduction of the IFA advisory fee. It is important to understand that the assumption of annual rebalancing has an impact on the monthly returns reported for the IFA index portfolios in both this Table, Table 11.9 and in the Index Calculator. The reason for this difference is that with annual rebalancing, the monthly returns are calculated by applying the asset class percentages to the year-to-date returns as of the beginning and the end of the month, unlike monthly rebalancing which assumes that the portfolio is perfectly in balance at the beginning of the month. At a month-end or year-end, the returns shown above may differ slightly from the returns shown on IFA's big table due to the different methods used in the calculation of the impact of advisory fees. See ifabt.com.
Sources, Updates, and Disclosures: ifabt.com
2012 Year End Data

Figure 7

Risk and Reward of 20 IFA Index Portfolios and IFA Simulated SP500


Figure 8

The Annualized, Highest and Lowest Returns for 20 IFA Index Portfolios Over Many Periods
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Figure 9

Risk and Reward of IFA Indexes
Links to DFA Mutual Fund Prospectuses: DFA Prospectus for most DFA funds - DFA Prospectus for Tax Managed Funds

Figure 10


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Figure 11


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Home
Risk Capacity Surveys
Retirement Analyzer
Calculators
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Chart Index
Open an Account
About Us
IFA.tv
YouTube
Articles
Books
Library
FAQs
Quotes
Podcast
Papers
Links
401(k) Scorecard
One Hundred IFA Index Portfolios:
Information
IFA Index Portfolio 10
IFA Index Portfolio 20
IFA Index Portfolio 30
IFA Index Portfolio 40
IFA Index Portfolio 50
IFA Index Portfolio 60
IFA Index Portfolio 70
IFA Index Portfolio 80
IFA Index Portfolio 90
IFA Index Portfolio 100
Disclosures for Backtested Performance

 Index Funds Advisors, Inc. All rights reserved.
Backtested Performance Info  |  Terms of Use  |  IMPORTANT DISCLOSURES

 

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