Pimp My Portfolio!!!

Raising risks and returns!

Some of you may have watched the MTV programme Pimp My Ride ; for those of you who haven’t it entailed the rapper Xzibit taking someone’s car and rebuilding it to mirror their personality – often it involved lots of ostentatious colour schemes, plenty of bling and fancy additions to what was usually a run of the mill saloon car.

Anyway to get back on track after catching part of an episode the other day I started thinking about how the example of how to us the risk system to think about allocation between Equities and Index-Linked Gilts (click here to read this article) and whether I could “Pimp My Portfolio” using something other than just the FTSE-100 and FTSE Index Linked Gilt Index.

I had hoped to be a bit more extreme than it ended up but leveraged ETFS that I could have used to take x3 long or x3 short positions only really became available in 2014 so I couldn’t test back to 1998 as I normally would (being a bit sad I may do the maths in excel at a later date!). Therefore I only changed the assets used slightly……

When it was low risk I invested

  • 40% in the FTSE-100
  • 25% in the FTSE Mid Cap
  • 15% in the FTSE Small Cap
  • 20% FTSE Index Linked Gilts

When it was high risk I invested

  • 20% in the FTSE-100
  • 80% FTSE Index Linked Gilts

In each instance I used the Total Return Index so that income would be taken into account.

First lets look at the original outcome using only the two indices

Saloon

FTSE-100 and FTSE Index Linked solid returns but a little boring?

Now lets look and see what happens when we add in the Mid and Small Cap Indices……..

An extra 1.19% per annum is achieved - an extra 73.98% over since 1998

An extra 1.19% per annum is achieved – or 73.98% total since 1998 – in comparison to original test

This type of approach brings risk and every individual needs to align their strategy to meet their risk profile……but for some that outlandish paint work or excessive sound system may be what you want!

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