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FAANG Stocks: Core-Satellite Portfolio Optimization, Backtest and Analysis #FAANG - YouTube
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Hey, this is Jim Damschroder聽
with portfolio think tank聽聽
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today. We're going to walk through聽
portfolio construction using聽聽
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Faang stocks. What are they? And what's聽
their impact on the portfolio. Let's go.
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All right, what are they? Easy enough FAANG is an聽
acronym and in investments. We love acronyms. This聽聽
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acronym is the first name of several company.聽
Facebook apple, Amazon, Netflix, and Google.聽聽
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We will probably be renaming this, given that聽
Facebook has changed its name to Meta, but that is聽聽
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not so important. In any case, these stocks聽
are some of the driving forces in our country.
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Most of us use these every day.聽
There's different variations on this.聽聽
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We're going to use one instead of Facebook,聽
apple, Amazon, Netflix, Google. We're going聽聽
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to use one swapping out Microsoft for Netflix and聽
as an institutional investor that has the benefit聽聽
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of putting all five companies in the top 10 of聽
the largest companies traded in the United States
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Let's explore their impact on investing. In the聽
S and P 500 index we're going to look at a little聽聽
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research by ed Yardeni and we can see here these聽
stocks were about a trillion dollars amongst all聽聽
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of them. Now, these stocks cumulatively are聽
$10 trillion, so their impact is substantial.
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We can also see that their share of the S and P聽
500 that's a market capitalization weighted index.聽聽
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It's gone from 9% to now聽
26% weight of the index. So聽聽
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if if you're a buy-and-hold investor聽
and you're you've got 26% of your聽聽
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exposure in the S and P five. So these聽
five stops, it's not such a bad thing.
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At least it hasn't been, but maybe聽
there's a way we could be more聽聽
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deliberate in our portfolio construction,聽
and maybe we could do better or worse.聽聽
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We'll learn that in just a minute, few more聽
things on this from a performance perspective,聽聽
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if you were to take Facebook, apple,聽
Amazon, Netflix, Google, and Microsoft.
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That's the whole enchilada. If聽
you took that out of the index聽聽
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and made it its own separate index, you can see聽
the contrast in performance here with those stocks聽聽
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providing a cumulative return substantially.聽
Then the index without those stocks,聽聽
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another way of analyzing this is聽
called a attribution analysis.
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And here we have some research from the bank of聽
Montreal from 2020. We could see that this case聽聽
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even though we've got 26% weight in these stocks聽
are responsible for contributing 41% of the total聽聽
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return of the S and P 500 index. So we say that.聽
These stocks are punching above their weight.
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What got me thinking is what if we could build聽
a core satellite portfolio construction process,聽聽
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where we use these new blue chip companies as the聽
core of our portfolio. And we gave them a weight聽聽
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that was proportionate to the weight that they've聽
been contributing to the performance of the index,聽聽
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freeing up all the rest.
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Underperforming assets to go out and maybe capture聽
some new ideas, optimize the whole enchilada, and聽聽
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let's see how we do. We're going to go in and do聽
that. I'm going to head to portfoliothinktank.com聽聽
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and click the big red button to聽
design and test our portfolio.聽聽
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And this gives us a page, which is our聽
interactive investment policy statement
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and we're going to hit the next button to聽
get into the the portfolio design process聽聽
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here under the first thing that聽
comes up is the legacy positions.聽聽
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You can use this to add specific聽
ideas or your existing account.聽聽
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And I'm going to go ahead and use this to put in聽
Facebook, apple, Amazon, Google, and Microsoft.
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I'm going to skip Netflix. You can use the system聽
to just put in ideas and it'll tell you if they're聽聽
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warranted for investment or you could also force聽
them into the portfolio by defining an allocation,聽聽
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Share or value. I'm going to do聽
that in this case and remember,聽聽
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these stocks collectively contributed 41%聽
of that S and P 500 index performance.
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So in a real simple version here, putting聽
a, an equal weight of 8% until all those,聽聽
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and then tossing 1% into cash or聽
getting. We've got our 41% in the聽聽
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in the FAANG stocks. And now let's go through and聽
build out the rest of the portfolio. See if we can聽聽
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do a little bit better than the index itself聽
here, we can set our objectives, and this is.
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The different properties of the, those聽
investments to be weighed specific to what聽聽
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you value. And I'm going to go for total聽
return. I'm going to dial down income w聽聽
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and if it's in a taxable account,聽
maybe turn that one down.聽聽
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I'm going to turn diversification up.聽
Capital preservation, consistency up.
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Okay. And then there's a risk capacity section.聽
I'm going to leave the defaults on that.聽聽
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And just skip ahead here. This is an all stock聽
portfolio construction process, so we're comparing聽聽
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it to a S and P 500. That's an all stock index. So聽
we're going to leave this as all stocks. Here we聽聽
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could add some investment ideas and I'm just聽
going to pluck in a few thematic investments
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I'm going to put in maybe freelance widely-held聽聽
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and biotech, so you can pick whatever you're聽
interested in investing in and change it anyway.聽聽
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Each one of these has the individual investments聽
underneath. And then based on how those聽聽
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individuals, investments are scored, or prediction聽
systems and how they combine with the rest of聽聽
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your investments and ideas to form a diversified聽
portfolio, determines whether they make the grade聽聽
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or they get cut and how much weight聽
they would be into the portfolio.
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And I'm going to go ahead and leave these聽
constraints as they. And we'll go ahead聽聽
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and set this thing to optimize every six聽
months and rebalance every three months.聽聽
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And here I'm going to prioritize 1,聽
2, 3, my different prediction models.聽聽
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And then we'll go ahead and click what聽
you want to have it in terms of execution.
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And it helps to put in a better account.聽聽
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In this case since we've got 41% of that聽
portfolio chewed up already, I want to make聽聽
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sure I've put in a million dollars. So it knows聽
to lock in those values. Okay. Notifications聽聽
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and our benchmark. You can customize all of聽
this. I'm going to leave all that as it is.
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And I'm going to set my back test length to be 60聽
months. That is five years. That puts it right.聽聽
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Proportional to the research you were looking at,聽
might make for good comparisons there. Okay. And聽聽
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here we go. Okay. This process usually just takes聽
him a minute or two to construct the portfolios,聽聽
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and it's going to produce back a walk聽
forward out of sample re optimized backtest
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so it's basically acknowledging that聽
the world changes and the portfolio聽聽
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that's optimized for us today. Isn't聽
the portfolio that was optimized for us聽聽
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a year ago, or what have you. But it's going to聽
go back and show you how it would have done it聽聽
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in the past to give you a more accurate, feedback聽
as to whether the strategy, should be invested.
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And here's our results. Let's check it out.聽
The diversification side, we've got a pretty聽聽
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decent exposure. It's not, round like a聽
basketball, but if we put our boxes on,聽聽
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we can see we've got most of our boxes covered.聽
Maybe two of them are a little lean, but I can聽聽
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live with that in an all equity portfolio and聽
our P and L obviously this looks beautiful.
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Beating the index considerably and聽
you can see right underneath it,聽聽
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we have our benchmark stats where their聽
return on the strategy. And this is a,聽聽
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an annual return annual geometric return 42%聽
considerably better than the S and P 500,聽聽
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which is the the benchmark there.聽
So far so good on the strategy.
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These numbers look great聽
beta. So this basically says聽聽
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that this strategy was up or down聽
about the same amount as the market,聽聽
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but we've managed to pack on 25% alpha聽
again, that's annual. That's pretty,聽聽
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pretty amazing number there. And our up capture聽
down capture looks good. Always good to see.
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Your ups, a bigger number than your downs. Very聽
good to see your downs under the market that聽聽
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you were comparing to. And you can see we're聽
in the we're right on the cusp there. Okay.聽聽
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We're, it's scoring us as adequate. We're聽
right on the cusp. We get into the green聽聽
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for our total diversification. And again,聽
we've got 41% chewed up in, in five assets.
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So we knew this was going to be a bit concentrated聽
of a strategy coming in. I'm okay with this as it聽聽
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is. I'd really like to see it just to maybe a聽
splash better, but given the performance that聽聽
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we've seen, let's see how the rest of it checks聽
out. Okay. So here's our individual price charts聽聽
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for the assets, and you can see what's what,聽
and here's a rolling chart of those assets.
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So you can see every six months where聽
those re optimizations took place.聽聽
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Always resetting our famous. Back to聽
8% each let's go ahead and take a look.聽聽
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What else the optimizer wanted here? In聽
this case, we had 23 investments that聽聽
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were considered for allocation. And the system聽
advised us to invest in these 14 at this time.
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This is the portfolio to invest in next. And聽
you can always go back under view options聽聽
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and see how that would have been聽
at different periods in time.聽聽
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And you can see we've got the Fang聽
stocks always locked in at 8%,聽聽
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which is also good because it's not letting聽
us drift too much. So we're never leaving.
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Anything become too big of an influence on that聽
portfolio, keeping really the emphasis on the聽聽
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strategy and not some individual investments that聽
maybe we get a little bit lucky on. So I'm liking聽聽
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everything I've seen so far. And you guys can聽
see here, the names of the companies in addition聽聽
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to the FAANG, we've got some of the biotech聽
companies, some of the other widely known widely.
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Investments. making lot of sense here, and聽
it makes sense that those were rounding out聽聽
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that portfolio in the correlation matrix,聽
looking good. We got a lot of stuff, blues聽聽
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and greens. Wonderful to see and even our, block聽
of Fang stocks it's not red, hot correlations.
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We're talking about correlations, 0.6 point seven聽
which is, much better than the appoint nines聽聽
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and eights that non-correlation is what enables聽
the optimization and the rebalancing to provide聽聽
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this gigantic alpha number. Overall I think聽
this is a pretty interesting strategy.
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I think. I might play around with聽
a few variations of this, myself聽聽
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for my own account. And I'm going to go ahead聽
and put a link to this strategy in the comments.聽聽
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And if you want to make one of these for your own聽聽
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you can go ahead and put a link to the one that聽
you built in the comments as well to do that.
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You just click on, share a public link and that'll聽
copy a link that you could put. And an email or聽聽
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Facebook or wherever and people could come聽
in and check it out without having to build聽聽
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it or have log-in credentials, pretty聽
happy with the way this went down. And聽聽
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I think these new blue chip companies in the聽
FAANG are now in this portfolio process, really.
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Contributing, instead of contributing much more聽
than their fair share against the rest of the聽聽
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S and P 500 index. The system has been able to聽聽
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select other investments that they keep it a聽
little bit more competitive. And that's why聽聽
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the return is so much greater than the聽
benchmark. I'm liking what I'm seeing.
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I think this is green lit for investment cap.聽
thank you for your time. And please consider聽聽
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liking subscribing helps me with YouTube and keeps聽
you update on the new content that we produce聽聽
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reviews of different systems, different portfolio,聽
construction tricks, and best practices.
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And if you've got an investor in your聽
life that you think could benefit from,聽聽
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maybe taking a little bit more of a systematic聽
approach getting insights, some of the analytics.聽聽
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And thinking more like a portfolio manager聽
instead of a trader kind of one stock at a time,聽聽
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how does that whole portfolio work together聽
using that power of diversification, which,聽聽
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is sometimes feeble, but if you do聽
it right, it can be pretty powerful.
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And I think we're seeing that here聽
with these giant alpha numbers聽聽
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using that combination of volatility, And聽
non-correlation re optimizations and rebalancing聽聽
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all ratchet up to create this聽
additive level of performance聽聽
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on top of your portfolio strategy.聽
Thanks for your time. Happy investing.
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