Portfolios

Each investor is unique in their:

• financial goals,
  
• investment horizon,
  
• financial situation,
  
• attitude to risk
  

We set up multiple portfolios that are available through the Curvo app, each optimised for a particular type of investor. When you sign up, you are asked a series of questions to get to know you and learn what type of investor you are. Based on your answers, we will match you with the best portfolio.

Your financial situation and goals (and even your attitude to risk) may change over time. That's why this process is repeated regularly to make sure that your investment strategy always remains aligned to you and your needs.

Asset allocation

Past returns provide no guarantees for the future. The value of your investment may fluctuate. You may lose (part of) your investment.

One of the core principles is to invest only in assets that are widely understood, that have stood the test of time and are predicted to earn significant returns over the decades to come. Concretely, the portfolios solely consist of index funds that invest in stocks and bonds.

Why stocks?

Stocks are the main drivers for returns. Throughout the decades, companies all over the world have continued to innovate and thereby yield solid gains to their investors. Global stocks have made an average annual return of 5.2% over the last 120 years, and that's after inflation [1]. There is no sign that this trend will stop: the drive to create and innovate is an innate trait of human beings.

However, there's no free lunch in investing. Higher returns always come with higher risks. In the world of finance, this risk translates to greater fluctuations in the prices of stocks. They can go up and down very quickly, sometimes as much as 45% in a good year like 1999, but also as low as -40% during a "once in a lifetime" crisis like in 2008. In finance jargon, we say that stocks are highly volatile.

To counter the fluctuations of stocks, bonds are used.

Why bonds?

A bond is like loaning money to a company or government. You give them money now, and they promise to pay you back later with a little extra as a thank you.

Whereas stocks are very exciting (and scary when they sharply drop), bonds are very boring. They don't fluctuate as much. But that means their returns are lower, at an average 2.0% per year [1]. So one way bonds are used in your portfolio is to tame the volatility of stocks. Portfolios with more bonds relative to stocks will be better suited for investors with a lower appetite for risk.

Beyond their role of stabilising a portfolio, bonds are also great diversifiers. It turns out that oftentimes when stocks are dropping, bonds are rising, and vice versa. So the losses of one type of asset can be partially offset by the gains of the other. In finance speak, we say that there is little correlation between stocks and bonds.

Combining stocks and bonds in a portfolio

The ratio between stocks and bonds in a portfolio is used as a knob to change the degree to which the portfolio fluctuates. When more stocks are added at the expense of bonds, the portfolio becomes riskier. But as a consequence, you get a higher expected return over the long term. Conversely, replacing some stocks with bonds makes your portfolio less volatile, but also lowers its expected return.

Choice of indexes

When choosing the indexes, most importance is attributed to:

• simplicity
  
• diversification across countries and regions
  
• diversification across sectors and industries
  
• weighting by market capitalisation
• exclusion of companies that are destructive to the planet
  

Stock indexes

Two stock indexes were chosen:

• FTSE Developed All Cap Choice index. The index is based on the FTSE Developed All Cap index and includes 4,776 companies across 26 countries that are considered "developed" markets (US, Japan, UK, Canada, Germany…). It excludes companies involved in non-renewable energies, vice products and weapons.
  
• FTSE Emerging All Cap Choice index. Similarly, this index is based on the FTSE Emerging All Cap index. It consists of 2,728 companies of all sizes from the 24 countries designated as "emerging" markets by FTSE. These countries include China, Taiwan, India and Brazil amongst others. It also excludes companies that are involved in non-renewable energies, vice products and weapons.
  

The combination of the two indexes represents 7,504 companies that are spread across 40 countries.

Bond indexes

The role of the bonds in the portfolios is to act as a stabiliser through government bonds, and as a diversifier through corporate bonds.

Three bond indexes were selected:

• Bloomberg Global Aggregate Corporate index. The index consists of bonds from companies from all over the world that meet the United Nations Global Compact (UNGC) principles. Furthermore, it excludes bonds issued by companies that are involved in controversial weapons or tobacco products.
  
• Bloomberg Euro Government Float Adjusted Bond index. The index is composed of government bonds from the countries that have adopted the Euro as their currency (France, Italy, Belgium, etc...).
  
• Solactive Eurozone Government Bond 0-1 Year index. Similar to the Bloomberg Euro Government Float Adjusted Bond index, it tracks Euro-denominated government bonds. However, it only invests in short-term bonds with a maturity less than a year.

Choice of funds

Once the indexes have been chosen, funds that implement them must be found. Several criteria guide the selection:

• Price. Fund providers charge an annual fee for managing the fund. Naturally, the lower the better!
  
• Taxes. There are several taxes involved when investing. Funds that lower taxes for you are chosen.
  
• Distribution of dividends. The portfolios are composed solely of accumulating funds because they're tax-advantageous to the Belgian investor when adopting a buy-and-hold strategy.
  
• Assets under management. Larger funds are less likely to be shut down.
  
• Replication. Funds that synthetically replicate their assets expose you to counterparty risk. Therefore, only physically replicated funds were selected.
  

On this basis, the following funds were picked:

We built five portfolios, each matching a different type of investor. They go in order of most risky (but highest expected return) to least risky:

Growth

Energetic

Smooth

Calm

Protective

Expected returns

You probably wonder what kind of return you can expect when investing in one of the Curvo portfolios. We use two methods to estimate:

1. Using the Capital Asset Pricing Model, which is a theoretical framework where we use the past performance of the asset classes each portfolio invests in.
2. Using Monte Carlo simulations, where we simulate possible futures using the past performance of the funds in each portfolio.

The Capital Asset Pricing Model, or CAPM in short, is like a recipe for understanding investment risk and expected returns. When we invest, we want to be compensated for two things. First, the time value of our money (what we could earn risk-free, like from government bonds). Second, the extra risk we're taking by investing in stocks or other assets. CAPM helps us calculate how much extra return we should expect for taking that risk.

With the CAPM model, we can estimate the expected returns of the Curvo portfolios. These take all fees into account.

We can also estimate the future by running simulations based on the historical performance of each fund in the portfolios. Because of the uncertainty of the future, we can map out five scenarios for each portfolio: great, good, average, bad and very bad. The simulations make a few assumptions:

• We ran 600 "possible futures" for each portfolio.
• The simulations assume a €2,000 investment that is kept for 30 years.
• The simulations take into account the management fee.
• The portfolios are rebalanced whenever one of the assets is out of balance by 5%.

Growth

Energetic

Smooth

Calm

Protective

Comparison

The results are summarised in the following table:

Quantifying risk

When investing, the trade-off between risk and return is inevitable. Each of the portfolios exhibits a different risk behaviour. For instance, the Growth portfolio has a higher expected return, but this comes at a higher risk. This is taken into account when matching you with the right portfolio.

As we've seen above, a higher risk translates to greater fluctuations. How can this volatility be analysed? One way is by looking at the maximum drop in value that a portfolio may suffer in any given year.

By studying the past, an idea of a portfolio's future behaviour can be obtained. In the graph below, we display the maximum annual loss that the portfolios may exhibit. Because the future is uncertain, one has to assume a certain range of confidence. As an example, for most years, Smooth will never drop more than 10%.

If you want to learn more on this analysis, we dig deeper into our calculations on Backtest.

Minimum investment periods

In the previous section, we saw that riskier portfolios may suffer greater losses. Because of this, more volatile portfolios require a longer investment time to increase the odds of a positive return. For each portfolio, there's a recommended minimum period you stay invested to have a good chance of a positive return by the end:

• Protective: at least 5 years
• Calm: at least 5 years
• Smooth: at least 7 years
• Energetic: at least 9 years
• Growth: at least 12 years

Managing your investments is an ongoing process.

Rebalancing

The portfolios are monitored on a weekly basis to see whether they're still in line with the intended asset allocation. It's rebalanced when any of the assets is 5% out of balance.

Monitoring of the funds

The funds in the portfolios are regularly monitored and reviewed. A fund may be replaced with a better or cheaper alternative.

Furthermore, each fund must always meet sustainability criteria. This means that a fund whose sustainability standards are not up to the criteria may be replaced.

In line with your objectives and situation

Every year, it is made sure that your portfolio is still aligned to your needs and financial goals. Through the app, you are also able to share if your life situation changes: job promotion, purchase of a house, children, etc... Your portfolio will be adapted accordingly. 

Investor lifecycle

As you get older and get closer to reaching your financial goals (for instance, retirement), the risk level of your portfolio needs to be adjusted. This will be a constant process throughout your journey.