The chart below represents a low-risky allocation of the Multi Wealth Advisors portfolio to an individual worth $100,000:
Before the launch of Investment Adviser, PMPT-based guidance was only available to a limited
number of investors as tailor-made PMPT solutions were too complex. Specifically, the effort
required to identify the true risk tolerance of an individual, optimize their assets allocation, and
identify the ideal securities to represent each asset class was beyond the reach of free, Web-based
tools. Everything gets even more complicated if add the necessity to rebalance investment
portfolios on a regular basis in order to maintain the desired risk level.
Choosing Ideal Managers
Investment advisers and brokerage firms have traditionally recommended resorting to various
hedge funds representing different asset classes. In this regard, hedge funds used to be very
convenient as they could be easily chosen using the well-known rating system. In 2010,
Morningstar admitted that its rating system did not successfully identify hedge funds able to
outperform the market in the future.
1. A significant amount of research published by now has shown that 80-90% of hedge funds and
managed accounts underperformed the market.
2. The most cited work on the subject showed that over a 20-year period, hedge funds on average
underperformed the market by 2.1% in terms of pre-tax return.
3. The problem is aggravated by the fact that most advisers underestimate the role of tracking
errors, liquidity and securities lending – as well as costs – when choosing the most appropriate
hedge funds or managed accounts.
Identifying True Risk Tolerance
Over the past five years, behavioral economics has gained a significant amount of knowledge on
identifying the risk perception by individual investors. In fact, it is irrelevant to directly ask people
which exactly level of risk they find acceptable. The usual reaction of the vast majority of people is
pick 6 on the scale of 1 to 10 because that is what they believe they should answer. Typically the
number they choose overstates their true willingness to take risks. Unfortunately, most free online
tools and financial advisers rely on these biased answers to minimize the number of questions
posed to a prospective client. In order to properly employ PMPT, one must get thorough
understanding of the individual’s objective tolerance for risk and their subjective perception of this
tolerance. For the sake of accuracy, we pose much more detailed questions to our clients and
process their answers by sophisticated algorithms.
The Importance of Rebalancing
Although the PMPT approach allows to compose the best possible portfolio at any given moment, its
composition will not remain optimal forever. It will naturally drift following capital market moves
and certain assets will outperform others. This typically results in two adverse outcomes:
The portfolio risk increases as the equity portion of the portfolio grows beyond its original
allocation, the allocation mix becomes sub-optimal. To maintain the intended risk level and asset allocations,
a portfolio must be periodically rebalanced with its original targets in mind. Once again,
sophisticated algorithms are required to optimize the rebalancing in line with tax and trading
At MultiWealth, revolutionize the investment business using the power of modern analytical
engines and the Internet . It is now possible to offer every investor the highest possible level of
financial rigor, formerly a privilege of the wealthiest.
Traditional financial advisors typically rely on populating their clients’ portfolios with the tried and
reliable asset classes - stocks and fixed-income instruments. In some cases, they might break down
their stock holdings into DM and EM segments. Investors are likely to increase their long-term risk-
adjusted returns if they add uncorrelated asset classes to their portfolio until they face diminishing
We have simulated every possible combination of the asset classes under consideration to
determine which of them increase the return simultaneously reducing the portfolio’s volatility
(risk), and came up with 3 major asset classes:
Commodities: Investments that reflect the prices of commodities, such as gold or agricultural
FX: FX instruments are a good idea for portfolio diversification in periods of market turbulence.
Fixed income: Sovereign debt and banking deposits.
We do not consider stocks an appropriate investment instrument, because equity markets are
usually the first to respond to economy slowdowns.
Optimal Security to Represent Each Asset Class
MultiWealth reviews asset structure of more than 1,000 hedge funds and managed accounts on
an ongoing basis in order to identify the most appropriate managed accounts to represent each asset
class. We look for hedge funds and managed accounts that minimize costs and tracking error while
offering ample market liquidity. Most investors do not realize that some funds and managed
accounts do not have sufficient precision in tracking the indices they had been designed to mimic.
Choosing funds and managed accounts with low expense ratios that do not track the asset classes
recommended by us creates the risk of your portfolio’s undeperformance. We choose funds and
managed accounts that are expected to be liquid enough to allow withdrawals at any time. Finally,
we select funds or managed accounts that have conservative and shareholder-friendly policies of
security lending. In addition to choosing what we believe to be the best managed accounts at any given
time, we explain why we do so. We provide a detailed analysis of how the selected funds or managed
accounts compare with our second and third best choice for each asset class in terms of their market
Optimal Mix of Asset Classes
MultiWeallth uses Mean Variance Optimization approach combined with the Black-Litterman
model to calculate the optimal set of investments among the selected six asset classes for every
degree of risk. Mean Variance Optimization uses the expected return and volatility for each asset
class and the correlations among asset classes to find the combination that delivers the highest
possible return for any given standard deviation of a portfolio’s returns. Our platform is built to
evaluate the comprehensive mix of allocation variations in each asset class. According to our
calculations, highly detailed optimization of the asset classes mix is likely to add approximately
0.5% to an individual’s annual investment returns for any given level of risk – as compared to
rounded allocations typically recommended by online asset allocation tools from brokerage houses.
Determining Your Risk
MultiWealth asks each prospective client a set of 7 questions to evaluate both the individual’s
objective ability to take risks and their subjective willingness to do so. In contrast, most online tools
solely focus on the subjective risk perception.
We ask subjective risk questions to determine both the level of risk an individual is fine with and
the consistency of their answers. For example, if an individual is willing to take much risk in one
case and very little in the other case, then the answers are deemed inconsistent and the client is
assigned a lower risk tolerance score than the simple weighted average of their answers would
yield. We believe the answers to these questions are critical for accurate assessment of an
individual’s risk appetite.
As for the so-called objective questions, we ask them in order to estimate whether the individual is
likely to have enough savings to accommodate for their post-retirement spending needs. The greater
the extra income, the more risk the customer is able to take.
Our overall risk metric combines subjective and objective gauges of risk tolerance with the heavier
weight assigned to the component that is more risk-averse. We have chosen this approach because
individuals tend to overstate their true risk tolerance.
Rebalancing & Ongoing Monitoring
A portfolio is rebalanced after dividends accrual on some of the portfolio assets, after a client deposits
funds on, or withdraws them from, their accounts, or if any changes in relative allocations justify a
rebalancing after taking tax implications and trading costs into consideration.
Importantly, a customer’s asset allocation will typically need to be adjusted over time as their
investment goals and risk tolerance levels may change. MultiWealth recommends our clients to
thoroughly review their investment plan every 1-2 years to determine whether their risk tolerance
and target allocations should be updated. We also remind our customers on a quarterly basis to keep
us informed of any such changes.