The Generation Z Portfolio is Blowing the Doors Off the Market

Posted on July 18, 2018 by


In January 2015 my wife and I decided to set up investment accounts for our school-aged children.  Each semester they are provided a reward for good grades, half of which they must invest in the market.  Our expectations were modest: We hoped that they’d learn about the value of investing in and holding stocks and maybe they’d learn a bit about selecting companies as well.  I’m calling this the Generation Z Portfolio. Here’s how it is turning out…

The author with his investment team.

How the stocks were selected

We gave our kids wide latitude in selecting stocks to invest in.  Sometimes they know exactly what they want, sometimes they ask for advice.  Sometimes we couldn’t buy the stock they wanted because it was too expensive (AMZN for instance is over $1,200 at present).

In general they pick the stocks representing the companies whose products they know and like. As an example, one son is an avid video gamer so he wanted to invest in Take Two Interactive (TTWO), creator of games like Grand Theft Auto.  Our daughter loves to watch movies so she bought Netflix (NFLX).

Each child has their own individual portfolio.  The statistics I report here are based on a simulated portfolio that represents a combination (union) of their three portfolios.  Each stock was added to the portfolio at the time one of our children decided to buy it.  With one exception they have not sold any of their holdings.  The exception is Ford (F) that we held for about a year, then exited.

How the allocations are set

The real allocations in our childrens’ portfolios were not thoughtfully determined because we purchased the stocks they wanted on an ad hoc basis moving forward.  If they got an influx of funds equal to 10% of their portfolio and they wanted to buy Sony (SNE), well then they had a 10% allocation to Sony.

For the purposes of this simulation however, I decided to leverage the successful allocation practices we follow at Lucena Research: Namely to use an optimizer.  Accordingly, the portfolio is optimized each month to maximize Sharpe ratio, with a constraint that the minimum allocation to any stock is 5%.

Performance and analysis

I used Lucena’s QuantDesk software to simulate the portfolio over time.  QuantDesk allows us to rebalance and optimize the portfolio each month over time. The results are illustrated in the figure below.  I have to say that the performance is remarkable.  Over three years the portfolio has outperformed the market by 129%, with a Sharpe ratio of 1.55. Annualized returns are 33.5% over the last 3 years.

One might suspect that in a bull market like the one we’ve been in that the returns could be attributed to high Beta of the portfolio stocks.  (A Beta greater than 1.0 indicates that the portfolio moves up (or down) more than the market as the market changes.) The portfolio does have a Beta greater than 1.0, but only slightly so. The fact that our Information Ratio is greater than 1.0 at 1.34 indicates that the kids are adding real alpha to this portfolio.

A simulation of the Generation Z portfolio with a quantitative analysis of performance. The portfolio curve is shown in orange, the benchmark (S&P 500) is shown in blue.


Holdings and allocations

This table reports the current (as of July 2018) assets in the portfolio as well as their allocations:

Symbol Name  Allocation   1 Year Return
AAPL Apple 5.0% 30.0%
AMD Advanced Micro Devices 5.0% 22.2%
ATVI Activision Blizzard 5.0% 35.5%
DAL Delta Airlines 5.0% -4.1%
DIS Disney 5.0% 7.0%
FB Facebook 5.0% 31.5%
HAS Hasbro 5.0% -14.6%
INTC Intel 5.0% 54.1%
MCD McDonald’s 5.0% 5.4%
MSFT Microsoft  5.0% 47.3%
NFLX Netflix 6.7% 134.7%
SNE Sony 13.8% 34.4%
TTWO Take Two Interactive 5.0% 66.5%
SPY S&P 500 ETF 5.0% 16.4%
UBSFY Ubisoft Entertainment SA 5.0% 114.4%
WMT Walmart 13.9% 18.3%

What’s next?

The kids want to add two new stocks this month: NVIDIA (NVDA) and Spotify (SPOT). It is probably also time to reassess some of these holdings such as Hasbro (HAS).  We might also drop the minimum allocation to 3% and add a maximum allocation of 10% or so to force more equal allocation.

Will their success endure? We’ll have to wait a few more years before we can claim that our kids are smarter than Warren Buffett. Maybe they’ve just been lucky to latch on to high flyers at the right time.  Or maybe they’re good.  We’ll see.  Watch this spot for future updates.


Disclosures and Disclaimers

Disclaimer: This information has been prepared by Lucena Research Inc. and is intended for informational purposes only. This information should not be construed as investment, legal and/or tax advice. Additionally, this content is not intended as an offer to sell or a solicitation of any investment product or service.

Please note: Lucena is a technology company and not a certified investment advisor. Do not take the opinions expressed explicitly or implicitly in this communication as investment advice. The opinions expressed are of the author and are based on statistical forecasting based on historical data analysis. Past performance does not guarantee future success. In addition, the assumptions and the historical data based on which an opinion is made could be faulty. All results and analyses expressed are hypothetical and are NOT guaranteed. All Trading involves substantial risk. Leverage Trading has large potential reward but also large potential risk. Never trade with money you cannot afford to lose. If you are neither a registered nor a certified investment professional this information is not intended for you. Please consult a registered or a certified investment advisor before risking any capital.