Investment Portfolio
Recently, as I was going through a group created to help people make better investment decisions, I came across a great misconception:
“Your portfolio strategy depends on your objectives” is total and utter nonsense.
NOTE: This newsletter is purely educational, and I don’t provide financial advice.
This being said, the objective of an investor is only one: maximize returns while minimizing risk. That’s it, nothing else. The amount of your preparation will determine your overall risk. Your returns will depend on market conditions and your preparation and research.
Saying “I want 5% returns” or 10%, 20%… those are fairy tales. You don’t decide on a return and then go after it. If that were the case, we’d just go for the highest number we could imagine.
The decision would be obvious on the highest return; the problem? Speculation.
Expected Returns
When you go after a predetermined ROI, you will be subject to cons, lies, speculation, and the overall risk of losing your principal.
So, what’s a reasonable expectation for your portfolio? A commonly accepted number is 2-5 percent.
This is also the recommended rate at which you can expect to be able to live from investments. But it’s not unusual to see periods of 9-10 percent either in the stock market, bonds, and other sound investments.
If you live from investments, it’s not advisable to withdraw that over 5% because a correction always follows times of abundance.
Hint: We've been in abundance for the last 10 years. We currently are at markets all-times high, you can be sure there will be a correction, but nobody knows when.
Portfolio Objective
Regarding your portfolio this is what you should strive for:
Preserve wealth, which is the most important
Get adequate returns for your investment
And there is a known proven method with a century of track record.
Risk mitigation
The way you preserve wealth is by managing risk. The most important aspect here is to preserve the value of your principal. I'm going to discuss two different approaches to your investment portfolio, one by Benjamin Graham, the other by Ray Dalio.
Benjamin Graham
Graham proposes you should split your portfolio between bonds and common stock (or an investment fund).
The base case calls for a 50/50 split between bonds and stocks. But you can go as low as 25% in either and no higher than 75% in either, depending on market conditions.
The way I see it you could also have some part allocated to cash or equivalent: money or gold. Silver could be an option as well (but it is speculative), I don’t consider crypto as a cash equivalent.
"Gold is money, everyting else is credit." JP Morgan
How much money? No lower than your emergency fund (depending on your life circumstances) and no higher than 50%. However, in normal circumstances, it should be around 10-15 percent or less.
Ray Dalio
Has the same approach, in a sense, but different.
Dalio proposes that the economy has 4 seasons, and you should allocate your investments to hedge for each season. As you understand his model, you can be heavier or lower in whichever season you believe to be the most probable.
Seasons:
As it relates to growth – you have rising or declining economic growth.
As it relates to inflation – you have inflation or deflation.
This portfolio distribution is presented in the book “Money Master the Game” by Tony Robbins. This strategy alone is well worth the value of the book, and I can't recommend it enough.
His allocations are in full market stock ETFs at around 25%; long-term (over 10 years) and medium-term (2-7 years) US treasuries at around 40%; gold at around 15% and commodities at 15%.
Each kind of asset performs in different seasons, by reading the book you can have a better understanding of how each asset relates to different seasons.
My perspective
I prefer the Graham approach because commodities are not a form of investment but speculation. This is not to say the commodity market isn’t lucrative or an adequate hedge. It's just my personal preference.
In review
The investor goal is not to have a predetermined result but to perform as well as the market or better while keeping the principal safe.
I shared two approaches to maintaining safety in your investments, and I hope they help you make better more informed investment decisions. In the next issue, we’ll discuss how to get the best returns with these two approaches.
How about you? What is your objective and strategy?
Feel free to share in the comments below.
Peace and Goodness,