The DIY Guide to Building Your Investment Portfolio
i’ve been thinking about how i want to structure my portfolio going forward for the rest of my life, taking into account:
– stability/volatility of portfolio as a whole
– mental/psychological aspects of executing strategy (fomo, patience holding cash, holding thru drawdowns, etc)
– ease of strategy execution
– time required to execute strategy
– potential returns
– will there be new cash inflows?
and i have come to 2 possible strategies:
1. permanent/all-weather portfolio with rebalancing
2. value-based portfolio which only buys assets which are super cheap
- Capital appreciation
- Capital preservation
- Pay out dividends/cashflow (4% safe withdrawal rate for FIRE)
- Avoid large drawdowns (steady growth with no stress)
- Work in various market conditions (eg. market crash)
Any asset by itself can experience catastrophic losses.
Diversifying your portfolio by including uncorrelated assets is truly the only free lunch.
consider tilting the equity exposure towards factors such as value, momentum, trend-following.
Once you have determined your asset allocation mix, stick with it.
The exact percentage allocations don’t matter that much.
Make sure to implement the portfolio with a focus on fees and taxes.
DIY with yearly rebalancing is the cheapest option, save on all fees, reduce withholding tax.
Go live your life and don’t worry about your portfolio!
Crash more than 50%: 1975, 2003, 2008
1990 – 2020 : permanent portfolio
$10,000 > $71,918
1990 – 2002 : cash
2003 – 2007 : equities
2007 – 2008: cash
2009 – 2020: equities
$10,000 > $19,086 > $78,532
As long as new annual cash inflow > 25% of portfolio, no need for cash
Allocate 1/3 each
Add in stuff about Ray Dalio quadrant
Harry Browne was not any financial advisor because he eventually ran for the U.S. presidential election. He devised the Permanent Portfolio strategy that is still in use today. It was a simpler version of a risk parity portfolio. A retail investor would have no problem implementing the former. Here are the essence:
“Your portfolio needs to respond well only to those broad movements. And they fit into four general categories:
Prosperity: A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.
Inflation: A period when consumer prices generally are rising. They might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).
Tight money or recession: A period during which the growth of the supply of money in circulation slows down. This leaves people with less cash than they expected to have, which usually causes a recession — a period of poor economic conditions.
Deflation: The opposite of inflation. Consumer prices decline and the purchasing power of money grows. In the past, deflation has usually triggered a depression — a prolonged period of very bad economic conditions, as in the 1930s.
Stocks take advantage of prosperity. They tend to do poorly during periods of inflation, deflation, and tight money, but over time those periods don’t undo the gains that stocks achieve during periods of prosperity.
Bonds also take advantage of prosperity. In addition, they profit when interest rates collapse during a deflation. You should expect bonds to do poorly during times of inflation and tight money.
Gold not only does well during times of intense inflation, it does very well. In the 1970s, gold rose 20 times over as the inflation rate soared to its peak of 15% in 1980. Gold generally does poorly during times of prosperity, tight money, and deflation.
Cash is most important during a period of tight money. Not only is it a liquid asset that can give you purchasing power when your income and investments might be ailing, but the rise in interest rates increases the return on your dollars. Cash also becomes more valuable during a deflation as prices fall. Cash is essentially neutral during a time of prosperity, and it is a loser during times of inflation.”
add fees and advior and robo-advisors
calculate end portfolios with and without fees
main challenge is sticking with a strategy
say you get losing years for first 3 years, or 50% drawdown on your first year, will you still be able to stick to it?
DCA equities long-run?
Defensive: PP is best for shorter timeframes, and if withdrawing and no new cash inflows
Aggressive: DCA equities is better if you combine timing/hedging with mostly equity
Level of aggressiveness depends on how many % of your existing portfolio are your new cashflows?
If new cashflow is 80% of current portfolio, then 80% aggressive, 20% defensive
Remember that if you are a “net buyer” of stock, you WANT the price to go down. Just like anything you buy, you want to pay less for it. When you’re a “net seller” (like in retirement) then you’ll want the market to go up.
basically if you ignore what you alrdy have, every new decline is a new chance to buy stock cheaper
Are you more concerned about maximizing gains, or minimizing losses?
The problem is people want to have both at the same time.
passive aggressive portfolio
Goal is to accumulate as much stocks as you can in your lifetime (at the lowest possible prices you can) before you retire, then switch to defensive mode
1. Fixed Weights Portfolio
The idea is to come up with fixed asset weight allocations for each asset class, and stick to these allocations no matter what the market conditions are.
This is accompanied with fixed periodic rebalancing (monthly, quarterly, yearly) to maintain those fixed weights.
- Historical average returns about 6%+
Things to consider:
- Optimal allocation rules
- Frequency of rebalancing
- No need to think or time market, just follow mechanical rules
- Very little time required to executed
- Easy to replicate and execute, no discretionary decision-making required
- Can avoid large drawdowns during market crash
- Must be willing to forgo huge gains during stock bull market (your portfolio will likely significantly under-perform a pure equity portfolio)
Examples of Fixed Weights Portfolios:
- Benchmark portfolio: 60/40
- Risk parity portfolio
- All seasons portfolio
- Permanent portfolio
- Global market portfolio
- Rob Arnott portfolio
- Marc Faber portfolio
- Endowment portfolio: Swensen, El-erian, Ivy
- Warren Buffett portfolio
- Tobias portfolio
- Talmund portfolio
- 7twelve portfolio
- William Bernstein portfolio
- Larry Swedroe portfolio
2. Asset Rotation Portfolio
As market fluctuates, some asset classes might be cheap at different points in the market cycle.
The idea is to rotate by holding cash and buying whatever is cheapest at that point of time, and wait for it to go up.
Similar concept as value investing, except that it includes more asset classes (besides just stocks).
Things to consider:
- How to determine what is cheap – perhaps some factor-based rules
- Less chance of seeing significant drawdowns in portfolio
- Must be willing to sit and wait for good opportunities (and potentially miss out some good ones that never become cheap)
- Asset might remain cheap or become cheaper after purchase
- More discretion required to determine what is cheap, and timing of purchase
3. Rotating Weights Portfolio
This is a combination of the 2 previous types of portfolio, by assigning fixed weights for different market scenarios.
There will be a set of criteria to determine the market scenario, which then determine what set of fixed weight to use.
Things to consider:
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