Portfolio

Summary

Also see implementation summary.

• Pick a simple asset allocation model, stick to it, rebalance occasionally.
  • Possibly put a small portion of money in high-risk high-reward places. (NN Taleb’s barbell strategy.)
• Initially, be equity heavy. But put some money in bonds (negatively correlated with equity).
  • USA - TSM core 5/8, SV tilt 3/8.
• Switch to fixed income heavy portfolio when retiring.
  • “Let us call the first set ensemble probability (concerned with a collection of people) and the second one time probability or ergodicity (concerned with one person through time). When you read investment recommendations based on long term returns of market - beware… they’re conflating the two. If the investor has to reduce exposure to the market due to big expenses, his returns will be divorced from the market, period.” - NN Taleb paraphrased.

More in CV.

स्थानानि

• USA
  • स्वेतिहासात् सौकर्यम्
• India
  • मुम्बायि-नाशाद् निवेशनाशस्यापायः

Measurement

USA

Performance

• portfoliovisualizer.com
  • compounded annual growth rate - 8.5%, inflation adjusted - 6.8%
• Mint
• morningstar

Asset correlations

• portfoliovisualizer.com

Equity: Everything + small value approach

Abbreviations: Total Stock Market: TSM, SV: Small Value.

Principle: “Fama French three factor model of US fund returns explains the risk and return of diversified equity portfolios across three risk dimensions: market risk, size risk and value risk. Investors who employ a Fama-French tilt in their portfolio believe that overweighing small-cap stocks and value stocks provides a different return path than holding only the capitalization-weighted market itself. Fama and French view any excess return from tilting is a payoff for taking additional risk.” - Rick Ferri RF2014, Fama IMG. This analysis was made popular by the morningstar.com chart [eg. IMG].

Preferred Implementation:

• TSM core 5/8, SV tilt 3/8. Repeat internationally. The allocation was checked with FF factors published on Ken French’s website .
• References:
  • Rick Ferri here, here, RF2014 ( TSM 3/4, SV 1/4.), RF2011: (2/3, 1/3)

See krayaNa-vikalpAH .

Equity vs negatively correlated items - balance.

• Allocating some portion to items negatively correlated with equity is a good way of dealing with years when the stock market is down (Eg. 2008, or the lost decade 2000-2010).
• Equity and bonds are negatively correlated (~ 0.33 - PP). So, sometimes when the stock market goes down, bonds might go up (or at-least not as down) and vice versa.
• Negative ETF-s are an option.

Broad investment in chosen sectors

Picking a sector

Different sectors show different patterns of growth over a long period of time.

• Cyclical: Real estate, basic materials, consumer items like cars, financial services.

• Sensitive: Energy (including petroleum), technology, communication services, industrials. These show greater variation depending on current macroeconomic circumstances.

• Defensive (Monotonically small growth): Healthcare, essential consumer items (like food), utilities (electricity, water).

ETF investing

One can invest in ETF’s tracking index funds. Similarly, one can invest in ETF’s tracking the bond and real-estate markets. To pick an ETF, consider its portfolio and deduce its potential profit/ risk.

Bonds

Some allocation to bonds, through an ETF perhaps, reduces volatility. Bonds are specially susceptible to the interest-rate-increase risk.

Bond ladder

Bonds have a fixed maturity date. So, investors often build a ladder of bonds such that one bond or the other matures in a given time slot. This brings greater liquidity to the investment.

Value investing

One judges the intrinsic value of a security, and buys it if the market value is less than this by a significant ’margin of safety’. One particularly focuses on value - rather than growth - businesses.

Identifying value securities

This can be difficult, despite the use of comparative measures of value, like P/E. Thus, it is advantageous to invest in areas which you understand - Or one can copy investments by reputed value-investor funds.

Usually, equities of small companies not yet discovered by the market fit this description.

One can ask the question: ’Will I be willing to privatize this business?’

Focus on differentiation

In addition, one may focus on well-differentiated, rather than generic, companies: this ensures that the underlying product retains an advantage in capturing customers even if competitors catch up. This was exploited by Warren Buffet, when he invested in Coca Cola.