Tag: Asset allocation

All asset allocation related articles are found here. Educative, informative and written clearly.

  • The Danger of Diversification In Investing

    The Danger of Diversification In Investing

    The Danger of Diversification In Investing
    Diversification has to be a well thought out step for investors. It can boost growth and lead you to wealth. But if doing improperly, it can cause costly failures.

    Investors infrequently pay attention to the danger of diversification. All taught that the idea of diversification is to reduce the portfolio’s risk. And nothing is wrong with that. Some amount of diversification is important or investors will take too much risk that will never be neutralized for.
    But sometimes too much can be very bad. It is the same with the diversification of the portfolio if it is too diversified. And we will explain to you the danger of diversification. 

    So, in the first place, the danger of diversification may come when the diversification is done improperly but also if the investment portfolio is over-diversified. But let’s go step by step through all examples of the danger of diversification because they can be very costly. They can ruin the whole investment and leave you with your empty hands.

    The danger of diversification in investing

    Portfolio without focus

    No one will tell you that the danger of diversification is the reduced quality of your investments. In investing, one of the very important parts is to have a well-focused portfolio. That provides investors to have the best opportunities. To say this way, publicly listed companies are not all worthy to invest in. Also, what is maybe more important, you can find even fewer companies that are so-called safe investments. In order to have well-diversified portfolios, investors don’t pay enough attention when picking the stocks they could add many of them that don’t give a margin of safety to the portfolio. That will cause a reduction in the quality of investment. That would be the danger of diversification.

    A complicated mixture of assets

    The other danger may appear if investors add too many assets without truly understanding what they have. In other words, their portfolios are too complicated. The point with investing is to have control over your investments and know what they are. If you have too many assets from different classes you would be lost in attempting to follow them and to stay on top of them. 

    Portfolio volatility

    It’s very important to understand that the more stocks you add to your portfolio, it will be more correlated to the market returns. There is some logic behind and you have to understand it because portfolio volatility can lower your portfolio performance. So, it can be too risky. Always keep in mind that the number of investors that ever reach average returns is under the average. The reason is the volatility caused by risk.

    Having an index fund instead of a portfolio

    Instead of buying too many stocks and adding too many assets, it’s better to buy some index funds. If you have too many assets, your portfolio will look like an index fund anyway. So indexing can be the danger of diversification. Indexing is good when the bull market, but if it is bear you could be faced with a lot of problems and danger.

    Indexing, as well as over-diversification, represents the hidden danger of diversification. For example, if your portfolio may not have quality if you hold second-rate investments along with great investments. Sometimes, holding so-called inferior investments is the result of ef emotional buying, so avoid that. Pick stocks after you research them, never based on some emotions.

    What can put us in danger of diversification?

    The largest single danger is a surprise risk. Surprises are often part of our everyday life but when it comes to our investment it is a sign that we as investors are not cautious enough. Investors should be aware of risks and to predict them as much as possible. It is crucial in investing, due to safety, to quickly transfer our assets that show more risks than we expected or we can accept.

    Also, forget you’re able to have an excellent and perfect plan for your future. Very often some unexpected events can arise. For example, this coronavirus pandemic that we have now. These events have a great impact on our investments so if we have over-diversified portfolios how could we manage all the investment? It’s almost impossible.

    The perfect investment plan doesn’t exist. Every single investor made some mistakes. Just listen to what Warren Buffet has to say about his mistakes and wrong decisions. Yes, even him.

    The belief that you are always right isn’t only a stupidity, it is a more dangerous practice. However, it demands to keep on learning in order to modify your behavior. 

    If you never change your behavior you’ll take too many risks and you’ll put yourself in one of the dangerous situations. Moreover, you’ll never grow as an investor and, also, your capital will not grow. Sometimes it is better to give up and admit we are wrong than stay with the wrong plan and make more mistakes. 

    Comfort from following others

    We are all vulnerable and insecure at some level, whether we admit it or not. A great number of people seek help in instant solutions. The easiest way is to follow what other investors do. That’s a kind of psychological effect. If the majority is doing something, how can that be wrong? Remember, only a few investors know how to make money on the stock market. The others, the majority fail. The stats are cruel. 

    The winners represent a small part of all investors. 

    Investing is difficult but it can be very successful and profitable. All you have to do is to guess where the new gain capacity will come from. The tricky part is that you cannot do that without the knowledge and without comprehensive research. The best suggestion is: follow the standards, not the people.

    The fake feeling of security can bring us to the danger of diversification

    The truth is that many apparently diversified portfolios aren’t really diverse. For example, if your portfolio consists of stocks of 5 different companies and 5 different industries it might seem as a well-diversified one. But if all your portfolio consists of 100% stock in one market index and they are all based in the same country and have exposure to the same currency, you have a very dangerous diversification. In other words, your investment is at great risk. 

    You might think you made a great choice, but in reality, you are at risk to lose everything if some unfortunate event hit that country or currency.

    Bottom line

    Proper diversification is a matter of great importance. Smart investors allocate their money based on their own valuations, never on some prophecy or doubted predictions. Avoid over-diversification if you are invested in ETFs or mutual funds since it is a common mistake. When picking the stocks, seek the highest quality companies, to direct the chances of success in your favor.

    The bright side of portfolio management is that you can avoid the danger of diversification if you manage your portfolio on your own. Diversification is an extremely crucial concept in portfolio management, but it has to be done properly. When building your portfolio keep in mind the danger of diversification in investing. That will help you to reach optimal diversification.

  • The Bear Market Starts – How To Avoid Big Losses?

    The Bear Market Starts – How To Avoid Big Losses?

    The Bear Market Starts - How To Avoid Big Losses?
    We are not clairvoyants so we cannot predict how long this bear market will last, but what we can do is to suggest to you how to overcome this market condition. 

    The bear market starts. Dow Jones closed down over 20% on March 11 compared to its highs in February. That is the end of its historic bull market run. The bear market starts. Actually, it started at the moment as the pandemic was declared by the WHO. What to do with your investments right now? Will the stock market crash?

    No one knows for sure what will happen next. But it is quite possible that the coronavirus could put stocks down for a long time. What makes us afraid is that the bear markets can go along with the recession.

    Investors are panicked. Past several weeks the stock market was switching so fast and unpredictable. Michael Macke, founder of Petros Advisory Services told CNBC Make IT about investors’ feelings: “like we are all Chicken Little.” His comment was relating to the tale about the chicken who was claiming the sky was falling, but the chicken was wrong, right or wrong?  “Only after the fact will we know for sure if we have a bear market or even a recession,” said Macke.

    Nothing can last forever, even bad or good. The good times must come to the end at some point. This is particularly true for the stock market. And this bullish period did it. So, the bear market starts.
    After a fairly exciting run, the stock market lastly jumped into the bear market territory. Investors are disturbed and panicked. 

    But what do we know about the bear market? 

    What to do when the bear market starts

    The bear market is a point when stock prices drop at least 20% from a recent high. They will stay down there for a while. But how long will it take for the stock market to recover? What to do? Will the recession come too? What to do with investments? How to avoid losses and is that possible at all? This is a turbulent time. So many questions but several answers.

    If we try timing the market we’ll be foolish. So, let’s see what experts have to say. First of all, they say drops like this one is a good opportunity to buy more stocks, particularly the people investing for retirement. This is important for younger investors who couldn’t buy stocks during the bullish market because the prices were too high, hitting all the time the new highs. If you have some spare money and you don’t need it in the next, for example, five years, put it in investments. But if you think you will need that cash it is smarter to stay away from the stock market. The history of the 200-years old stock market shows that the market will start to rebound as the bad news stops coming and the prices will stop to decline. 

    What is smart to do during the bear market period?

    When the bear market starts, it is smart to check your concrete investment strategy. If you are a young investor it is quite possible you are facing the bear market for the first time in your life. So, this is a great opportunity to check your risk appetite and how much you are able to manage it. You might obtain a valuable lesson.

    Even advanced investors do the same. They are reviewing their portfolios to be sure that the investments they are holding are suitable for their investing goals. It is very important to see your investments are in line with the risks you take. Some experts think that pilling off into safer investments is a bad decision. And maybe they are right. History shows that if you successfully handle your stocks during the bear market, it is more possible to profit a great when the market recovers. Yes, this all about long-term investors because investing isn’t about a moment in time, it is a process over time.

    What is the best strategy when the bear market starts?

    No one likes this. This enemy is dangerous so don’t try to fight back with it. The most important is to stay calm. Okay, you may play dead as you should do when you meet the bear in the woods. Just lay down and pretend you are dead. This was a joke but it works when the bear market starts and everything seem so uncertain.
    So, don’t be frightened. Fear is a bad partner now.

    Do you know the old saying on Wall Street? “The Dow climbs a wall of worry.” What does it mean? This means the markets will continue to rise despite anything. Nothing can stop that. No matter if we have an economic crisis, terrorism, or other misfortunes. Just keep your emotions under control and far away from investment decisions. Look, today’s catastrophe will be just an unpleasant flash one day. Nothing more. Well, it can last a few years but still.

    It is a normal condition

    The other important thing. It is normal to have bad years in the stock market. They are coming in the cycles and it isn’t unusual. For long-term investors, this is particularly a favorable situation. They can buy stocks at discount. 

    Speaking about this bear period, it might be smart investing in, for example, NFLX (Netflix) can be a good choice. Due to the coronavirus outbreak, and pandemic people have to stay at their homes and what are they going to do?  Watching TV, of course. That will bring a higher income with more subscribers, consequently, the dividends could be higher and the stock price will rise. But don’t buy Uber’s stock, for instance. You might wonder why. It is quite simple to explain. As more people will stay at home, less income will be for Uber and prices can drop. (Thank you Guy, for these examples.)

    Maybe the stocks of the companies that are involved in vaccine development or anything related to this unfortunate situation are not bad decisions. Pharmaceutical, detergent, soaps, antiseptic, hygienic supplies producers, virus testing, and other biotech companies. Think about this.

    Diversification can help also

    The point is to have a well-diversified portfolio. If you don’t have yet, it is time to add bonds, cash, stocks. The percentage of each will depend on your risk tolerance, goals or are you an investor with a long time horizon or not. A proper allocation strategy will save you from potential negative forces. 

    Further, invest only the amount you can allow to lose, that will not hurt your budget or the whole capital. For example, don’t take short-term loans and buy stock with that money if you don’t plan to hold them for a long time, e.g. five years or longer.
    Keep in mind, when the bear market starts, even trivial corrections, can be remarkably harmful.

    But as we said, when the bear market starts that may provide great opportunities if you know where to look for. We pointed to just a few examples above. Maybe you should follow what Warren Buffett did. So, buy the value stocks since their prices are going down.

    Bottom line

    What to do when a bear market starts?

    We can’t predict how long this bear market will last. If you’re considering selling off a group of stocks to lower your losses, just don’t do that. By doing so you’ll end up locked in losses. How can that situation help you? But if you have cash available for investing, this bear market period is a great time to do so. Remember, just don’t invest money you may need in the next five years or more.

    Also, don’t get scared as some investors are when a bear market starts. The stock market will recover from this as always it did during history. If you buy stocks now and your plan is to hold for a long time, you will have good chances to end up in profit.

    Maybe it is best to use our preferred trading platform virtual trading system and check the two formula pattern.

  • 80/20 Investing Rule – Pareto principle

    80/20 Investing Rule – Pareto principle

    80/20 Investing Rule - Pareto principle
    80/20 investing rule or Pareto principle is great for individual investors who don’t like conventional rules. It isn’t difficult but could increase the chances of your profit. 

    Let’s see first what is behind the 80/20 investing rule or Pareto principle. 

    It’s a saying, which claims that 80% of both outcomes or outputs is a consequence of 20% of all inputs for some event. The 80/20 investing rule is frequently used in many fields not in investing only.

    But our subject is investing, where the 80/20 rule means that 20% of the holdings in a portfolio are in control for 80% of the portfolio’s growth. Well, this 20% can be in charge of 80% of the portfolio’s losses. 

    For example, you can build a portfolio of 20% growth stocks and 80% bonds which are less volatile investments. The 80% will provide you a nice and stable return since the bonds are low-risk, while the 20% in stocks that are considered as the higher-risk investment could give greater growth and higher profit.

    Also, you can add to your portfolio 20% stocks in the extended market that cover 80% of the market’s returns. But this can be too risky because the stocks are unpredictable and volatile.

    Okay, you wouldn’t believe that the market rises 80% of the time, right? But it is true. But does the market drop 20% of the time? The best way to check this is to check it by yourselves and you will be surprised as well as we were. Advanced traders and investors use this 80/20 investing rule as a great advantage. 

    How to use the 80/20 investing rule?

    Examine your investment portfolio and think which of your investments result in 80% of the returns. What can you see? The stocks are what generates most of the returns. 

    If it is needed, don’t hesitate to cut off a stock if it looks like it falls into your 80% of your overall investment portfolio in terms of returns. Anyway, we want to give some ideas on how to use the 80/20 investing rule and become a better trader.

    First of all, you have to finish some tasks such as evaluating how strong your earning power is and to know the inventory of your assets in the portfolio. What are your best assets in terms of investing? You must know that your portfolio is your financial house and you have to keep it in order. You can do that only if you measure and estimate from time to time but actually frequently. Be reasonable, not too frequently. You don’t need the stress. All you want is to avoid unnecessary risks. Okay, you did this task and periodically just go over these figures to check if they follow your investment plan. It is vital for investing to check the current and potential earning power from time to time and keep an eye on your outgoings.

    Let’s follow the 80/20 investing rule.

    Investing success depends on a few resolutions. For example, the simplicity of your investment strategy and portfolios.

    The main aim of investing: Never lose money. That is the rule No1. This means never bet on price changes and rising markets. You need to build an investment portfolio able to follow this rule. Well, we have to be honest, there is no trader or investor that came into the safe zone and comfortable position with speculating and risking in the stock market. Too many risks will more likely lead you to large losses, not to the profits.

    Benjamin Graham said:

    “Investment is most intelligent when it is most businesslike.”

    What is the right meaning of this saying? Managing the investments is like you are running your own business, your company. So, you have to respect some principles that could lead you to success.

    The 80/20 investing strategy

    The 80/20 investing strategy is all about increasing the chances of your investment success. Actually, it is all about how to unite your portfolio strength and its resources. But, the 80/20 rule has nothing to do with asset allocation. It is wider than that. The goal is to achieve the highest returns possible.

    80/20 rule investing means intelligent investing.  

    At its essence, the 80/20 rule requires you to recognize the best assets and by using to achieve maximum returns. To do that you don’t need complex math, it’s just a rule.

    When the markets are overvalued, why do you have to buy? The risk of loss exceeds the potential return, right?

    The 80/20 investing strategy will reduce levels of volatility as we described and reduce the drawdowns. Your assets will really “compound” over the long-term. One of the easiest ways to manage this strategy is to use a moving average crossover. The principal is quite simple. Stay in stocks when the S&P 500 index is above the 12-month moving average, and you change to bonds when the S&P 500 falls below the 12-month average.

    Pareto principle

    Let’s say your portfolio has many holdings. But it doesn’t matter how many holdings you have, the 80/20 rule or Pareto Principle applies. To win by using the 80/20 rule, you have to keep in mind a few things.

    Firstly, 80% of your profit depends on 20% of your activities. You can spend a lot of time choosing some great stock, evaluate it, estimate, try to figure out where to set a stop-loss, basically, you have just a few tasks that should be in your focus. Yes, few but they will generate you a profit.

    So what do you have to be considered about? What steps do you have to take? You should know your ideal allocation based on your risk tolerance. Also, you have to rebalance it periodically. Can you see? Just two steps, but important though. With these two simple things, you will have success more often.

    And you will see that 80% of your returns come from 20% of your holdings. How to choose the winners? Well, you know, they are companies built to succeed for a long time.

    Bottom line

    80/20 investing is excellent for individual investors who don’t like to follow conventional rules. It isn’t complicated but could easily increase the odds of your success. Just remember that 80% of your returns arrive from 20% of your holdings. Try to find the winners in your portfolio, play on them and look at how your portfolio will become worth and rise in value. 

    This 80/20 investing rule or Pareto principle is visible in almost all areas of our lives. The 80/20 rule was developed by Vilfredo Pareto in Italy in 1906. He was an economist and he saw that 20% of the pea pods in his garden produced 80% of the peas. After that, he revealed that 20% of citizens in Italy hold 80% of the land. Well, did the 80/20 investing rule grow in Pareto’s garden? According to the legend, yes.

    You can find little scientific analysis that either proves or disproves the 80/20 rule’s validity. But the fact is that many financial advisors and consultants have the 80/20 investing strategy as an offer. Moreover, they have extremely good results.

  • The 60/40 Portfolio is Dead – How to Replace It

    The 60/40 Portfolio is Dead – How to Replace It

    The 60/40 Portfolio is Dead - How to Replace It
    Bonds and stocks have only interacted negatively in the past 20 years. Their average correlation throughout the previous 65 years was positive. When this correlation isn’t negative, the 60/40 portfolio is weak in protecting your investment.

    We all had believed, for a long time, that the ideal is a 60/40 portfolio, which consists of 60%  in equities and 40% in bonds. That excellent combination provided greater exposure to stock returns. At the same time, this mix gave a good possibility of diversification and lower risk of fixed-income investments.

    But the world is turning around and markets are changing too. 

    Experts recently noticed that this 60/40 portfolio isn’t good enough. Portfolio strategists claim that the role of bonds in our portfolios should be examined. They argue we need to allocate a bigger part toward equities.

    Strategists report

    Bank of America Securities (a.k.a. Merrill Lynch) published research last year named “The End of 60/40”. The strategists Jared Woodard and Derek Harris wrote:  

    “The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies.” 

    That note by Merrill Lynch caused great turbulence among investors. The point is that your conventional sense of investing 60% of your portfolio in stocks and 40% in bonds is no longer so smart.
    Merrill Lynch strategists explained that there are grounds as to why the 60/40 portfolio will not outperform portfolios with more stocks versus bonds in it. Therefore, investors have to allocate a bigger percentage of equities to their portfolios instead of bonds.
    This is the opposite scale compared to what investors used for many years. They were investing in equities for price rallies and buying bonds for current income.

    How did the 60/40 portfolio die?

    For the last 20 years, the golden rule was a portfolio of 60% stock and a 40% bond. Everything was good with that: investors had the bonds in portfolios, a 60/40 portfolio provided them the upside of equities, their investments were protected from downturns.  But they gave evidence to investors as to why this ratio should be changed and why they have to add more equities than bonds. 

    Here are some. Data is for the markets globally. During the last year, $339 billion were in inflows to bond funds but almost $208 billion were in outflows from equity funds.  So, we now have a tricky situation. Bond yields had fallen. The consequence is that we have about 1.100 global stocks that pay dividends higher than the average yield of global government bonds.

    The global economy slows

    We must have in mind that the global economy lags due to the aging society and there were rallies in bonds almost all over the world. It was like a bubble. Hence, the investors who manage a traditional 60/40 portfolio are in a situation that threatens to hinder returns.

    “The challenge for investors today is that both of those benefits from bonds, diversification and risk reduction, seem to be weakening, and this is happening at a time when positioning in many fixed-income sectors is incredibly crowded, making bonds more vulnerable to sharp, sudden selloffs when active managers rebalance,” said strategists from Merrill Lynch.

    The 60/40 portfolio canceled

    The popular rule of thumb: investment portfolios 60% in stocks and 40% in bonds, is smashed. The finance industry did it. Moreover, financial advisors urging investors to hold riskier options since, as they claimed,  bonds no longer offer diversification. Hence, bonds will be more volatile over the long run. Further, the 60/40 portfolio has sense in the market conditions when stocks and bonds are negatively correlated. The stock price falls – bonds returns rise both serving as a great hedge, bonds against falling stock prices, and stocks as a hedge against inflation. According to strategists, no more.

    This will completely change the portfolio management.

    The benefits from bonds, diversification and risk limitation, seem to be missing. The bonds are more vulnerable to unexpected selloffs. The mentioned rule of thumb was accurate for 20 years but not for the past 65. Also, it is noticed that this period of negative correlation between bonds and stocks is coming to an end.

    Also, Morgan Stanley warns that returns on a portfolio with 60% stocks and 40% bonds could drop by half in comparison to the last 20 years. Earlier, the analysts and strategists from Guggenheim Investments, The Leuthold Group, Yale University, also prognosticate distinctly lower returns.

    How to replace the 60/40 portfolio?

    The 60-40 portfolio is dead and it is a reality.

    Be prepared, you have to replace it. Some experts suggest keeping 60% in stocks but to hold a position shorter, as a better approach.

    But you have to hedge your portfolio. Experts suggest single-inverse ETFs and options for that purpose. 

    The others think the best way is to replace the 60/40 portfolio with some hedged equity portfolio. This actually means you should have more than 60% in stocks since the stock market is more liquid in comparison to the bond market. For this to implement, it is necessary to have tools. Also, the knowledge on how to use them. From our point of view, it seems that time to forget the 60/40 portfolio is here. All we have to do is to change the mindset and stop thinking about the mix of stocks and bonds. Instead, it looks like it is time to think about changing the net equity exposure.

    Maybe it is the right time to hold more cash, which can be a tactical defense. For example, cash can be a part of your 60% holdings when you are not fully invested in stocks. Or you can hold cash in the percentage that previously was in bonds. Also, you can combine it. You MUST build a hedged portfolio to avoid the 60/40 portfolio hurricane that is likely coming.
    For example, build a portfolio of, let’s say 75% stocks and 25% your hedge combination. This range can be tighter also. 

    Honestly, it is so hard nowadays to fit the excellence of the 60/40 portfolio.

    Bottom line

    The 60/40 portfolio was really good but it had a wild side too. The stock portion was down over 25 years of its 91-year existence. Over those 25 years, the average loss was above 13%. But there were bonds with a gain of above 5%, which reduced some of the losses. This portfolio was stable and reliable and you could use it for a long-time. 

    The other problem with the disappearance of the 60/40 portfolio is diversification. Is it dead too?

    Peter L. Bernstein said, “Diversification is the only rational deployment of our ignorance.” Investors have to figure out different access if stocks and bonds no longer balance one another. This great portfolio will miss everyone. Maybe, one day, we will meet again. But some conditions have to be fulfilled. The interest rates should be 6% again,  the stock market valuations shouldn’t go over 15x the previous 10 years’ worth of average earnings. That is hard to achieve now.
    R.I.P. the 60/40 portfolio.

  • Asset Allocation: A Method To Use

    Asset Allocation: A Method To Use

    Asset Allocation: A Method For 2020
    Before you start with asset allocation you have to choose what kind of investor you want to be. How do you see yourselves, like conservative, moderate or even aggressive investors?

    For any investor, filling the investment portfolio with a proper mix of stocks, bonds, cash, real estate, and other investments is critical to financial well-being. This mix is known as “asset allocation.”  The tricky part is that you cannot find a unique one that could suit all. Every investor must find own based on risk tolerance, timeline, and financial goals.

    But even if you already defined what assets you want in your portfolio, it is still easy to get lost. Well, you want to optimize your portfolios, but you are gathering news every minute. And you are changing your decisions based on them. So, the consequence is that is more likely you have some “confused” portfolio, an assemblage of everything instead of a well-diversified portfolio.

    Your portfolio has to be built with the goal of delivering income.

    The asset management landscape is changing

    First of all, In 2020 we can expect a huge rise in assets. It is predictable that economies in, let’s say, Asia, Middle East or Africa will grow faster than in areas with developed economies. 

    Extension in assets will be driven by several trends. One of them is the increase of wealthy individuals in those areas. So, we can expect the asset management landscape in 2020 will be changed. What investors have to do? Investors have to adjust their portfolios to new circumstances. 

    The investors should consider what caused an unusual change of growth and returns last year. Will the same conditions continue into this year? Will global economic growth returning to the trend? What about trade tensions? Is it over? All of this must influence investors’ decisions when building the investment portfolio and asset allocation.

    The effect of asset allocation

    The purpose of diversification is to avoid extremes. Asset allocation has to provide investors to score high returns, reduce volatility, protect them to have significantly lost capital. 

    You can accomplish this by asset allocation. All you have to do is to divide your investments into different classes of assets. Spread it into stocks, bonds, real estate, and cash. They will act separately from each other and your investment will be protected. Of course, you can spread your investment into cryptocurrencies, gold, commodities, or something else. Asset classes can be further divided into several sub-sectors.

    Asset allocation is extremely important. Some studies reveal that asset allocation has a tremendous contribution to a portfolio’s overall returns. Even bigger than individual stock pick. Economists Paul Kaplan and Roger Ibbotson wrote that more than 90% of a portfolio’s long-term returns were generated by asset allocation. So,  asset allocation has an important role in long-term returns.

    How to start?

    The first important step is to determine the target return. The issue is simply – by how much your portfolio has to grow to match your financial goals. But think about another issue too – what is your risk tolerance. How much risk are you able to take to gain a higher return?

    You have to do all of this before choosing the investment strategy. If you are a buy-and-hold type you’ll be able to allow a higher level of risk. You will have periods with lower returns but they will be substituted with periods of higher-than-expected returns. So, it’s easy when you are an investor with a long horizon. But if you are not, if your time horizon is shorter, you’ll favor a lower risk portfolio.

    Conservative Investing

    Conservative investors tend to hold bonds. Their portfolios consist of 60%-80% in bonds of different maturity dates, different issuers. Well, bonds are not without risk, to be honest. Over the past few years, interest rates are rising and it causes bond prices to fall. The bond market can crash as well as the stock market. Do you remember 1979/1980? By some calculations, investors had losses more than $400 billion in total. 

    For example, baby boomers. They are inclining to conservative asset allocation. Their portfolios consist of over 70% in bonds. They control about 65% of all bond assets, by the way.

    Modern asset allocation

    There is something named modern portfolio theory and consequently, modern methods of asset allocation. This means a huge range of asset classes and sub-asset classes into portfolios.

    At its core, modern portfolio theory is all about diversifying your asset allocation. 

    Modern portfolio theory is assumed to help reduce return risk by diversifying into many assets. But the first assumption of this theory is that asset classes are not in correlation. The point is to look at your investment as component parts of a whole. To be more clear, if one asset drops, the other will jump. It is just like a permanent zig-zag. Each investment is a moving gear. According to this theory, investors should balance a potential risk and returns but in the manner on how they might influence the risk and returns of the overall portfolio.

    Start investing

    Yes, you can do that, you can turn plans into dollars. 

    Just create portfolios to maximize the anticipated return based on an acceptable level of risk.

    Don’t time the market. You have to look at your investment in the long term since the time in the market is very important. Do not let violent fluctuations or volatility disturb you. You are investing with your goal in mind.

    Yes, you are more satisfied with less risk and nervous with grown risk. Moreover, you prefer the portfolio with the least risk, but one with the highest return possible and with the lowest risk.

    Modern portfolio theory asserts that the risk for individual stock returns has two components: systematic and unsystematic risk. Systematic risk is the market risk and you cannot avoid it. For example, recessions, interest rates, wars are that kind of risk. The unsystematic risk is specific to individual stocks. Management changes, lessening the company’s operations, and similar, are unsystematic risks. You can lower this type of risk if you have a well-diversified portfolio and good asset allocation. 

    Proper portfolio building is difficult. It isn’t easy. 

    Asset allocation is portfolio diversification

    The goal of asset allocation is to maximize the returns of a portfolio and reduce the risks.

    Stocks will give you strong returns over a long time but they are volatile and inclined to periods ups and downs. But the combination of national and foreign stocks is healthy because sometimes one country is overvalued while another country is undervalued. 

    There are two main approaches to asset allocation.
    Strategic Asset Allocation
    Tactical Asset Allocation

    Strategic asset allocation indicates holding a passive diversified portfolio. Meaning, you will not change your asset allocations based on market conditions. You will hold, add money and re-balance.

    If you choose this strategy, you have to build a diversified portfolio of index funds or ETFs. From time to time you’ll re balance it. For example, when one asset class is increasing and another is decreasing in price. All you have to do in order to maintain the same weighting is to sell the increasing one and buy the underperformed assets.

    Tactical asset allocation is complex and relates to almost permanent adjusting your weightings to different asset classes. You have to recognize where good risk/reward ratios are in the market. 

    The benefit is that you can really reduce volatility and increase returns. Though it’s more tending to individual failure, and if you do it badly you will decrease your returns.

    Bottom line

    Everyone would ask what’s the best asset allocation for a certain age? Here is one simple way to calculate it. 

    Subtract your age from 100 –  that’s the percentage you should keep in stocks. For example, if you’re 40, you should hold 60% of your portfolio in stocks. If you’re 80, you should hold 40% of your portfolio in stocks.

    But some advisors would recommend you to subtract your age from 110 or even 120 since people are living longer and longer. 

    When you choose what kind of investor you want to be whether conservative, moderate or even aggressive, it is time to focus on the asset allocation method. Spread it into allocations over particular investment categories: large, mid, small, and foreign stocks. 

    Balanced asset allocation in your portfolio is the right way to become a successful investor.

  • Coffeehouse Portfolio The Lazy Portfolio

    Coffeehouse Portfolio The Lazy Portfolio

    Coffeehouse Portfolio The Lazy Portfolio
    This is another in a series of lazy portfolios and one of the most popular. There is no single “coffeehouse portfolio” and an investor can adjust the basic version to own needs and investing goals.

    This lazy portfolio, Coffeehouse portfolio, that financial advisor Bill Schultheis made famous in his book “The Coffeehouse Investor” is so simple.
    The Coffeehouse portfolio is built of 7 funds. The basic version starts with the composition of 60/40 stock/bonds. The fixed income part is put into a bond fund (you have to choose). The 60% in stocks is divided equally between six index funds. That index funds are a large-cap value fund, a small-cap fund,  a small-cap value fund, a foreign fund, a REIT fund, and a large-cap fund.

    “Investing should be dull,” said Nobel economist Paul Samuelson. Yes, some would say the same. But we have to be honest. This kind of portfolio maybe isn’t suitable for some Millennials experienced in investing. The Coffeehouse portfolio is too much dull. On the other hand, it is good. All you have to do is to set it up and live your lives.

    And this discovery is amazing. 

    You can hear investors saying the same thing again and again: You need some simple but well-diversified portfolio. You don’t need more than several funds (4, 5, 9 whatever), but pay attention, as you are a novice, they have to be low-cost and able to create winners during both bear and bull markets. 

    That’s the point with lazy portfolios. There is no active trading, no market timing, and of course, no commissions. Moreover, they are simple. Well, someone may ask what happens with assets absent from such a portfolio. Forget it! You don’t care!

    How to structure Coffeehouse portfolio

    It is quite simple, as we said and here is one example:

    10% Vanguard 500 Index
    10% Vanguard Value Index
    10% Vanguard Small-Cap Index
    10% Vanguard Small-Cap Value Index
    10% Vanguard REIT Index
    10% Vanguard Total International Index
    40% Vanguard Total Bond Market Index

    Or

    10% Large-Cap Stocks
    10% Small-Cap Stocks
    10% Large Value Stocks
    10% Small Value Stocks
    10% REITs
    10% Total International Stocks
    40% Bonds

    As you can see in this portfolio, it is massive on the REITs, is slight on international stocks, and misses diversity on the fixed income side.

    Roll the dice

    Basically it is a “slice and dice” portfolio. So we can say it isn’t a “total market” example of the portfolio. A total-market portfolio consists of 1/3 equal parts of a total bond market index, total stock market index, and total international stock market index. But this “slice and dice” portfolio seeks to benefit from the higher returns. There is a higher risk when investing in value stocks and small stocks.  And, as you can see, this portfolio has a massive collection of both small, and value stocks.

    The 60% piece of the Coffeehouse portfolio represents 6 different funds that cover a different part of the market. That is a really good part of this portfolio since it is adding to the diversity.

    The rest of the 40% of the portfolio is a total bond fund that includes the whole of the bond market.

    It is recommended to rebalance the Coffeehouse portfolio every year. That secures that the asset allocation percentages are held at the accurate amounts. But it can be an individual decision for every investor, there are no rules what is the accurate amount.

    Modifications of this lazy portfolio

    As you can see this portfolio holds more bonds. It is more than some average investors would like to hold, especially if you are young. To make a comparison, the target-date funds, for instance, for Vanguard hold 10% bonds until investors are 45. We found some of the Trinity University studies and one shows that even investors in retirement should own 50/50 portfolios or even more aggressive. 

    Honestly, the Coffeehouse portfolio favors small-cap and value stocks. And do it with reason. Historically they have had higher returns and which means higher volatility too. But you can tweak the portfolio.

    How to adjust the Coffeehouse portfolio

    One method is to reduce your exposure to bonds (for example you could hold 10% of them) and split the rest of the portfolio equally into six funds. In this way, you’ll have a much more aggressive portfolio if you like that. But keep in mind, that is riskier at the same time and you must know how much risk you are able to handle.

    Why not invest in the Coffeehouse portfolio

    Firstly, for some investors, this portfolio hasn’t enough international exposure. It holds only 10% of Total International Stocks. Secondly, the 40% bond allocation will reduce your returns, you can be sure. Also, rebalancing can be expensive. There are too many funds to set them up. 

    For young investors, it isn’t so easy to just buy and hold. What if the prices are going up and down frequently? How to stay calm and do nothing? That’s the tricky part of any lazy portfolio. 

    Also, as we said above, the Coffeehouse portfolio can be too conservative for some investors. Where has the excitement of investing gone? Yes, you can adjust the portfolio as we described but still. Hence, to be honest, the one size that suits all methods sometimes don’t work for everyone. Especially if you prefer to be a more aggressive investor.

    Why invest in this portfolio

    Allocation on the value stocks is an advantage. The value stocks have outperformed growth stocks for 20%, according to historical data. Also, since this portfolio holds 20% small-cap stocks, it is good because they have outperformed large caps. Historically speaking, of course. By being a lazy portfolio and holds 40% in bonds, the Coffeehouse portfolio is less risky. 

    Bottom line

    A creator of this portfolio is Bill Schultheis. He wrote a book about dullness investing. He had found that when you simplify your investment decisions, you end up with better returns. 

    His book “The Coffeehouse Investor” explains why investors should stop holding top-level stocks or mutual funds, and stop attempting to beat the stock market. Instead, keep stick to three clever principles: 

    1) There is no free lunch
    2) Never put all eggs in just one basket
    3) Save for rainy days

    Sure, there is one more. Don’t pay too much attention to daily ups and downs in the stock market. It can ruin your life. But with investing in the principle buy-and-hold, with an annual rebalancing of your portfolio, it is more likely that you will build your wealth. There’s nothing wrong with adjusting the CoffeeHouse portfolio. It’s more important that you stick with your plan. The weighting of your allocations is less important but has to be reasonable. And a note for newbies, sometimes it is smarter to be a bit conservative especially in the stock market. 

    And here is a bit of statistics. Behavioral finance professors  Brad Barber and Terry Odean discovered: “The more you trade the less you earn.” Buy-and-hold investors are doing better than traders. Active traders can lose a lot of money paying transaction costs and taxes. 

    The truth is that active traders can turn their portfolios over for more than 250% per year, but their returns can be just like 11% after paying tax. Opposite, buy-and-hold investors can turn their portfolios over a bit around 2%, making around 18% returns. 

    Finally, this is just one of the numerous approaches to investing. You are the one who has to choose. It’s all up to you.

  • Lazy Portfolio – How to Make Wealth With Minimum Engagement

    Lazy Portfolio – How to Make Wealth With Minimum Engagement

    Lazy Portfolio - How to Make Wealth With Minimum Engagement
    A lazy portfolio is a diversified portfolio that allows you to grow your wealth without stress or a lot of work.
    There is no active trading, no monitoring your stocks every day, and no paying to handle your money.

    Let’s make clear what’s a lazy portfolio? In short, the lazy portfolio is passively managed, low-cost, diversified and tracks an index.

    Actually, a lazy portfolio is a simple set-it-&-forget-it strategy. It requires a minimum of maintenance so we can easily say it is a passive investing strategy. Due to its nature, it is suitable for long-term investors. In essence, it is a buy&hold strategy that working very well for investors that feel fears when they have to make investing decisions. Even more, this strategy provides investors to avoid greed, maybe the most dangerous feeling in the stock market. 

    The lazy portfolio isn’t only for lazy investors, this has to be clear. It is for investors who want to avoid high risks while investing. We will introduce some of the best lazy portfolios that could provide above-average returns with below-average risks.

    How to recognize the best lazy portfolio?

    Actually, it is yours, the one that you maintenance. Each investor has its own style of managing, a different approach, so the way of investing is absolutely individual. But the goal is the same – to outperform the market and generate the highest-as-possible returns.

    In most cases, a lazy portfolio can do that. Even Warren Buffett believes in a lazy portfolio, you can ask him. Also, many other successful investors built a lazy portfolio instead of fancy strategies. 

    But in most cases, a lazy portfolio will not give you to time the market, or to beat it. Also, it will never give you a chance to pick individual stocks but, at the same time, it is low-cost and loaded with fewer fees.

    A selection that makes money

    Index funds are a good choice as being less volatile. Well, you will not earn your money fast but you could stay in the market for a long time, over 10 years, for example. And you’ll make a profit.

    Index investing is essential for laziness. Trust us. You don’t need to actively manage ETFs. What you have to do is to choose among several different recipes but generally, they come into three categories:

    Two-fund portfolios
    Three-fund portfolios
    Four-fund portfolios

    Two-fund portfolio

    A two-fund portfolio is suitable for investors who want an easy asset allocation portfolio. The two-fund portfolio is built of one fixed-income fund and one equity index fund. You will find your selections depending on the asset class and asset type.

    It easy to create a two-fund portfolio. 

    There are almost 2,000 ETFs out there and you can pick any of them. 

    First, decide which assets you need. Stocks and bonds are of the core asset classes and your lazy two-fund portfolio will need them. Stocks perform well when the economy is good. But, bonds will protect your portfolio from market uncertainty. Of course, you don’t need to hold stocks and bonds, you can choose something else, as we said.

    If you are a very lazy investor your two-fund portfolio could be consists of 60% of total world stock index fund or ETF and 40% of US diversified bond index fund or ETF, for example.

    Three-fund portfolio

    A three-fund portfolio is composed of only three assets. They are usually low-cost index funds. It requires very little maintenance on your part and that’s why it is another example of a lazy portfolio.

    It is a pure 60/40 rule. This one recommends investing in international index funds and stock market index funds. For example, according to Taylor Larimore, an advocate of holding investing simple, all you need is to handle with three mutual funds. That will require an hour per year managing your money, he said. You may diversify your three-fund portfolio on 40% of bonds, 42% of stocks and 18% global stocks. According to some experts, it is the best proportion.

    Four-fund portfolio

    The best example of this kind of lazy portfolios maybe is Dr. Bernstein’s “No-Brainer” lazy portfolio.

    Dr. William Bernstein wrote “The Intelligent Asset Allocator” and “The Birth of Plenty”. He has promoted the capability of the index fund over individual stocks and bonds. 

    One portfolio that he proposed in “The Intelligent Asset Allocator” is named the “No-Brainer” portfolio. It is composed of 4 equal funds: 25% bonds, 25% global stocks, 25% US stocks and 25% small-cap US stocks. No-brainer indeed. 

    But this portfolio will give you a chance to diversify the risk over time.

    If you are smart, you can be lazy

    You will show you are a really clever investor if you set up all of your buying to be automatic. For that, you will need SIP – a systematic investment plan. Mutual fund or brokerage could help you with this. In this way, you will lessen the risks of market fluctuations. Moreover, this will provide you invest a fixed sum in a mutual fund plan at regular periods. For example, you can invest $500 in a mutual fund each month. It is a helpful tool.

    Manage no-load funds

    As we said, a no-brainer is really good. If you use no-load funds for your lazy portfolio you will avoid sales charges, so-called loads. Well, to make this clear. You are dealing with mutual funds and it is quite possible to do all the necessary things related to your portfolio and investments, yourself. So, why should you pay any additional fees? The point is to keep your cost low to boost your returns, right?

    Rebalance your lazy portfolio

    Re-balancing a lazy portfolio is simply turning the current investment allocations back to the initial investment allocations. So, you will need to buy or sell shares to bring back the allocation percentages into the initial balance. 

    Re-balancing is important maintenance and you should do it periodically, for example, once per year. Well, there is always a possibility with, for example with mutual funds, to set up automatic rebalancing.

    Advantages of a lazy portfolio

    Lazy investing could be the best way to invest. First of all, it is simple Holding just a few funds makes things easier. Further, it is low-cost investing since you don’t need to pay any fees for trading, managers, etc. If you build a lazy portfolio you just have to buy some cheap assets and voila. But the most important feature is the diversification. You can hold thousands of stocks and bonds with just several investments. 

    Disadvantages of a lazy portfolio

    It isn’t easy to find some disadvantages, but there are some things to consider before starting.

    One of them is tax-loss harvesting. if investing with 2 or 3 funds, you might miss out on some tax-loss harvesting possibilities. The other problem is the lack of customization. You can’t customize a lazy portfolio like you can with others. But that is the point, to keep it simple. Simplicity is the amazing part of it.

  • Asset Allocation Models – Protect Your Investment

    Asset Allocation Models – Protect Your Investment

    Asset Allocation Models
    Here is how to protect your investment with different models of asset allocation

    By Guy Avtalyon

    Asset allocation models are the way to split your investment into different asset classes: stocks, mutual funds, bonds, private equity, etc. That will give you the possibility to lessen the risk of your investment. Every asset class carries some level of risk but different. For example, if the value of bonds rises, the stocks will fall. When the market is falling, real estate may provide you a nice return.

    The point is to have a diversified portfolio built by the asset allocation model among asset classes. Every investor has its own model of asset allocation. It is based on individual investing goals and risk tolerance.

    Also, personal asset classes can be separated into different sectors.

    You can use different types of asset allocation models.

    Asset allocation model created by your needs

    For example, for some investors equities are more favorable than other asset classes. Or if you are in serious ages you may prefer to put your money in some source of fixed income that can provide you stable retirement income because your goal is to save what you earned during your working life. Thus, you are not worried about market fluctuations. So, you may have the majority of your portfolio in stocks.
    But if you are a younger investor you may prefer some investment with faster returns.

    What are the different models

    Most asset allocation models come into four models: growth, preservation of capital, income, balanced.

    The growth asset allocation model is suitable for beginners interested in long-term investments. If you are at the beginning of your professional career you will be interested to deposit some amount every year in long-term investment such as common stocks that may not pay you dividends but can be good in the long run. Fund managers could advise you to invest in some foreign equities to diversify your portfolio.

    But if you want to preserve your capital you will like some other model of asset allocation, like preservation of capital. This model will suit you if you want to avoid risk to lose even a small part of your investment because you would like to use it in the next 12 months, for example, to buy a house. In this case, your investment portfolio will have about 80% in treasuries or commercial papers. There is some risk in this model of asset allocation due to the inflation that can lessen your buying power. Think about that.

    Income as an asset allocation model

    The usual income investor comes from a group of people near retirement because the need for cash in hand is of essential importance.

    The balanced model of asset allocation is kind of halfway between income and growth. It is a compromise between long-term growth and current income. This mixture of assets that can provide cash but also the growth of principal value.

    Balanced portfolios is built of medium-term investment and stocks of well-established companies.

    The investor’s needs may change during the time.

    The asset allocation will follow that change. For that reason, it is always smart to switch a portion of your investments before the important life changes. Do it occasionally. For example, you could move 10% of your investments to the income allocation model yearly as you are approaching retirement. So, you will have the whole of your portfolio adjusted to your new goals.

     

  • Stock Market Is Going To Crash? Where Could You Put Your Money?

    Stock Market Is Going To Crash? Where Could You Put Your Money?

    Do you believe that the market will crash or you know? There is a big difference between what you believe and what you know.

    2 min read

    market crash

    Market crash or market not crash. If you truly believe the market is going to crash, there are a lot of sorts of places where you can put your money.

    You could buy gold or real estate or you could take an aggressive approach. And try to capitalize on stocks’  by loading up on investments designed to rise when the market falls or you could move it all into cash.
    But be honest.

    Do you really believe in such a scenario? Market, crash!

    There is a big difference between what you believe and what you know. Do you know that the market crash is close? When? Tomorrow? Next week?

    On the other hand, I can understand that someone can recognize market crash in this uproaring and uncertain times.

    We all remember, OK most of us, March 2009 and market crash.

    Everyone was extremely agitated about the falls in the stock market. And people were feared that the stock market might continue falling. Many people wanted to sell the holdings in his investment portfolio, move the proceeds to cash and sit out the market turbulence.

    And you know that emotions have an important influence on investor behavior and how do they make decisions.

    This can often lead to investors failing to capture the returns that are there for the taking. And as a result, suffering poor financial outcomes and according to some research, we are twice as sensitive to financial losses as we are to making gains.

    But is it so today?

    Is this the same situation? Will the market crash? Or it may not be. Think about it.

    The ones who like to predict disasters pointed to any numbers of reasons why they believe the market is headed to a crash.

    You have the choice to pick. From the growth-slowdown scare in China that sent stock prices down 12% in the summer of 2015; Brexit and the election of Donald Trump. Anything is supposed to be catalysts for a market rout. Obviously, some prediction of the market’s downfall is going to turn out to be right. But after the turnaround began in March 2009, it’s not as if investors knew the bear had run its course.

    While we believe we know where stocks are headed, we actually don’t.

    The same goes for market pros who may speculate and prognosticate (sometimes even provide valuable insights into what’s driving the market). 

    But they don’t really know what the financial markets are going to do in the near term. They don’t know will the market crash. 

    I don’t think it makes sense to shift your money around in an attempt to outguess the markets, whether that means going to cash to avoid a setback or moving to an investment you think will thrive while the market drop.
    That doesn’t mean you should sit back and do nothing.

    You can do the following things:

    The most important thing you want to confirm is your asset allocation or the percentage of your holdings that are invested in stocks.

    That will determine how your portfolio holds up if the market takes a major dive.

    Take this time to go over your holdings and tally up how much you have in stocks and how much in bonds and you’ll see how your portfolio is divided up between stocks, bonds, and cash.

    Second, figure out where your asset allocation should be.

    I’m sure you want a blend of stocks and bonds that will generate high enough returns so you can reach your financial goals but at the same time isn’t so risky that you’ll sell stocks in a panic during a major stock rout.

    Think back about how you handled past downturns or how you reacted when stocks began to dip and dive. You want to come as close as you can to a blend of stocks and bonds that you’ll be okay holding in a variety of market conditions. And then make all necessary adjustments.

    Then you feel you’ve got a portfolio that will provide sufficient gains during rising markets and enough protection during routes.

    You’ll be able to hang on until the eventual recovery, regardless of what’s going on in the market. The idea is to make sure your portfolio doesn’t become too aggressive during market upswings. Or too conservative when stocks take a hit.

    Making dramatic changes such as fleeing to cash or switching to different investments altogether, may be challenging at times when every news story or TV show you see seems to suggest that the market is on the edge of Armageddon.

    But you don’t want to let fear and emotions dictate your investing strategy and lead you to make impulsive decisions.

    Can I guarantee that this approach can provide you with the best results during the long – term? Of course not.
    This is just another  ”what would be if it were” scenario.

    Risk Disclosure (read carefully!)



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