This article is meant to express my view on long term investing as a retail investor, frustrated with the inconsistency of portfolio returns formerly administered by a reputed Swiss private wealth bank.
When you invest your bankroll (to use a Poker term) with a view to conserve and increase your wealth and not loose capital in the long run, you go back to basics. After 2 years of letting a Swiss private wealth bank manage my money and missing out on a fantastic bull run (S&P500 went up 30% circa in 2016-2018 investing period) and I had zilch returns (yeah about 0% net of fees with over 60% invested in equity - good stock pickings from the professionals).
Now, I went back to basics and generated over 14% return in 2019 with a portfolio beta of 0.4 (much lower risks then the market). Then I started reading Big Debt Crises by Ray Dalio, looked at his portfolio and found out that I have the same top 15 positions as his firm. Those positions I took following my own investment philosophy.
Everyone thinks they retail investors are dumber than professional banks, hedge funds etc. But let's also look at the advantages a retail investor has over these players. Yes, ADVANTAGES.
1) You play with your own money. It means you don't have to report quarterly and annual positive beat-the-benchmark results. Why is this an advantage? You can really take the long view on investing, which in practice means YOU DON'T HAVE TO TIME THE MARKET. I know, not ground breaking. Everyone knows that. Also 99% of people break this rule and trade. Why ? Because it's fun and you can boast to your friends. If you can be disciplined about this and avoid it, you will always make money at this game.
2) Beat the benchmarks - who cares? Not me, I have a set return-on-investment target which is reasonable and calculated to generate net worth more than enough for me when I retire with my portfolio. It is 6% per annum. Funny enough it is almost the same target as the Sovereign Fund of Singapore and Temasek has 370bn$ AUM, so they know what the hell they are talking about when setting a target ROI. Why not higher? Because they know higher ROI means risking your capital long term. Again not groundbreaking but you would be surprised how 90% of people I talk to talk about benchmarks when they should be thinking of their own tailored ROI objective.
3) How to make money in the long run? ETFs. Again not groundbreaking but you cannot boast to your friends that you made money on TESLA's incredible run. You know what? To hell with TESLA and FOMO. To hell with all the individual stock pickers who think they know best. Long term you are looking at loosers, I only know one guy who beat the market long term, it is Jim Simmons and let's not pretend we understand how he did it, because what he does is very hard to replicate. So you have to structure your ETF portfolio to asset classes that - looking at blended ROI - meet your target. Also look for asset classes that are uncorrelated in price movements. Diversification does not mean OTHER securities, it means UNCORRELATED price movements for those asset classes. You can take closing prices for that instrument and do a correlation factor calculation in Excel, an 8th grader can do it. When I made my ETF portfolio, guess what - I ended up with Ray Dalio top 15 positions. Turns out one of the greatest Wall Street investors thinks THE SAME WAY. If you don't have too many ideas and you need to build an equity position to boost your overall portfolio returns (you cannot make 6% long term from bonds alone sadly and the low rates environment will become the norm I am afraid) just buy SPY. High liquidity and you have S&P500 in your portfolio. SPY does not go bankrupt. SPY always goes up at 10 years time frame, even after the 2008 debacle the top was 1500. 10 years later it was 2900 so you do your math.
For bonds some of my preferred ETFs are sovereign US$ denominated bonds of emerging market countries who are returning 5% yield on average. Maybe Argentina will default (sovereign defaults are rare in reality) but even then you loose 2% of your position (or that country's weight in the ETF). EMB is my favourite bond ETF (and not surprisingly one of Ray Dalio's biggest bond ETF positions). I could not understand why corporate investment grade in US returns up to 3% yield and sovereign bonds 5%. It is PERCEPTION and GEOGRAPHICAL BIAS. In other words - Pakistan , wow sounds bad. No dudes, it is a sovereign bond and they need access to debt markets so it is not so bad. Yes, Greece can happen but again, remember, you loose 2% in a sovereign default and still have a 3% net yield, like the moronic -barely beating inflation - investment grade bonds. I am appalled by the gall these people have to pay these kind of rates and pretend it is ok. Not to mention the European Central Bank and negative rates. This anomaly induced by an overextended monetary policy made me get out of EUR assets entirely and go 100% on US$ denominated assets, which I did at 1.13 EUR/USD FX rate. Now it is 1.09 so made money here as well. USD dominance will continue as to date it is the only major currency administered responsibly with risk free rates at inflation rate level. You also have the Japanese Yen and the Cable, but let's be real, not a lot of assets denominated in that currency that are attractive return wise.
4) Last but not least, I cannot stress this enough - AVOID PRIVATE WEALTH ADVISORS LIKE THE PEST. They have to prove to you their worth so they will not advice you following the above philosophy. They will come up with "stock picks"and "market-beating investment themes and ideas" with your money. That is capital-at-risk play and most of them don't truly understand the above principles, they are 90% salesman and 10% finance skills. Long term they will destroy capital value for sure.
Hope this helps guys and you enjoyed my little article/rant.
Disclosure: I am/we are long EMB.