Flaunt Your Assets: Core Investment Portfolio

First of all, what’s a financial portfolio? It’s a grouping of financial assets that you choose to invest in. It can have both publicly tradable securities like stocks, bonds, futures and options and non-publicly tradable securities like private investments, venture capital, real estate, cryptocurrencies and art.

There are three key criteria to adhere to when constructing a portfolio:

1. The Portfolio Should Fit Your Investment Needs

As I’ve highlighted in my first book, Wise Investing, the most fundamental step should be that your portfolio fits your needs and your lifestyle. Your saving and investing activity should be something you can sustain your whole life and sleep tight at night. If portfolio construction is a new activity for you, then it is better to start safe and re-evaluate your risk profile later if you wish. Investing is as much a game of patience as it is a game of wits.

2. Diversification and Counter-Cyclicality

“Location, Location, Location” is a well-known proverb from property investors. Likewise, for financial portfolio it’s “Diversify, Diversify, Diversify”. Yet, just buying a lot of securities that carry the same type of risk is not good diversification. Aim for a portfolio that has some counter-cyclicality in it, which means that when one type of risk is triggered and that part of your portfolio diminishes in value, the other part of the portfolio actually increases in value or at least remains relatively unscathed. That’s why a lot of portfolios combine stocks or stock ETFs with high quality bonds. When the stock market corrects (falls), a high-quality bond portfolio will remain relatively stable and generate predictable income. Another example of good diversification is geographical diversification, which allows an investor to limit the impact to his or her portfolio due to, for instance, localised political events.

3. Analyse Your Biases

Biases are and always will be a part of our nature, however, it is crucial to understand their effect on our decisions regarding our investments. Like with any biases, there are limiting financial biases and empowering financial biases. An example of the former is home bias – a tendency to stick to investments in your home country, because for some reason they feel safer. An example of the latter is investing in sustainable businesses as research shows such investments perform better over the long run. Only you know which of your biases and beliefs are helping you and which are limiting you. However, one thing is certain: they require constant analysis.

I am not a proponent of hard written rules in investing because I believe that every investment portfolio is very individual. However, it is always wise to keep some guiding rules in mind.

Core Portfolio Rules

1. Keep at least 80% of your portfolio in publicly tradable securities, that’s what we call a “core portfolio”. You can experiment with the rest. However, do so only if you have a specific reason to experiment. Otherwise, keep all 100% of your portfolio in publicly tradable securities.
2. Keep your core portfolio in solid currencies that are strengthening, for instance, when a certain Central Bank or Monetary Authority is increasing their interest rates. In the near future such a currency will only be the United States Dollar (USD). However, please note that the relative strength of currencies changes over time.
3. Keep a significant amount of your core portfolio in bonds unless you have a specific bias and a strong reason to do otherwise. You can use a classic 50-50 split (50% bonds, 50% equities), which works well for a lot of investors. Alternatively, you can use my business partner’s rule and use your age as a gauge for the proportion of the portfolio to keep in bonds. For instance, if you are 30 years old you could keep 30% in bonds.

Total Portfolio Rules

1. Do not invest more than 10% of your portfolio into a single security or a single company, unless that security is a diversified index ETF.
2. Do not invest more than 35% of your portfolio into a single sector unless you have a very strong reason to do so
3. Do not invest more than 35% of your portfolio into a single geographical region, unless that region is a major economic block like the US.

Now that we’ve covered the key pointers, we will examine 2 of the most important tools that will enable you to build a high-quality core portfolio: ETFs and Bonds.

You may have heard of this term, or you may have even dabbled with it without really understanding it. Either way, I’ll give you practical steps to make better investment decisions within the world of Exchange Traded Funds (ETFs).

ETFs are funds that have been turned into a listed asset and are traded on an exchange. Most ETFs are listed on widely recognized exchanges like the New York Stock Exchange (NYSE) and therefore can be accessed via almost any brokerage platform. ETFs are designed by professional fund managers and generally follow a certain investment theme (investment declaration). The fund managers are then responsible for building and maintaining a portfolio that will deliver on the declared investment theme. Often, when we speak about ETFs, we refer to stock ETFs (ETFs that primarily consist of listed stocks, like QQQ). However, there are many other types of ETFs like fixed income or bond ETFs, gold ETFs and many more. For instance, one of the most popular ETFs in the world is SPY - the ETF by State Street Global Advisors that tracks the S&P 500 Index and contains stocks of some of the biggest companies in the world by market capitalisation. Another popular ETF is VOO (which is an alternative of the former by Vanguard Group). QQQ tracks Nasdaq-100 and is issued by Invesco.

ETFs like SPY, VOO and QQQ that track an index are commonly referred to as index ETFs. Index ETFs are created by large companies with sufficient skill and economies of scale. As a result, they are able to closely follow a certain index even in times of high volatility. They’re also affordable. The accessibility of individual ETFs will significantly vary depending on what exchange they're listed on. If your capital is below USD2 million, avoid exotic exchanges and stick to the large and liquid ETFs listed on established exchanges.