the know-nothing investor

…money doesn't grow on trees, you know?

Tag: Multi-asset portfolio

8.SIDEWAYS

Last two years have been hard, my portfolio has been flat. Sideways it seems, like in the movie this could be my history of a disillusioned man in his forties, going bald and still dreaming of moving into the investment industry or simply getting rich. At least I shall not drink my best wine in a Mcdonald’s cup. Sad that was, Mr. Giamatti.

Nevertheless, I agree that being middle class sucks, sometimes you do not have time to meet your obligation even more to read, write or think. When you mix middle class and investments your thoughts become blur and that is a sweet spot for mistakes. It is where you make dumb decisions like sell a bottom or buy a top. Or even sell everything and start all over again, thinking “this time I will make it perfect”.

Perfection is something that does not exist, even in upper classes, after all nobody is really normal and we all live with a odd self inside, which made me realize that I should embrace my imperfect portfolio and accepted that will be ruffled times. But guess what? Fewer returns today means greater returns in the future, providing that society and economics continue very similar to last century, which I think it will because people are people, even if today it seems the world will implode at any second.

So if in the future the probability of having higher returns is great, there is only one thing to do that is to putt more money to work. That was exactly what I have done in last market correction. When some of my equities ETFs went under the 30 RSI weekly chart, I bought some more. Although I did not have the courage to go the full monty because I think it is pretty clear that we are relatively advanced in the economic cycle and we should proceed with caution.

So far so good. It seems like my portfolio is giving back some of the return that I did not get in last two years.

In 2017, assets had a good run but EUR appreciation against USD took almost all off my returns. Remember that my assets are USD ETFs and I live in a Eurozone country, so I ended 2017 with a mere return of 0.98%.

In 2018, although last trimester was a value killer, because of my USD based currency portfolio it was not so bad and I closed the year with negative return of 3.97%.

I guess this is what happens when you own all the market and all the global assets, sometimes you get dragged others you get lifted.

Since inception these have been my after-tax rate of return:

Returns

 This portfolio was design to have an annual return of 10% and last two years it has been lagging.  I am confident that in the future it will pick up the pace.

 

7.ON BEING BORED

It has been a while since I last posted, but I’m not broke or even worse…dead. So it’s always immensely enjoyable to be back again. Although I’ve been feeling a little blues about writing and investing, I will always return to an old place that I love.

When you do something with immense passion is normal, sometimes, to feel bored about it. In last years investing has become a great part of who I am. I like it so much, that I have finally figured it out what profession I want to embrace when I grow up. Sadly, this enlightenment came with a 20 years delay. Nevertheless, I can do it as my primary hobby and it only took some saving and a lots of reading.

And modesty aside I’m doing it like a pro, at least doing like a pro for the goals that I’ve designed my multi-assets portfolio for. These have been my return after-taxes for the last four years:

2013 -3.49%
2014 17.03%
2015 5.00%
2016 10.81%

 

Those numbers are a little different from here, mainly because I finally had time to do some math about IRS double taxation from Portugal and US. Apparently due to US-Portugal Tax Treaty agreement I only have to pay a maximum of 28% over dividends. Which is pretty nice and much more fair in fiscal terms. This year I’m flat because of EUR/USD pair’s evolution, but we still have a couple of months to see how it ends. 

So why am I bored? Basically, because I can. I have the privilege of not overlooking my account for weeks, because after that lapse of time everything will be pretty the same or at least it will require minor adjustments.

In this kind of investment is good to be bored. It means you’re doing it the right way. It doesn’t come with excitement and adrenaline pumping emotion as in day-trading but it comes with a fair return rate and you will also keep your mental and physical wealth. It’s a win-win situation but you will become bored and I will not have lots to write about. And that’s why I’ve enormous hiatus in my blog posts. I’m richier but bored.

Few posts over time means scarce readers. Posts like this one,about being bored, or the qualities of being average will make me lose those readers. But as I learnt from Barry  Ritholtz (here) I primarily write for me. It transforms my abstract thinking into concrete ideas, which can be revisited now and then without normal mood swing bias. With this I improve my decision-making capabilities and my angsts are soothed in times of doubt. In the process if I can help common people, like me, learning anything about investing that will not be an average achievement but a great one.

 

6.NOT KNOWING

Not knowing is a great source of angst. It can drive you to insanity if it’s a huge “not knowing” problem or it can, at least, cause some anxiety for a couple of day if it’s a minor one – “I wonder what my weird neighbour is doing bagging and digging by the fence!?”.

When mixing “not knowing” with money the results can be quite unpredictable, because we are adding to powerful emotions another layer of complexity. Money has central role in our days life, since enables almost everything that we are suppose to wish for, so losing it can be extremely mentally and even physically painful. More you lose more devastated you will become.

When little fishes, like me, are thrown in the big ocean that markets are we are dealing with a lot of emotions and decisions, thus it’s normal for the average Joe to fail. Then you can try to improve your strategy and market psychology or you can just quit and look elsewhere for returns.

When this happened to me I remember thinking that I would easily trade some uncertainty for less rate of return. For that I needed to know where markets go and if for a single equity is difficult to predict its evolution for an asset class it’s easier and there’s historical data to prove it as we can verify in chart below, courtesy of Ph.D Jeremy Siegel.

http-%2f%2fwww-econlib-org%2flibrary%2fenc%2fstockmarket-html

The most suspicious will tell “But that was two hundred years ago, what about now? And in the near future?”.  For sure everything will be pretty the same, after all in the last century the World had two major and global wars and markets still surviver and as you can verify by the upper chart they still prospered.

Of course it’s our call to be angst by our market decisions or instead we can soothe our emotions by choosing asset that no matter what will go up.

This doesn’t mean that investing in a diversified portfolio is a walking in the park, it also takes resilience, patience and time. Sometime lots of time.

My portfolio for instance, in Abril 2015, it hitted its all-time high. I was marvelled how easy was to increase my value account. By the end of August I had had a drawdown of more than 20%, which by my previous simulation, when I was choosing the portfolio assets, had only occurred in 2008 subprime mortgage crisis. This was hard but I knew, because of charts like that one from Professor Siegel, that assets eventually would turn around and follow their normal paths and the true was that I still ended the year positive.

Nevertheless, it took almost 18 months to have a new all-time high and with more money involved.

The greatest difference, now, is that I know how markets and assets behave and knowledge as always the ability to make the angst to go away.  

4.TAKING IT LIKE A MAN

My personal life is in the same point that it was when I wrote “Living by Repetitive Patterns”. I guess I’m at the bottom of a no free time life cycle and soon I’ll be able to write more often about my learning curve as a know-nothing investor.

Back in July, I was so glad that I handled perfectly that market correction, but it it’s funny how markets are so unpredictable and now, in the beginning of October, we still are in the same market correction, or in a bear market or even in crash mode. You can name it whatever you want. It doesn’t matter for multi-asset portfolio strategy. We don’t have to expect anything from markets and always remember they don’t own us nothing. Therefore embrace the pain of watching your rate of return down the drain and take it like a man. Although no harm is done if we shed some tears in the process.

A 20% drawdown isn’t very pleasant to suffer, but when we have a strategy that have been working since last century we can put it in perspective and stay calm.

This means I should stay arms crossed doing nothing? Doing nothing is better then do it wrong. So I’ll wait patiently for markets to calm down and they will, they always do. Even after a major economic crisis or war they always get back on their feet. This time will be no different.

Meanwhile, I’m trying to save more money to buy equities ETFs on a discount. I’m very fond of discounts and because I failed the big one, back in 2009, I’ve been trying to catch these small corrections to do some dollar-cost averaging.

PS – I took so long to write this post that equity markets are showing some upside reversal signs, although back in July I thought the same. But it doesn’t matter my strategy is a broader one, where markets erratic movements in short time periods are meaningless.  Like my investments my blog is aiming for long run.

 

 

 

13.MY ETF MARKETPLACE

After I settled each asset allocation I went searching for the equivalent ETF. Because US ETF market is much bigger and offers an enormous variety of funds compared to Europe I decided only to buy US ETFs.

My primary goal was to find ETFs with lowest expense ratio possible, but I also took a peek at market capitalization. Coincident or not, low expense ratios are normally associated with big market caps. In the long run every expense counts.

To define what to buy I used an ETF database and through a simple search of categories I quickly gathered an ETF portfolio, with different asset classes and geographical diversification.

It had passed 7 month since I had quit short-term trading. That was the time I took to learn about ETFs, long-term investing, multi-asset portfolio and how to make one. This was the result:

PortfolioAllocation

 

The expensive ratio is really low with a figure of just 0.17. This means that in a 10 000 usd value portfolio 17 usd will be used in management costs by the ETF issuers. Try to beat this mutual funds!

I was also glad to confirm that the Vanguard ETFs were the ones with lower expense ratios, meaning that Mr. John Bogle’s investing philosophy is still nurtured in his company, which sadly isn’t the mainstream policy in financial business.

The most expensive ETF is the commodity one, DBC – PowerShares DB Commodity Index Tracking Fund, but this was expectable because of contango effect. There were others cheaper, but I wasn’t very fond of their market caps, so I decided to go with the most valued one.

Vanguard also have a cheaper ETF for big american caps instead of SPY, but choosing between them represented less than $0.5 and this allowed me to be exposed to more ETF issuers. It’s also neat to have the benchmark in my portfolio for performance purpose.

Another particularity is that instead of having only one ETF for US stocks, normally it’s choose an ETF for small cap value equities because they have better historical returns, I rather divided it three small, medium and big caps. I like the a idea of following a company’s growth, from small to big cap.

This time it would be different I would make money. I would use my short term knowledge and market-timing for perfect entries. Knowing that if I failed, time would ill mistakes. Although this time I wouldn’t do that kind of mistakes.

I had the money, I knew what ETFs to buy, I was a fresh customer of an US based broker. I had it all. Once again I was so full of myself that I forgot passed lessons and bought all the ETFs in one week and then the market went for a correction.

Oops I did it again…

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iShares –  iShares 20+ Year Treasury Bond ETF – TLT

iShares  – iShares TIPS Bond ETF – TIP

SPDRButon– SPDR Barclays Intermediate Term Treasury ETF – ITE

VanguardButon– Vanguard REIT ETF – VNQ

iShares – iShares Gold Trust – IAU

Invesco– PowerShares DB Commodity Index Tracking Fund – DBC

VanguardButon– Vanguard FTSE Emerging Markets ETF – VWO

SPDRButon– SPDR S&P 500 ETF – SPY

VanguardButon– Vanguard Mid-Cap Value ETF – VOE

VanguardButon– Vanguard Small-Cap Value ETF – VBR

VanguardButon– Vanguard FTSE Pacific ETF – VPL

VanguardButon– Vanguard FTSE Europe ETF – VGK

11.MUST-HAVE ASSETS – PART II

Equities shares

This group is simpler, it’s all about stocks. Equities shares from around the world to be precise. But what to buy? As I said before I wasn’t a great stock picker so I decided to buy them all.  Equities ETFs from different parts of the world were the answer. This allowed me to be diversified by region, sector, market cap and currency, in a way I never imagined that I would have enough funds to do it so.

Those ETFs reply global indexes and therefore through one ETF you can have the best 500 companies of Europe, for example. It’s easy to decide what ETFs to have because you can divide the world in regions and buy ETFs that have companies from those regions. This means you can have ETFs from North America, South America, Europe, Oceania, Asia and Africa.

World regions also can be divided into developed and emerging economies, where in first group you have North America, Europe and Asia Pacific (Oceania plus Japan, Hong-Kong, Singapore, South Korea). Countries with emerging economies are normally found in the rest of Asia, South America and Africa. Developed countries tend to give smaller return than emerging economies, because it’s more difficult to have big growth in mature economies but they also represent less volatility to your portfolio.

Of what I’ve read and learnt the majority of portfolios have separate allocations for North America, Europe and Asia Pacific, but normally choose only one ETF for emerging countries. Which makes senses, because some regions doesn’t have enough countries with minimum conditions to have proper stock exchanges. Therefore I also opted for one ETF that includes the most important companies of emerging countries.  

North America

The ETFs of this region represent two of the biggest economies in the world, USA and Canada. The ETF should track a free float-adjusted market capitalization weighted index which is designed to measure the equity market performance of the North America. It is possible to choose an equal weighted ETF, which will give same value to all the companies in the index, but I prefer a weighted one because is closer to reality and that for me is reassuring (although it’s possible that equal weighted ETFs have better performance). Many portfolios prefer only to have stocks from US without Canadian ones.

USA

NorthAmerica

Europe

The Old Continent is not doing so well in recent years, but it is home of inumerous development economies such as Germany, United Kingdom and France. The european ETF should also track a free float-adjusted market capitalization weighted index that represents the equity market performance of the developed markets in Europe. Besides those countries, a european ETF normally also have stocks from these markets: Austria, Belgium, Denmark, Finland,, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.

EUROPE

Asia-Pacific

Japan has major role in this region and this means that last three decade Asia-Pacific indexes have been going sideways. Nevertheless, if you are really aiming for long term it is interesting to verify that the annualized rate of return of this region in the last 45 years is still greater than US or European ones. The Asia-Pacific ETF should be similar to the previous ones and it should track the performance of developed markets of that region. Australia, Hong Kong, Japan, New Zealand and Singapore are normally the covered countries

Pacific

EMERGING MARKETS

Great rate of returns come with high volatility. Although these countries have great potential for economic growth is also true that what would be a small problem in developed countries can be a major crises in emerging markets. Once more it’s important to choose a passive ETF that seeks to replicate an emerging market index. The index will represents the equity market performance of emerging markets. Emerging indexes normally follow these countries: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

EMERMarkets

These are the regions that through ETFs it’s easy to be exposed to. Equities shares with geographic diversification should have the biggest chunk in your portfolio. They will give a boost to your account’s value when world economy is doing good. The rates of return mentioned in the charts don’t include rebalancing, so adding new money over years will for sure improve those returns and for my taste they are quite interesting.

8.NEW PARADIGM

 

“In the investing world, a new paradigm is totally new way of doing things that has a huge effect  on business.”  – in  Investopedia    

 

After I stopped trading I started wrote in a financial forum about my trading disadventures, as part of my healing process. I needed to understand my mistakes and feelings, but I also wanted to learn from other traders with similar experiences. Everyone was really nice telling me stories with great resemblance to mine.

Nevertheless, there was a user with the nickname of LTCM (curious name) that started to post in my topic some charts of trend following funds performances in recent years and the results were almost as bad as mine. This made me thinking how could professionals had so lousy performances? And how could I, as trader wannabe, to achieve great performances if pros couldn’t?

Featured image

A Comparison of CTA Indexes with trend following strategies – RED ROCK

For sure that I had responsibilities in my trading, but were there any edge to my system? Probably not, specially for a person who is only starting and hasn’t mastered trading psychology yet. But what kind of system would fit me was the following question that popped out.

LTCM was a mysterious user, as if he knew something that the rest of us didn’t, that allowed him to make clever remarks to all who wanted to be traders. Normally he would say that is extremely hard for micro-investor to succeed in trading and great majority of us should abandoned short-term trading for the good sake of our money. So I remember to read again his topic about “How to get rich slowly”.  Reading that completely changed the way I thought about investing/trading. Was such a good reading, that I can compare it to Barry Ritholtz writings. But to read it in portuguese were financial illiteracy is so big was really a treat. It was so good that it was severed copied and exposed in other financial forums. Nowadays, being copied is a kind of success recognition I guess.

There are two ways of learning faster, through books or mentorship. LTCM was a kind of virtual mentor. Because he posted some charts and articles in my topic, made me start to wonder if I was in the correct path. But for learning quick you also must embrace what are being teached to you. The true is that LTCM started is topic two years before and I didn’t pay much attention because I thought I would succeed in short-term trading and I wanted to get rich quickly not slowly. Now because I was sore of lost money I was really paying attention.

Reading LTCM’s topic, Barry Ritholz in his blog, John Bogle’s “The Little Book of Common Sense Investing” and a lot of other articles and blogs on the web did the rest.

I had discovered a new paradigm for the average investor like me to take his fare share of market’s profit. A multi-asset portfolio with geographic diversification would be it.