How to resurrect your $ 1 million portfolio!

How to resurrect your $ 1 million portfolio!

Train Wreck

Of the 100 articles that have historically been published regarding how to spend [or invest] there has been less than 1 feature written about how to resurrect what has been notionally lost because there will always be more positive stories exhorting you to get onto the perpetual bull run. The stories of risk, care and caution, and discussion of a sustainable portfolio are difficult messaging in a world that is either driven by momentum investing or value seekers willing to stand alone, take the flak, and weather underperformance for a long period. The world is either running to catch a speeding train, or it is willing to sit in a wrecked train hoping it will start chugging along eventually. Such polarized approaches have hurt the discipline of investment management and hence the small investor on the street, who lacks education, lacks instruments, and has no one to simplify the business involving his pension.

News Is Not A System

You may know the ineffectiveness of news as an indicator, but you may still read it. Your addiction to news is what keeps the press running. The news industry has made investing an adventure sport. News is a poor system and Google’s first-page search results are a popularity contest, which has nothing to do with anticipation, education, or intelligence. News-based market timing has less than an 18% chance to make you rich . There is enough literature out there that will tell you that information can be irrelevant when you expect it to be relevant and vice versa. If more than 9 out of 10 professional asset managers can fail to beat the market, without reasonable research skills and experience, your chances of getting rich based on the news are a lot lower than the flip of a coin.

Better To Be Dumb Than Intelligent

Many of our clients and readers who have lived through many bear markets know that you need to go through a couple of bear markets before you stop thinking of yourself as an intelligent investor. The more the bear markets you live through, the dumber you feel, because experience makes you realize how little you know. Underplaying your skill helps conserve money, sustain, and overcome instant gratification as you naturally become cautious in exuberance and risk-taking in a crisis.

10 Rules Before Resurrection

First and foremost you have to remember a few things. It was never about the market, it was always about you.

Second; the Market is a train station, there is no need to run after a train because there is always another train.?

Third; the Law of ruin is still valid. The more you will trade, the more you will lose. You have to hold if you want to increase your chances to generate wealth.?

Fourth; emotional investing is for rookies. Systematic investing increases your chances to contain emotional mistakes. Following a set of rules has a higher probability to beat a human intuition “system” riddled with biases.?

Fifth; The reason the market always beats asset managers, in the long run, is because it does not read the newspaper. S&P 500 and most benchmarks in the world print a value, every tick, based on just one variable, price.?

Sixth; markets are complex and complexity’s job is to confuse, not to clarify. Using tools that clarify confusion is less important than the ones which embrace or work despite the confusion.

Seventh; five things happen in the market. The small profit, the small loss, the no change, the big profit, and the big loss. There is one thing you need to avoid, to stay in the investing game, the big loss. Once, you have a big loss, you have taken yourself out of the investing game. Risk is more important than a return.

Eighth; Lack of diversification is the biggest investor mistake. Never put all your eggs in the same basket, which increases your chances of bankruptcy. Diversify, diversify, diversify.?

Ninth; Compounding creates wealth. For the money to compound, you don’t need to just hold, you need to stop paying fees year after year. The annual management fee kills the compounding. The more you pay annually without performance, the more you are subsiding your asset manager’s and advisors' underperformance. Over the last 10 years, fees on average could cause up to 50% of foregone profit.

Tenth; Poor investing has everything to do with poor psychology, which creates overconfidence and keeps you married to poor biases. Even smart money herds. United we stand, united we fall. You need to do things differently to expect a different outcome. A scientific explainable, replicable, open method can go a long way in resurrecting and improving your portfolio performance.

Leverage Your Failures

Never lose the opportunity to go through your damaged portfolio. Think about all the rules you have broken and allowed biases [overconfidence, confirmation, anchoring] that crept into your decision-making.

Fallen Eagles Can Reduce Tax Bill

Fallen eagles don’t just rise from the ashes and start soaring again. If you have dead-weight companies that had no revenue and you bought into their growth future, you have bought into a Tulip story. The faster they rise, the faster they go out of business. Extremities like Carvana were obvious but went ignored. We pointed out Nasdaq's exuberance as an extremity, which was hard to sustain. One approach is to transform fallen eagles into a reduced tax bill, especially if the blue-chip [the revenue-making companies] continue to sustain the clutter.

Take A Mandates Test

There is no resurrection or rebuilding that can happen without you understanding that mandates are not what you buy off the shelf. Mandates [The markets and assets you can invest in] are the backward integration you need to do before you reap the benefits of a systematic machine. Your advisor should be educating you about what are the constraints of their mandates [the coverage they can offer you, and what they can’t]. If you don’t know that equity is just one of the five key asset classes out there, you have failed the Mandates test.

Developed Markets Large Cap Is Liquid

Illiquidity premium is for the private equity market participant. A million dollar portfolio [MDP] needs liquidity and hence should understand that when times go tough, which they invariably do, only quality stays liquid. Momentum crashes are the only times, blue chip, and liquid companies, diverge from their premiums, creating opportunities. S&P 100 is the top 100 large U.S. companies and should be part of the MDP’s mandate. Our machines look at other large cap [capitalized] global mandates like Canada 60, and Europe 50 and plan to add Japan 30 to the list. Pension fund allocations can’t avoid local mandates and hence AlphaBlock looks at all G10 benchmarks.

Get Exposed To Commodities

An MDP portfolio of portfolios is incomplete without a commodities exposure. Commodities are an under-represented asset class in the MDPs because asset managers are biased towards equity. Things have changed over the last two decades after the launch of ETCs [Exchange traded commodities] and ETNs [Exchange Traded Notes] and owing to the 2008 commodity bull, but no asset class grows in a secular bear market. We have talked about inflation and why the current trend may not be transient. Despite, the current attention on commodities, there continues to be a dearth of commodity instruments in the market. And only the sophisticated advisors may tell you that equity stocks operating in the commodity space are stocks that behave like equity not like their underlying commodities and don’t serve the purpose of commodity exposure. Commodities should not be seen as a homogeneous asset class as Energy, Metals and Agricultural commodities, which could diverge consistently for long periods and hence may require more attention.

Alternative Energy Is The New Energy

The world can not run without energy and with legacy energy [Crude and Natural Gas] under positive pressure from multiple contexts like inflation, supply chain, climate change, and geopolitical risks. Alternative energy [solar, wind, hydro, clean, biofuels, etc.] is an essential asset class that can’t be ignored. Alternative Energy allocation can be seen as a green inflation hedge, which has underperformed broad markets and is poorly correlated to the S&P 500. A poorly ranked asset class that is relevant for the world to address climate change is extremely relevant for institutional allocations. Alternative energy has been enhancing efficiencies for more than a decade and Oil above $ 100 keeps the asset class in top attention for sovereign allocators, who are anxious about $ 300 Oil.

Emerging Markets Are Attractive

Emerging markets have underperformed developed markets secularly since 2008 and though an underperforming asset class can continue to underperform for a long time, while it may be underperforming, the chances for a group of countries with high growth rate and internal demand to stay unattractive is a state of decreasing probability and relatively lower risk. At an annual 18% standard deviation the Emerging Markets as a group is less risky than the annualized 22% standard deviation of the S&P500 [Since 2018].

Web3 Can't Be Dismissed

We published a working paper on incentives and Web3 and why it’s premature to dismiss top cryptocurrencies. The ongoing negativity in cryptocurrencies is characteristic of a relatively new asset class and the price structure of early 19th-century stock market indices looked a lot similar to the price of Bitcoin. The Web3 mandate at a certain low allocation is risk-reducing and return-enhancing for the MDP portfolio of portfolios.

After the Mandates, comes the allocation. How to use naive allocation or machine allocation to construct the portfolio of portfolios. After allocation, comes the PTFs [Portfolio of Exchange Traded Funds], which are the portfolios built from a collection of ETFs, an essential innovation that gives convenience and alpha to the MDPs. Week after week, we will do our bit to speak about systems, investing, machines, how not to lose big, how to compound your gains and why information is not an orange.?

Our message is not different for the $ 1 trillion Sovereign Fund or the $ 100 allocating student from Vietnam. The message is the same. You should never pay an annual fee, only pay for alpha and demand ETFs that only charge on Alpha.

If your portfolio needs resurrection write to us [[email protected]] to know more about our pay-for-alpha services which we currently offer in Canada, Switzerland, and India.

AlphaBlock Team