Portfolio construction

ChilliBob

 Cheers mate, I have watched quite a few of Ramin's videos, some are really good, but over time I've seen he does skip over some important or interesting bits once you delve a bit deeper.

I do watch his videos each time though  

Thrugelmir

To quote George Soros with regards to the art of portfolio construction.  

'It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.'

ChilliBob

Thrugelmir said:

To quote George Soros with regards to the art of portfolio construction.  

'It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.'

So diversify.. If you're bg shoot the moon fund choice flops at least you're CGAR has delivered some kind of (low) return... I guess how to proportion each depends on your goals and risk profiles. 

Thrugelmir

ChilliBob said:

Thrugelmir said:

To quote George Soros with regards to the art of portfolio construction.  

'It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.'

. I guess how to proportion each depends on your goals and risk profiles. 

Correct. No one size fits all answer.  

ChilliBob

Thrugelmir said:

ChilliBob said:

Thrugelmir said:

To quote George Soros with regards to the art of portfolio construction.  

'It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.'

. I guess how to proportion each depends on your goals and risk profiles. 

Correct. No one size fits all answer.  

Yep, and I'm sure mine will evolve over time as my circumstances and tolerances change too. Working out the starting point is tricky, but I guess it's just a point to work from after some time for reflection has passed 

JohnWinder

ChilliBob said:

There doesn't seem to be much content on the popular sites, or I have not found it, on the actual mechanics of portfolio construction and maintenance/rebalancing.

OK, so now it’s been pointed out, with the link in the second reply. Essentially: determine your risk tolerance for an appropriate stocks/bonds/cash mix; buy broadly diversified global (or home biased, possibly currency hedged) index equity fund(s), and low risk bond fund(s); rebalance every few years if needed; don’t mess with it unless your personal circumstances changed substantially. Isn’t that the mechanics?

I'm aware of the need to diversify, but I'd be interested to read articles others think are decent, or learn how more experienced investors on here would construct and maintain a portfolio. Especially in the current climate where the concept of 60:40 is claimed to be dead by many a manager, and the role of gov bonds not behaving as they have been for ages. 

Well, in what sense is it dead? Or is this fund managers looking to drum up business from index investors who might be tempted to stray off course without good reason?  Government bonds are behaving just as they always have, but with lower yields than has  been customary. Stocks do that at times also; do people say the role for stocks has changed when that happens?

Maybe read some views about this here: https://www.bogleheads.org/forum/viewtopic.php?t=310053

ChilliBob said:

Also I'd be interested to hear what people think of construction in the current climate, where investors chronicle proclaimed the role of government bonds was very different to the past.

A crib sheet of correlations would be good, alongside one's that typically do well or bad in inflationary and higher interest rate environments.

I suppose it depends on what role you had for government bonds in the past was, but if was the simple role of ameliorating the volatility of a stocks portfolio, then nothing need have changed. Yields are down, yes, but we need to accept this unless some other asset class has changed its characteristics in the meantime, so that its risk/reward profile has changed. Has that happened with real estate, commodities, currencies?

A crib sheet of correlations would be good, alongside one's that typically do well or bad in inflationary and higher interest rate environments.

The limitation of a crib sheet of correlations is that it tells you what they were in the past, not what they will be in the future, which is all that matters. Do past correlations look like future correlation? Have a look at some long term chart of stock/bond correlations and watch them swing from positive to negative and back again. https://www.bogleheads.org/forum/viewtopic.php?t=284795

Cover any part of the chart, and try to predict what happens in the covered part. Like much else in investing, it seems to be a big, time wasting diversion from living a normal life and ignoring your investments. If the active fund managers who study correlations, and everything else daily, can’t in the majority outperform index funds over periods of more than about 3 years, why should we bother, especially since it just risks blowing us off track? Of course, if something earth shattering comes up that will impact how we should invest, we should know about it. But if so, it will be front page stuff, not arcane correlations that most people haven’t heard of.

Or should one just look to wealth preservation type things like cgt/pnl/ruffer? I'd considered these kind of things, and also considered stuff like REITs, TRIG etc. 

Don't think so.  It can be very difficult for the likes of us to compare their performances with an index fund stock/bond mix, and you might not find a SPIVA or Morningstar comparison to help you. But why would we think those wealth preservation fund managers are any better or worse than the majority of other active fund managers who are repeatedly shown to be incapable of beating an index over more than about 3 years time periods?  It’s an appealing title, ‘wealth preservation’, but let’s look deeper than that.

It does make me think perhaps I should leave it to an active manager in a WP fund instead, at the expense of higher returns in a global tracker or other active funds. 

Doesn’t make me think that, because there seems nothing but the fund name to suggest it will do a better job. 

As a general principle, choosing wisely a suitable investment strategy, then sticking to it to avoid the behavioural impacts that easily damages the returns is the way to go.  Are low bond yields enough to up end our strategy and move to active wealth preservation funds? Hardly.

ChilliBob

[Deleted User] said:

To supplement whatever you're reading on portfolio construction, you could do some backtesting on a site like https://www.portfoliovisualizer.com/ - it lets you pick asset classes and some tickers.

There is obviously a lot to get into in order to understand the statistics, alpha/beta, Sharpe ratio etc.

When constructing my portfolio, I plotted out what would have happened if I started out investing around the worst possible times in the last several decades. Then I set my savings rates/massaged my financial goals based on this... This way at least, I'm likely to hit my goals and not be disappointed.

Cheers, that's another I have looked at before but ages ago. I broadly know what those terms mean already both from recent learning but also historically from previous work.

Cheers  

ChilliBob

I get that mix of stocks and bonds for risk appetite = portfolio. This could be achieved very simply too, but for different circumstances or preferences it may be more complex. 

I suppose I was looking for more research or info around the types of portfolios people choose and why - pinwheel, golden butterfly etc so visualise how you'd look percentage allocations of your own portfolio - which hopefully the second link will provide when I can give it some good attention.

Regarding bonds, I don't think it's for managers to try and sell their funds tbh, I think its quite simply that putting money into something with a negative return isn't very attractive! The thread you linked to seems pretty conclusive, I will point out its over a year old though and (I believe) the yield drop is a more recent thing.

I guess I'm just looking to reduce the bumps one may experience with just a global tracker, or this and a collection of aggressive active funds. (in this case). 

Correlations will clearly change, but I think it was Linton in the Japan/China thread who mentioned the correlation of Japan smaller companies, which was really interesting.

Thanks for your comments John. 

Eyeful

Just stick to the basics. Chose a share/other asset mix, which will allow you to stay invested for the long term and let you sleep at night when markets crash. 

There is a lot of information on the "Portfolio Charts" site on how the various portfolios have behaved over time.Just pick the portfolio you like and stick with it.

If you do not want to go to all that trouble, then pick a simple global multi asset fund with the share/other asset split you are comfortable with.

Its not rocket science, though a lot of vested interests would like to make you think it is.

Thrugelmir

Eyeful said:

Its not rocket science, though a lot of vested interests would like to make you think it is.

Often said that "investing is simple but not easy".  Most people simply need to control their emotions. Greed starts to kick in during bull markets. The risk premium on equities exists as one day there will be a bear market. Corrections are part and parcel of being investor.