For the past two years, I've been putting more than 60% of my income into different assets for investment. For that amount, one would have thought that I had a great investment strategy. Today I shall reveal my strategy for the past two years and share my new strategy moving forward.
My strategy for the first two years of investing can be summed up with:
Buy something, anything. And then try not to go broke.
That was it.
Fresh out of school, I've never dabbled in stocks, bonds or REITs but I knew that I've to get started. And just like how I learn to build a cryptocurrency HFT bot by losing tens of thousands of dollars over two days, I've decided to jump into the deep end first. That is to put money into the game first, and then figure out how things work along the way. My goal then was to spend my first two years to build up a portfolio of things and then optimize later when a significant amount of money is at stake.
Along the way, I've discovered my style for investment and found some great resources on building an investment portfolio for the long term.
Here are some that I've found the most value in:
Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School
Rich By Retirement: How Singaporeans Can Invest Smart and Retire Wealthy
Blog: The Bogleheads 3-Fund Portfolio for Singapore Firewalkers
With these great pieces of advice, I began to see my investments as a long term strategy to get rich. I've got cryptocurrencies to keep me distracted and poor in the short term anyway.
I started to place more emphasis on buying ETFs that are diversified and adding bonds to the selection. However, there was no methodology or strategy to decide what to keep in or out. Reflecting on my strategy at the two years mark, there are some important lessons I'll like to share for the newcomers to investing.
Take that excuse that is stopping you from putting your first dollar into investment and shove that down the chute.
The market seems high now? The price now is irrelevant, it's tomorrow's price that matters.
A recession is coming? The recession is always around the corner, no one knows when it will hit. Also, bonds are great for recessions.
Stock/Bonds/Commodities/REITs is risky? Holding your money in the bank is risky. Watch how inflation swallows you whole.
The best time to start was yesterday. The next best time is now.
There will always be a voice nagging about why you shouldn't get in. Rather than complaining about how the market is not optimal for you to get in, just buy something and learn along the way. If it goes up, good for you. If it goes down, that's your tuition fee paid (and it's better spent compared to paying some trading guru who sells crappy courses to get rich).
If all those don't help, remember that a dart-throwing monkey can out-perform the experts and the benchmarks. Grab a dart and get started!
After you get your first dollar into the market. Get another dollar in and then go with the flow.
I get paid on the 12th of every month. That is also the day I spend more than 60% of my income by buying one or two assets on the market. Once you get into the flow, it becomes natural. Set yourself a goal to set aside x amount of money for investment every month and do that first. The number does not have to be big, it can be 300, 3,000 or 30,000. Just make sure that is in line with your investment goal (aka. I want to save x amount by in y years).
With this habit, you will unconsciously be performing dollar-cost-averaging and evening out the highs and lows of the market.
Our news is cluttered with the shiniest investments out there:
Be really careful about putting money into these get rich schemes. They usually come with a high level of risk that you are not prepared for. Worse, you do not want a phobia of investing just because you've lost 50% of your savings in cryptocurrencies.
Remember that the world is powered by the boring companies. Shipping, rubber, mining, land development, farming, etc. These are sectors that would not go bust just because a recession hit. These boring companies deserve a little of your attention and investment to let them continue to feed, clothe, shelter, bank and connect you better.
If you must get into the hype, spend no more than 4% of your savings on these shiny things. (I'll explain why 4% in future posts.)
It doesn't seem like a good time to get into the market now because prices are too high and you don't know if it will fall tomorrow? Or perhaps it doesn't look like a good time because prices are falling and you don't know if it will fall further tomorrow?
Forget about timing the market. Even experts can't do that. If you stuck to your habit you would have bought them at both the high and low prices. Letting your money work in the market for a longer time beats trying to figure out when is the best time to put money in.
Buy something that works for you. Crypto doesn't work. Gold doesn't work. They do not breed and reproduce to make more gold/crypto.
Put your money in businesses that generate value for you.
If you are into 50% stocks and 50% bonds, rebalance when it is far out of that range. If you are into 50% oversea stocks, 25% local stocks and 25% local bonds, rebalance when the ratio is off.
This way, you are unconsciously buying low and selling high. Of course, there are multiple strategies to rebalance a portfolio. Pick one and live with it.
Now that you've put money in the market. Read a book while waiting for the money to grow. The two books above are great reads. Here are some more resources:
Ok, I kid about the last one. Bought that domain recently to put junk on it.
Now that I've got some ka-ching in the brokerage account allocated randomly I'm working on how to optimize my portfolio by applying lessons from modern portfolio theory. My goal is to lower the risk and increase the returns only by changing the target allocation for each asset.
I've already spent the last two weeks working on a portfolio allocation optimizer and have got you some sneak peek into it before I write about it more extensively.
I'm currently invested in 9 different (and almost random) assets:
names = ["VUSA", "A35", "S59", "VUSD", "BAB", "IWDA", "Z74", "ES3", "VWRD"]
allocations = [
0.08992020522,
0.2744348384,
0.03070927321,
0.01896821775,
0.06166520726,
0.06204753154,
0.02053451402,
0.3393806347,
0.102339578,
]
Backtesting this allocation, I get the following results:
{'dateStart': Timestamp('2013-06-05 00:00:00'),
'dateEnd': Timestamp('2019-06-13 00:00:00'),
'days': 2199,
'valueStart': 100000.0,
'valueEnd': 136880.8698902693,
'sharpe': 0.5311533533335171,
'drawdown': 0.871492505791684,
'drawdownPeriod': 33,
'moneydown': 1203.394011582248,
'maxDrawdown': 12.472099548565895,
'maxDrawdownPeriod': 377,
'maxMoneydown': 14646.856656697055,
'averageReturns': 0.04713891602722052,
'standardDeviation': 0.05109431364199573,
'positiveYears': 5,
'negativeYears': 2,
'noChangeYears': 0,
'bestYearReturns': 0.09387728540006157,
'worstYearReturns': -0.03591125111581217}
By changing the allocation to the following:
optimizedAllocation = [
0.15475892125470264,
0.20547924399206283,
9.482548858319044e-13,
8.960370051426765e-14,
0.4801464697188137,
0.032286985065754975,
0.024513084545404733,
0.10281529542266218,
3.19884065758836e-13,
]
I get this results:
{'dateStart': Timestamp('2013-06-05 00:00:00'),
'dateEnd': Timestamp('2019-06-13 00:00:00'),
'days': 2199,
'valueStart': 100000.0,
'valueEnd': 146532.57716551426,
'sharpe': 0.7515747624605625,
'drawdown': 0.0,
'drawdownPeriod': 0,
'moneydown': 0.0,
'maxDrawdown': 4.935560437033693,
'maxDrawdownPeriod': 248,
'maxMoneydown': 6256.930259689281,
'averageReturns': 0.057232148370835755,
'standardDeviation': 0.04953884860228981,
'positiveYears': 7,
'negativeYears': 0,
'noChangeYears': 0,
'bestYearReturns': 0.15900549707538514,
'worstYearReturns': 0.0010410745158344614}
Okay, if that's too much to read, let me break that down:
All of these by just shifting the percentage of each asset in the portfolio.
Now that I've built something for myself, I'll like to share it. I'll like to help people who want to optimise their portfolio using a similar strategy (If I tell you I'm using machine learning will it help?).
Here's the fun part: I'm not selling this product/service. We will have a chat about your investment strategy and I run this algorithm on your portfolio. You get the full report and choose what you want to do with it. Then we will go our separate way. You with your report and learnings. And I will gain more insights into the market and how people invest.
If you like that arrangement, contact me.