Finance 201: What is the Golden-Butterfly Portfolio?

Hi friends,

Today I shall be talking about something that is similar to the All-Weather portfolio, and one that is compared to the All-Weather by other financial writers. This portfolio has a higher exposure to stocks as compared to the All-weather. It is supposed to have a similar return as the US stock market but with lower volatility. 

This portfolio was constructed by the founder of Portfoliocharts.com, Tyler (Who is a mechanical engineer *hint* *hint*). I aim to be like him one day, even though my field of study isn't in finance, I would want to correct information to my readers for them to make the correct financial decisions in their lives.

This portfolio was an extension of the permanent portfolio, which is designed to do well in the four possible economic conditions (Prosperity - Stocks, Recession - Bonds, Inflation - Gold, Deflation - Stocks and Gold)

Golden-Butterfly Portfolio:
Stocks: 40% (20% Small-Cap IJS, 20% Total Stock Market VTI)
Bonds: 40%  (20% Long-Term Treasury Bond TLT, 20% Short-Term Treasury Bond SHY)
Commodities: 20% (20% Gold Trust GLD)

Backtest of data:
Using data from lazyportfolioetf.com
Assuming all dividends reinvested, rebalanced at the start of every year




This is a really interesting return, as we can see that in 15 years rolling returns, the average annual return is 9.34%, and the worse possible case is 7.09%. I would say that I would want 20-years rolling returns ... so...

But there is a need for you to understand that it doesn't mean that you will not experience losses, there is still a standard deviation of 8.28%. It just means that over a long period, there is a lowered chance of you ending up losing money.

Thoughts and comments:

I would say that I can understand the appeal of this portfolio, as it has a higher exposure to safer assets and hence, would have a more consistent return. It would be suitable for investors who do not want to see too big a drop in their portfolio and would let their emotions take control of their investment approach.

I would say that if you can stomach the fluctuations of the market, you can consider sticking to a more risky portfolio. But yes, you should always try to understand your risk appetite.



Sources:
https://www.theoptimizingblog.com/golden-butterfly-portfolio/
https://portfoliocharts.com/2016/04/18/the-theory-behind-the-golden-butterfly/
http://www.lazyportfolioetf.com/allocation/golden-butterfly/
https://www.thesimpledollar.com/investing/retirement/why-i-chose-this-controversial-all-weather-portfolio-for-my-life-savings/
https://portfoliocharts.com/portfolio/golden-butterfly/

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Finance 201: What is the Efficient Market Hypothesis

Hi friends, 

Today, I would like to talk about this important piece of information that I have learned in the beginning portion of my finance journey - The Efficient Market Hypothesis (EMH). This piece of information has served as a cornerstone in my investment approach and why I believe in ETFs rather than Mutual Funds. And I cannot wait to share this piece of information with you guys today. 

Definition: 

The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information, and consistent alpha generation is impossible. - Investopedia

The Efficient Market Hypothesis (EMH) essentially says that all known information about investment securities, such as stocks, is already factored into the prices of those securities - The Balance

There are different forms of EMH, which will be discussed later in the post. But I would like to highlight what the abovementioned definition means. This would mean that in an efficient market, no investor is able to consistently outperform the market (outperforming the market is alpha). In this article, I will be discussing the evidence for and against EMH, the different forms of EMH, how you can utilize EMH in your portfolio, and my personal thoughts and comments. 

Evidence for EMH:
1. As was discussed in my previous look at the SPIVA papers, that shows very strong evidence for EMH. In the SPIVA paper, it has been shown that ~90% of mutual funds underperform their index/benchmark in a 15 years time horizon. Hence, we can see that in the long run (15 years), really low portion of active management approaches can outperform the market

2. Furthermore, as companies release their quarterly earnings reports, we can see that the stock prices are quick to reflect based on the report. 

Evidence against EMH:
1. Just like how 90% of mutual funds underperform the market, there are actually 10% of the mutual funds that still outperform the market in the 15 years time horizon. However, I am unable to find a comparison in performance beyond 15 years.

2. Not just mutual funds, there are active investors that have outperformed the market over long time horizons like Warren Buffett, Peter Lynch, etc.

Forms of EMH: 
1. Weak Form EMH:

This is when all past information is priced at the stock price. Hence, fundamental analysis of securities using P/E, PEG, Cashflow, Dividend growth allows for investors to produce returns above the market in the short term and there are no recurring "patterns" that an investor can take advantage of. Hence, technical analysis won't work and fundamental analysis would not work in the long run. 

2. Semi-strong Form EMH:

New public information is instantly priced into the stock price. This would mean that fundament and technical analysis would not work at all (This is where it is a bit ridiculous. As we all know that new formation is not instantly reflected in the stock price, heard of insider trading?) - This covers for private information

3. Strong Form EMH:

Both public and private information are priced into the price. Hence, no investor can outperform the market.

It is important here to say that EMH is able to explain for a majority of the market investors. However, just as all models, there are abnormalities that fall outside of this model. Hence, there will be extreme winners and extreme losers in the stock market. However, as we do not take note of the extreme losers, it can affect our perception of the market that there is a chance to outperform the market. 

How you can take advantage of the EMH:

1. Invest in super low-cost ETFs: This is such that you may take advantage of the EMH and stick to the market's performance as close as possible. (Low expense ratio) Passive investors' approach

2. Invest in inefficient markets: This is for markets that stock prices would not immediately change based on the news but it would take a few days. But with the advent of the internet, such markets are getting rarer and rarer. 


Thoughts and comments:

You are aware of it already. I am a firm supporter of the EMH. This is especially after the long-term performance of ETFs trumping on mutual funds. Furthermore, it is almost impossible to judge if a mutual fund will outperform the market in the long run (except if it is done in hindsight *cough* shady practices *cough*. 


Hence, I would always voice my support in ETFs due to their efficiencies and be disappointed as a majority of the market is still done by active investment. HOWEVER, more and more money in the market is going into passive investment. So.. I guess things are changing. And we are in the midst of this change. 

Till then,
Stay vested, stay frugal my friends.

Dionysius



Sources:
https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
https://www.thebalance.com/efficient-markets-hypothesis-emh-2466619
http://static.stevereads.com/papers_to_read/the_behavior_of_stock_market_prices.pdf
https://us.spindices.com/indexology/core/spiva-us-year-end-2019

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Finance 201: What is the All-Weather Portfolio?

Hi friends,  

I hope that you have benefitted well in the previous famous portfolio entry. Previously we have talked about the investment approach of Warren Buffett. Today, I am going to talk about the passive investment approach of a Hedge Fund Owner; Ray Dalio.

Of course, let me start off with some interesting facts about him:

1. He found Bridgewater Associates, which became the largest hedge fund in the world, with US$160 Billion AUM
2. He was not a good student until college, before that, he did not perform academically
3. He predicted the 2007 Great Financial Crisis, Bridgewater's flagship fund gained 9.5% during that period.
4. He signed "The Giving Pledge", committing to giving half of his net wealth to charity. This was done with Bill Gates and Warren Buffett.
5. He was born into a working-class family. He started investing at 13 years old.

Now that you know more about this legendary man. Let us take a look at the portfolio composition of his All-Weather portfolio. Oh right, in an interview for Money Master the Game, Ray Dalio has mentioned that this portfolio of him will produce positive returns most of the time, in any economic environment. Hence, we will be putting that to the test along with the leveraged version of the All-Weather portfolio.

All-Weather Portfolio Composition:
US stocks - 30% VTI
Long-Term Treasuries Bonds - 40% TLT
Intermediate-Term Treasuries Bonds - 15% IEI
Commodities - 7.5% GSG
Gold - 7.5% GLD

Leveraged All-Weather Portfolio Composition:
2x Large-Cap US stocks - 30% SSO
2x Long-Term Treasuries Bonds - 40% UBT
2x Intermediate-Term Treasuries Bonds - 15% UST
2x Commodities - 7.5% DIG
2x Gold - 7.5% UGL

Woah. Hold up. What is leverage?? Alright. This is something that I did not explain in my Finance 101 series. Leverage is like an amplifier, it allows for increased returns, just like how it allows for greater losses. Also, there is a higher expense ratio in leveraged ETF as compared to normal ETFs.

With that, let us take a look at the performance of the All-weather Portfolio (Portfolio 1), the 2x Leveraged All-weather Portfolio (Portfolio 3) and compare it against the S&P 500 (Portfolio 2) (2011-2020) :





As we can see here, the results are kinda surprising. Especially seeing how the portfolio 3 outperformed the S&P 500. This is a higher return, with lower St. Dev and a lower Max. Drawdown. ##Of course, I am not factoring in the cost of investment (Which is higher for a leveraged ETF)## But the normal All-Weather portfolio also has a return 65% of the S&P 500's returns while only 35% of the max drawdown.

If you have remembered, I have taken a look at the distribution of returns of the All-Weather portfolio over the 20 years and 30 years time horizon. Hence, we know that the All-Weather portfolio has this one advantage. It is really really safe. It can protect your assets if you are willing to forsake the potential of a higher return brought by an all-stocks portfolio.

Limitations:
I have only used backward data from 2010 to 2020. Hence, they are not indicative of future performance. I have also not factored in the cost of investments between the different portfolios.  

Thoughts and comments:
Imagine, having this portfolio that will make you money no matter what economic situations we may be in. That would be an attractive option, isn't it? Hence, if you wish for your money to have a decent return and not have such a high risk and lose sleep over it, I would highly recommend that you take a look at this portfolio.

With that, 
I end today's topic. 

Stay vested, Stay frugal my friends,
Dionysius

PS: I cannot find information beyond 2007 for the All-Weather portfolio... This is the earliest I could go.

Sources:

https://achievement.org/achiever/ray-dalio/

https://www.bridgewater.com/resources/all-weather-story.pdf

http://www.lazyportfolioetf.com/allocation/ray-dalio-all-weather/

https://betterspider.com/all-weather-portfolio-ray-dalio/
https://www.theoptimizingblog.com/leveraged-all-weather-portfolio/
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTI&allocation1_1=30&allocation1_2=0&symbol2=TLT&allocation2_1=40&allocation2_2=0&allocation2_3=0&symbol3=IEI&allocation3_1=15&allocation3_2=0&allocation3_3=0&symbol4=GSG&allocation4_1=7.5&allocation4_2=0&allocation4_3=0&symbol5=GLD&allocation5_1=7.5&allocation5_2=0&symbol6=VFINX&allocation6_1=0&allocation6_2=100&symbol7=SSO&allocation7_3=30&symbol8=UBT&allocation8_3=40&symbol9=UST&allocation9_3=15&symbol10=DIG&allocation10_3=7.5&symbol11=UGL&allocation11_3=7.5
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTI&allocation1_1=30&symbol2=TLT&allocation2_1=40&symbol3=VBMFX&allocation3_1=15&symbol4=DBC&allocation4_1=7.5&symbol5=GLD&allocation5_1=7.5

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Finance 201: What is the Warren Buffet 90-10 Portfolio?

Hi friends,

Has anyone not heard of Warren Buffett? Hahaha. He may be in one of my series in the possible future. But yes, some information about him first:


1. He was born in 1930, Omaha Nebraska (That's why he is also nicknamed as the Oracle of Omaha). 2. He is one of the most successful investors of all time, with a net worth of US$72B (corrected as of 4th May 2020).
3. He runs Berkshire Hathaway (BRK.A), a company with the highest stock price in the work (It is priced at US$273,975. This is already lower due to the Covid-19 situation.)
4. He became a millionaire at the age of 30 (I aim to have 1/10 of what he has by 30)
5. He became a billionaire at the age of 55 (I aim to be 1/500 of what he has by 50)

As you can see, he is really really really rich. In fact, he is the 4th richest person in the world. He is also a firm believer in value investing. According to him, there are companies in which the stock market would value lower than its intrinsic value (undervalued). Hence, he has invested in these companies that brought him to his fortune today.

Portfolio
Thus, I thought it would be interesting to figure out what he perceives to be a good retirement/long-term portfolio. The information is found in his 2013 letter to Berkshire Hathaway shareholders. In the instructions to his will, Buffett has instructed the trustee to invest 90% of his asset (the amount left over after donating a large portion to charity) into a low-cost S&P 500 index fund and invest the remaining 10% into short-term government bonds.

Reasoning:
He reasoned that the majority of high-fees managers underperform market indexes like the S&P 500 in the long run, hence, he believes that the portfolio returns held by this trust will be superior to those attained by most investors. The 10% allocation to bonds also acts as a hedge against stocks as when the S&P 500 goes down, government bonds would rise in value.

With that settled, let us take a look at the backtest of the performance of this portfolio, shall we? I will be splitting this into 3 portions, the long-term performance of this portfolio, performance during bull markets, and bear markets.

Some of the data were taken from other financial blogs as I am unable to find the long term data. But if we were to look at a specific bull and bear market, I am able to test for them. 

Portfolio 1 is the 90/10 Buffett Portfolio while Portfolio 2 is the 100% S&P 500 portfolio

Long term return:
From 1977 - 2019. We can see that the 90/10 portfolio does have a lower variance as compared to the 100% S&P 500 portfolio. But also, it has a noticeable lower return as well. 



Bear Market Performance (Mar 2000 - Oct 2002) and (Dec 2007 - June 2009) 



2000 - 2002


2007-2009



Bull Market Performance (Oct 2002 - Dec 2007) and (June 2009 - Jan 2020)


2002 - 2007 

2009 - 2020

From our observation, Buffett's portfolio has done better than the pure S&P 500 portfolio in a bear market, but worse in a bull market. Duh. Next better financial blogger, please. hahaha.

But what I want you to understand is that in a bear market, there is some significance in the CAGR and best year performance. In the GFC, CAGR of portfolio 1 was -21.42%, the best year was 3.12% CAGR of portfolio 2 was -24.16% and the best year was 3.21%. In the dotcom bust, portfolio 1's CAGR was -11.68%, the best year was -1.25%. Portfolio 2's CAGR was -13.89% and its best year was -2.38%. This would really show the impact that having some stocks would have on your portfolio. It can cushion a bit of your losses, while in an upmarket during a bear market period, it can perform just as well. 

So... two key points:
1. Minimise your losses
2. Perform almost as well in an upmarket in a bear market period. 

Meanwhile, the bull market scenario is quite in line with what we hold as conventional wisdom. So there isn't much to write about. 

Just one more fun fact before I end of this series. Someone did the 4% rule with a 90% stocks and 10% bond portfolio. They have discovered that only 2.38% failed in a 30 years retirement period. It performed almost as good as a 60% bond and 40% stocks portfolio. Hence, this is something that you might want to take note of.

While this portfolio may not allow you to be as rich as Warren Buffett, I hope that the lessons learned today will allow you to take better control of your personal finance. 

Till then,
Stay vested, stay frugal my friends. 

Dionysius




Sources
https://www.theoptimizingblog.com/warren-buffett-portfolio/
https://www.fool.com/investing/2019/11/26/an-in-depth-breakdown-of-warren-buffetts-portfolio.aspx
https://www.fool.com/investing/2019/09/08/warren-buffetts-investing-plan-for-his-family-why.aspx
https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp
https://www.financial-planning.com/news/testing-warren-buffetts-suggested-retirement-portfolio
https://www.gurufocus.com/news/824671/how-warren-buffett-made-his-first-million

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Finance 201: Different asset classes and their performance in different economic climates

Hi friends,

Welcome to the first part of my Finance 201 series. In the articles that are labeled under this series, I will assume that you already have a basic understanding of different financial instruments (bonds, stocks, ETFs, hedge funds). If not, do take a look at my Finance 101 series.

As the first part of this "higher level" series, I plan to at a closer look at the different portfolios of famous investors and I will be talking about their respective investment approach and their backtested investment returns. To do that, I felt that it is important for us to understand the performance of different asset classes in different economic climates (like recession, bull, or bear market). 

To do that, I will be looking at the correlation coefficient of their returns. For those that don't know what is a correlation coefficient, it is a statistical measure of the strength of the relationship between the relative movements of two variables.  Essentially, if I increase by 10%, you increase by 5%, and if I increase by 5%, you increase by 2.5% and if I decrease by 10%, you decrease by 5%, we would be positively correlated. When I change by a certain percentage, you would also change by a certain percentage. A negative correlation would just mean that if I increase, you decrease, if I decrease, you increase. This correlation coefficient is also a measure of a linear relationship.

The values of the correlation coefficient are from -1 to 1. -1/+1 would mean a negative/ positive perfect correlation. While 0 would indicate no correlation. 

First off, we will be taking a look at the long-term correlations between the assets (1960 to 2017), then we will take a look at the correlations in different specific economic climates. For the bull market climate, we shall look at 2010 to 2019. For the bear market climate, we shall look at 2007 to 2009 (Great Financial Crisis anyone?). I was hoping to find more data for the other recessions like the dotcom bubble and all that, but I can't seem to find it. Do let me know if you have access to any studies on it. 


Long-term correlation (1960-2017):


Across the board, with no distinction between upmarket and downmarket: 

Looking at the highlighted portion for Table 3 Part A,
Real Estates (Global Real Estates, Commercial, Residential, etc) has quite a strong positive correlation (0.73) with equities (stocks). 
Non-government bonds (think commercial bonds) has a mild positive correlation (0.52) with stocks Government bonds have a weak positive correlation (0.27) with stocks 
Commodities (Rare metals like Gold, Silver, Platinum) have no correlation (-0.04) with stocks

Looking at the downmarket (Where the price of the asset ends the year lower than the start of the year) highlighted in red, table 3 part B:

Real Estates have a strong positive correlation (0.76) with stocks
Non-government bonds have a weak positive correlation (-0.36) with stocks 
Government bonds have a weak negative correlation (-0.15) with stocks
Commodities have a mild negative correlation (-0.46) with stocks 

Hence, we can see that "safe haven" assets like bonds and commodities do exhibit different behavior in a downmarket compared to the average performance. They move into more negative correlations with stocks

Looking at the upmarket (Where the price of the asset ends the year higher than the start of the year) highlighted in blue, table 3 part B:

Real estates have a mild positive correlation (0.58) with stocks
Non-government bonds have a mild positive correlation (0.48) with stocks
Government bonds have a weak positive correlation (0.31) with stocks
Commodities have no correlation (-0.07) with stocks 

Hence, we can see that in an upmarket, the assets are more in line with long-term behaviors in table 3 part A. Except for Real estates, which moved towards a more negative correlation with stocks. 

Summary for this part (+ means more positive correlation with stocks, - means more negative correlations with stocks and 0 means almost no change):

                                   |Upmarket | Downmarket|
Real estates                 |       -       |         0         |
Nongovernment bonds  |      0        |         -         |
Government bonds       |      0        |         -         |
Commodity                  |      0        |         -         |

#ADMIRE MY GHETTO TABLE#

These are the long-term performance of these assets. 



Here we can see that the 20-years overlapping average correlation between the different asset classes with stocks and bonds.

We will now look at the bull-market correlations from 2010-2019:




We can make the following observations:
Investment-grade bonds have a weak negative correlation (-0.22) with US stocks
Commodities have a mild positive correlation (0.57) with US stocks
Global (All stocks in the world) stocks have a strong positive correlation (0.97) with US stocks
International (All stocks in the world except the US) stocks have a strong positive correlation (0.87) with US stocks
REITs have a mild positive correlation (0.65) with US stocks

Here we can see that this is in contrast with our previous data. This is where I will need to clarify that the 2010 - 2019 is actually an anomaly, as it was the longest bull-market that we have ever seen. So you will need to take note of this observation. Furthermore, an upmarket year in the first part means that a rise of 0.1% would still constitute as an upmarket. While 2010-2019 was upmarket on steroids, with consecutive upmarkets. Hence, I felt a need to look specifically at a bull-market period rather than an upmarket year

Let us take a look at the performance in turbulent times (2007-2009) during the Great Financial Crisis (This is different from the down market, as it represents a significant downmarket. This is in contrast to part one where a 0.1% drop in market price between the start and the end of the year would mean a downmarket)


We can make the following observations: 
International stocks have a strong positive correlation with US stocks
Emerging market stocks have a strong positive correlation with US stocks
REITs have a strong positive correlation with US stocks
Commodities have a mild positive correlation with US stocks
High yield bonds have a strong positive correlation with US stocks
International bonds have a mild positive correlation with US stocks

Hence, we can see this dragging effect of stocks for the majority of the financial instruments especially in times of volatility, with all of them having a positive correlation with stocks. 

I honestly did not expect this behavior. However, there is a limitation as there are no correlations between stocks and US bonds... 

With that, I hope that you can have a good understanding of the different correlations of different assets in different economic conditions. It was certainly beneficial to me. hahaha

With that, 
I end today's topic. 

Stay vested, Stay frugal my friends,
Dionysius

Sources:
https://www.guggenheiminvestments.com/mutual-funds/resources/interactive-tools/asset-class-correlation-map
https://www.vanguard.co.uk/documents/adv/literature/dynamic-correlations.pdf
https://academic.oup.com/raps/advance-article/doi/10.1093/rapstu/raz010/5640504

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Finance 101: What is a portfolio?

Hi friends, 

I bet that you have heard of it before. "I have a portfolio of blah blah blah", or "How big is your portfolio?" So... What is this "portfolio" that everyone who is investing/ planning their finances is talking about? Today I shall be tackling this question:

Definition:
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly tradable securities, like real estate, art, and private investments. - Investopedia

A portfolio refers to a collection of investments or financial assets held by an individual, investment company, financial institution or hedge fund. This grouping of financial assets can include everything from gold and property to stocks, bonds, and cash equivalents. In essence, an investment portfolio acts as a big briefcase-carrying all of these financial assets. - Capital

These are the essential points.

1. Group of financial assets (Financial instruments that can be anything that we discussed and more, like real estates, arts, whiskey, etc)

2. Held by an individual, company, funds. 

For today, we will be talking about your individual portfolio. As per the definition, your portfolio is a combination of the different financial instruments that you are holding. A portfolio is also something that you should build based on your preferences. It should be in line with your investment beliefs and your risk appetite

Here are some of the things you should consider before setting off to build your portfolio:

1. What is your risk tolerance? 

How much gain/loss are you able to tolerate? Are you ok with a portfolio that can give you large returns and losses?

2. What is your time horizon?

A longer time horizon would mean that you can create a portfolio that has a higher potential for appreciations. 

3. What assets are you comfortable/ familiar with?

If you are competent and have a lot of experience with a particular financial instrument, you can consider having more of your portfolio allocation to the instrument that you are familiar with. 

Here are some of the financial instruments that you can have in your portfolio. We have actually gone through the majority of them in the other Finance 101 articles:

1. Stocks, etfs, mutual funds, index funds, Reits 

2. Bonds, bond funds

3. Gold, precious metals

4. Crypto (Bitcoin, ethereum)

5. Real estates 

6. Other financial instruments like alcohol, art, etc

7. Commodities like copper, steel, oil

8. Insurance

As we are talking about the personal portfolio, in which I would assume that you do not have the need to invest in commodities, alcohol, art etc. We will focus on 1,2,3,4,5,8 I will analyse it from the POV of a) Aggressive investors (with a long time horizon) b) Conservative investor (with a shorter time horizon) c) Investor who is looking to pass intergenerational wealth d) ultra-aggressive investor

Do note that the allocations are just for example. You should do your own research. 

a) Aggressive Investor (For those who wants :

1. Stocks (85% in etf, individual stocks)

2. Bonds (0%)

3. Precious metals (4% in gold)

4. Crypto (1%, treat it as a gamble)
5. Real Estates (5%)

8. Insurance (5%, to protect against sudden events)

b) Conservative Investor (For those who wants to have some returns but cannot take too many losses)

1. Stocks (20% in etfs, and reits etfs)

2. bonds (60% in bond funds)

3. Precious metals (5% in gold)

4. Crypto (0%)

5. Real Estates (5%)

8. Insurance (10%)

c) Generational Wealth Investors (For those who wishes to pass to their offsprings without incurring taxes)

We do not have inheritance tax in Singapore. But do know that if you pass on properties, your offsprings might need to pay property taxes on it, or pay for the maintenance fees. 

Hence, you might want to consider holding on to stocks and bonds. 

d) Ultra-aggressive Investors (me, with about 30-40 years of investing)

1. Stocks (95% in etf, individual stocks/ reits)

2. Bonds (0%)

3. Precious metals (0%)

4. Crypto (0%)
5. Real Estates (0%)

8. Insurance (5%, to protect against sudden events)

I will reiterate this again. Your portfolio would be reflective of your investment beliefs. Your portfolio should be tailored to your needs. Of course, with a portfolio, you should always look at it every now and then to rebalance it. The rebalancing would allow your portfolio realigned with your chosen allocations. This rebalancing should be around once per 3 months. 

As always, do take note that the allocations are just examples, you should always do your own research before making any financial decisions. 

Also, now that we have settled a majority of the financial instruments, I will be moving on to the most famous financial portfolios that are held by famous investors like Warren Buffett, Ray Dalios, etc. It will be named "Finance 201". I am an Engineer for goodness sake. How creative do you think I am :')  Don't worry. Finance 101 series will still run on, just keep sending in request so that I know to explain some of the basic terms that I have used in my posts

With that, 

I end today's topic

Stay vested, Stay frugal my friends,

Dionysius

Sources:
https://capital.com/portfolio-definition
https://www.investopedia.com/terms/p/portfolio.asp

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Finance 101: What is a Bond?

Hi friends, 

Bond, James Bond

Up to this point, I hope that you have benefitted from this series. I have also benefitted from the series as I learned about infographics design for this series and reinforced my financial knowledge as well. Do let me know if you have any ideas for Finance 101 or any other series that I can do. 

With that out of the way, let's look at the financial instrument that allows you to be a loan shark - Bonds. So, what is a bond? 

Definition:
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. - Investopedia

Bonds are debt instruments. When you buy a bond, you are lending money to the company or government institution issuing the bond for a fixed rate of return. -DBS

The keywords are:
1. Loan/debt
2. From company/government to investor
3. Fixed-rate of return

Essentially, you are lending a sum of money to a company or government, in which you will receive interests annually for the period and you will receive the sum of money that you lent at the end of the period. The entity that issued the bonds would use the money and invest in projects/infrastructures that they believe will have a better return compared to the interest they pay you. (i.e, I borrow $5,000 at 1% interest, to invest for a return of 8%. Profit for me 7%)

Furthermore, in the event where the entity is unable to pay its debt (default), bondholders have higher priority over stockholders over the liquidated asset of that company. When the company makes money, bondholders are also prioritised over stockholders in receiving the money. 

"That's great! Why does everyone not rush to bonds?" Good question, that's because historically, bonds have an average return of 5% but stocks have an average return of 10%. Furthermore, low risk doesn't mean no risk. There are cases where companies or countries that have defaulted on their loans (Does the name Hyflux ring a bell?).

Hence, bonds as a financial instrument would be suited for a conservative investment approach. This is the reason why we are recommended to allocate more of our portfolio to bonds as we age. Furthermore, bonds are income-generating assets rather than growth assets. Hence, if your desire is to have passive income, you may look at bonds as a valid option. 

BUT, if you would refer to my 4% Rule article, you would know that bonds are unable to last you that long into retirement based on historical data. Furthermore, Warran Buffett has not incorporated bonds into his portfolio at his age as well. So you might want to take that into consideration. 

After this long period of voicing my opinion, let's look at the advantages and disadvantages of owning bonds. 

Advantages: 
1. Safe and consistent income - due to the interest rate (coupon) that you will receive
2. Higher on the priority list in the event of liquidation
3. Passive income 
4. Diversify your portfolio as it is a different financial product from stocks

Disadvantages:
1. Lower returns as well
2. Default is still probable
3. Some bonds are not available to retail investors (Some bonds are too high in value, $250,000 for one bond)

These are the priority of bonds payout (A higher priority would mean that you would be paid first in the event of liquidation) 
1. Senior secured bonds (secured means that that debt is backed with collateral)
2. Senior unsecured bonds 
3. Junior Subordinated bonds
4. Guaranteed and insured bonds (The guaranty is from a third-party, but not 100% insured.)
5. Convertible bonds (Can be converted to common stock)

How to find the right bond?
1. Coupon Rate: It is the interest rate paid on the bond (3% of $1000 would be $30)
2. The seniority of the bond: If you have higher priority if the company is liquidated
3. Outlook of the company: If the company is over-leveraged on debt, income statement etc. 
4. Inflation trend: If inflation is at 3% and your bond has an interest rate of 3%, your effective return is 0
5. Liquidity of the bond: If you require money in a short amount of time, are you able to redeem the bond for cash? You can look at the daily trading volume of that bond. 

Thoughts and comments:
As bonds are currently not in my portfolio, I am not that familiar. However, if you wish to diversify your risk, you might want to consider using bond ETFs which has a lower chance of losing your money. 

Sources:
https://www.investopedia.com/terms/b/bond.asp
https://www.dbs.com.sg/personal/investments/fixed-income/understanding-bonds
https://www.investopedia.com/articles/investing/121815/understand-security-types-corporate-bonds.asp
https://www.investopedia.com/articles/bonds/09/bear-on-bonds.asp
https://www.investopedia.com/articles/bonds/07/fixedincome.asp

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