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 Hedge Fund?

Hi friends, 

I will be diving into hedge funds for this post. I'm not sure about you, but in my perception, a Hedge fund is really prestigious and yet shrouded in mystery. Like, what do they do and what are they for? Allow me to answer that in today's post:

Definition:

Hedge funds are alternative investments using pooled funds that employ different strategies to earn active returns, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns - Investopedia

A hedge fund is a sort of investment partnership or pooled investment structure that is setup by a money manager or registered investment advisor. - DrWealth

Here are the keywords:
1. Pooled funds/investment - From other investors and the fund's manager
2. Aim to generate high returns - By going into derivatives and leverage (Hedging)
3. Only accessible to accredited investors - You have to be really rich to gain access
4. Less regulated than mutual funds - They can invest using a wider set of financial instruments
5. Actively-managed investment style

So... What is a Hedge Fund?
Imagine: I discovered a way to exploit the market (I honestly don't know in what way) by using derivatives that would allow me to above-average return. That would be my strategy. From there, I put in $20 million and pooled $200 million from other investors and set up a fund where I promise to deliver returns given a fee for my services. 

The benefit for me is that I am paid a fee for my services and from the original fund, I can leverage (let's say I borrow another $400 million from the bank) to make even more return. Because of the less regulation of Hedge Funds, I can look at other instruments, beyond stocks, bonds, etc. Usually, a fund would specialise in one particular field (like junk bonds, real estate, wine, whiskey, patents, etc)

So now that we know what is a hedge fund, let us look at the advantages and disadvantages:

Advantages:
1. Alignment of interest (As the fund manager has his money inside the fund, his aim is to increase his wealth)
2. Flexibility (Due to the lesser regulations, Hedge Funds can be flexible in their investment approach)
3. Professional Management (You have a manager that professionally manages your money)
4. Diversification (Hedge Funds may use other instruments to diversify their risk)
5. Potential to do better than the market

Disadvantages:
1. Less Transparency (Due to the lax regulation, there is not much transparency in Hedge Funds)
2. Fees (You would have to pay for the manager's services)
3. Understanding of Strategy (You might not understand the strategy employed by the fund due to the complexity) 
4. Low liquidity (You can only redeem quarterly or a set period)
5. Potential to do worse than the market 

Thoughts and comments:
In Singapore, you would have to be an accredited investor before you are allowed to invest in Hedge Funds. This would mean that you have either S$2 million in net personal asset or income of S$300,000 in the past 12 months or a corporation with net asset more than S$10 million.  I am definitely not one. Hence, I do not have any reasons to invest in them. 

If you are interested, these are the criteria to select a good hedge fund:

1. Investment Approach - Do you believe in the strategies applied by the fund?
2. Fund Manager - How much is the manager vested in the fund? Why should you put your money with him?
3. Fund's liquidity - What is the redemption period in the year?
4. Amount of marketing/ pitching the managers have to do - If the manager is that good, does he need to market his hedge fund to you?


Personal Portfolio:
As mentioned, I am not an accredited investor (when I am, I'll tell you k?) As you guys have already known, I am a firm believer of the efficient market hypothesis, that no investor can consistently exploit the market. Hence, even when I am an accredited investor, I would not have a big portion of my investment in hedge funds 

There a lot of famous hedge fund managers out there. I'll just list a couple out here:
1. Ray Dalio (famous for predicting the 2007 Global Financial Crisis, He has also managed one of the biggest hedge funds in the world - Bridgewater Associates)
2. Michael Burry (famous for being portrayed by Christian Bale in the "Big Short", he also managed Scion Capital from 2000 to 2008. He successfully took advantage of the 2007 financial crisis and shorted the housing market.)

On the other side of the spectrum, Warren Buffett did make a bet with the top Hedge Fund managers that investing in the market index would generate a larger return compared to Hedge Funds. If you are interested, you can take a look at this article: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp. It also shows us that fees really do play a huge role in the returns that we get from our investors. 

I hope that you now have a better understanding of Hedge Funds

With that, 
I end today's topic. 

Stay vested, Stay frugal my friends,
Dionysius



https://www.straitstimes.com/business/banking/worlds-biggest-hedge-fund-returns-found-in-singapore
https://www.drwealth.com/hedge-fund-singapore/
https://www.fa-mag.com/news/how-o-select-hedge-funds-5267.html
https://seekingalpha.com/article/4266569-how-to-pick-hedge-funds-3-common-traps-to-avoid
https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp
https://www.investopedia.com/terms/h/hedgefund.asp
https://infoforinvestors.com/investing/alternative-investments/hedge-funds-pros-cons/
https://seekingalpha.com/article/4266569-how-to-pick-hedge-funds-3-common-traps-to-avoid
https://insidermonkey.com

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