PORTFOLIO CONSTRUCTION
Easy in theory, difficult in practice
In his presentation, Myles Zyblock discussed the tenets of portfolio diversification and how investors can make more disciplined decisions to maximize the likelihood of successfully meeting their goals.
Four Steps to Building Better Investment Portfolios
Determine one’s financial goals
Devise a portfolio plan consistent with those goals
Stick to the plan with unemotional discipline
Frequently remind yourself that a plan is easy to make, but investing based on the plan is not
Knowing What Not To Do Is Often Easier and More Important
- Don’t watch markets daily. This encourages noise trading given that the odds the stock market goes up or down on any given day is very close to 50-50.
- Don’t chase the latest hot stock or investment theme. This rarely ends well. Does anybody remember Cannabis stocks from 2017-18?
- Don’t wait for the next “pullback” of X% to buy stocks. This erodes the impact of compounding on terminal wealth. And, none of us are equipped with a crystal ball.
- Avoid excessive leverage. It fragilizes an individual, company, and a system to shocks. Long Term Capital Management, a highly leveraged hedge fund, had a Sharpe ratio of 4.4 one day, then it disappeared the next.
- Don’t own a company just because it's cheap. Owning a good company at a fair price has proven to be a better proposition than owning a weak company at a cheap price. Zombie companies, or those with an interest coverage ratio below 1.0, have gotten nothing but “cheaper” over the past 15 years.
- ‘All-or-nothing’ approaches to investing can end in ruin. Diversification might deliver a constant state of performance regret relative to what the 20/20 hindsight investor expects, but it rarely results in ruin.
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Odds the stock market goes up or down on any given day
Be consistent: Timing the market is a mug’s game
Trying to time the market is a near-impossible task. What’s the solution?
- Systematically allocating into one’s portfolio will generate a greater return than waiting and buying at the major bottoms with perfect foresight.
Building Better Portfolios: Focus on a process, not a prediction
Understand the character of financial markets to make better investment decisions
- Markets are hard to predict, especially over short time periods;
- They’re volatile; and
- Typically appreciate over the long run
Be prepared, not surprised
- Diversify within and, especially, across asset classes; and
- Maintain exposure to stock, bond, and alternative investments
Be a strategic decision maker
- Start investing as early as possible;
- Invest regularly; and
- Invest as much as is feasible, at each interval, given financial constraints