Personal Investing

1.  Make the decision to start saving

Become an investor and not just a consumer. Aim to save 15-20% of your income and automate it. Always look to maximize any 401K matching programs and HSA contributions because of their favorable tax treatment. If saving is too painful now, commit to saving more every time you earn more or put aside some of that well-earned bonus.

2.  Understand the fundamentals

Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.

Stocks perform well with positive economic growth and inflation. However, they are volatile and can rapidly decrease in value

Bonds are fixed-income investments and increase in value when interest rates go down. They counter the volatility of the stocks.

Commodities have high volatility and do well in environments where rapid inflation hurts stocks and bonds. However, unlike other investments, there is no income.

Cryptocurrency: Similar to commodities in that they have extremely high volatility and will do well in environments with inflation. An interesting dividend is the fact that coin holders benefit from receiving additional coins anytime there is a hard fork with the token that they hold. e.g. for anyone that held Bitcoin in November 2017, they received the exact same amount of Bitcoin cash lodged into their wallet when the hard fork happened. The same happed with BSV and BCH back in Decemer 2018. The Ethereum Constantinople Hard Fork Set To Go Live This Week on the Ethereum network. If you are interested in purchasing some, I recommend Coinbase or RobinHood.

3.  Understand the importance of asset allocation

There are only 2 big forces to worry about: Growth and Inflation. Each can either be rising or falling so there are 4 separate investment scenarios. Rising growth and rising inflation, rising growth with falling inflation etc.)

When Fed was becoming tight enough to raise short-term interest rates above long terms rates (inverting the yield curve), Inflation hedged assets and the economy goes down.

When the choice is between accelerating inflation and deflationary depression, hold gold (which performs well in accelerating inflation) and bonds (which perform well in deflationary depressions). Up until that point, gold and bonds had moved in opposite directions, depending on whether inflation expectations rose or fell. Holding these positions are safer than holding cash which loses value in an inflation environment, or stocks which crash in a depression.

To hedge against the worst possibilities, buy gold and T-bill futures as a spread against Euro-dollars which was a limited way of betting on credit problems increasing.

Ray Dalio suggests that there are only 4 things that move the price of an asset:

Different investments will perform well in different seasons. The chart below breaks it down:

4.  Avoid traditional mutual funds by investing in low-cost ETF Funds

Mutual funds profit when they gather large sums of assets and charge high fees. They also fail to beat the market over any sustained period. Align yourself with a fiduciary registered investment advisor such as Vanguard who operate on a not-for-profit basis. By lowering your fees and investing in low-cost index funds, you can retain 60-70% more. To purchase stock without paying trading fees you should try Robinhood.

5.  Study the experts

To be a successful investor, one needs to be an independent thinker who bets against the consensus and is right. That’s because the consensus view is baked into the price. This does mean that you will be painfully wrong a fair amount of times.

Now that you understand the importance of diversification, Dalio’s “holy grail” of investing: With 15-20 good, uncorrelated return streams, you can dramatically reduce risk without reducing expected return.

Here are the Portfolio distributions of some of the industries most successful investors:

6.  Rebalance your portfolio

You should aim to rebalance your portfolio at least once a year. You can also check out Wealthfront which acts as an automated advisor and can create a diversified portfolio based on your risk profile and rebalances itself automatically throughout the year. 

7.  Think about lifestyle

Where you decide to live can also have a significant impact on your financial situation. You should consider basing yourself where there little or no state income tax. This includes Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. This works particularly well for individuals working in the professional services industry when significant travel required.

8.  Know how and when to sell

With investing you have to be defensive and aggressive at the same time. If you’re not aggressive you won’t make money. If you’re not defensive you won’t keep money. What’s also important to realize is that you don’t have to predict the future. Use indicators to catch shifting fundamentals. so you can adjust appropriately with the available real-time information. Remember that when people are very pessimistic, they sell out, and prices get very cheap. Most people are more emotional than logical and tend to overreact to short term results. They give up and sell low when times are bad and buy to high when times are good.

Finally if/when you do decide sell, be sure to hold investments for a minimum of a year and a day to qualify for the lower capital gain tax rate.

Brendan DalyComment