What's Wrong with my Portfolio
The markets $SPX500 are up today and all the stocks in our portfolio open in green including Qudian $QD which lost 11% yesterday.
What's Wrong with my Portfolio
My portfolio lost 6.5% in January 2020 and this is the worst performance in years. Everything that could go wrong last month, went wrong. It is obvious for me to ask the question, what is wrong with my portfolio and how to improve it? Everybody is going to make mistakes as an investor. In 1982, Ray Dalio crashed his hedge fund and since then, he has been asking himself the question, what can go wrong with his portfolio and tries to prevent it. Warren Buffett number one rule of investing is to never lose money. I already broke that rule in January. Let's see what we can do about it.
The coronavirus affected by portfolio. The two $OIL companies in my portfolio, Parsley Energy and Concho Resources were affected. Skyworks Solutions with much business in China was affected. GameStop stock price fell by 40% because they lowered their revenue guidance. This has nothing to do with the coronavirus, yet it affected my portfolio. Wall Street didn't like the earnings of Travelers Companies and the stock had a bad month.
The correlations between the different stocks in my portfolio are quite low but the portfolio itself is not enough diversified in asset classes. When oil and stocks go down at the same time, I lose money. I need something that will protect me from these and that would be bonds. One thing that I need to make is add more bonds to my portfolio.
There are four types of economic environments:
1. expansion - where we are right now
During expansions, the best investments are stocks. In recessions, it is bonds, gold $GOLD and commodities. In inflation, it is gold, commodities and TIPS $TIP . During deflation, it is treasury bonds. You need all of that in your portfolio to prepare for any environment. I'm not telling you that you need 25% of your portfolio for each environment. It depends on where we are in market cycles and asset prices.
Just because stocks have been the best performing assets in the last 11 years doesn't mean that this will continue. It is important to diversify away from stocks and have more bonds, gold and commodities in your portfolio. In case of a bear market, you can then take advantage of the higher gold, bond prices to buy stocks at a discount.
This year there will be elections and consequently, a volatile market. You need some bonds in your portfolio. You don't need to go and look for individual bonds. Good bonds are hard to find with these low interest rates. It is better to just invest in an ETF holding government bonds such as TLT ETF $TLT .
The main objection I get about bonds is that the returns are lower compared to stocks. Well, Ray Dalio's All weather portfolio beat the market with 60% in bonds. The worst performance of the all weather portfolio was in 2008 when it lost 3% while the market lost 50%.
You may tell me that you have recession proof businesses in your portfolio. Recession proof business doesn't mean recession proof stocks. Diageo is a recession proof business but the stock is certainly not.
Having bonds in your portfolio doesn't mean you won't beat the market. If buy the right stocks, you can have great returns. You only need one tenbagger in your portfolio to beat the market even if the rest (90%) just have average returns.
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