How to manage your portfolio, it sounds like a fund manager will tell you what to look out for in your portfolio in current market conditions. It isn’t though, I will discuss what I think is the best strategy based on your capital on hand for the long term.
So first of all, let’s get into the asset classes that are neccessary to deploy your capital in an efficient, safe and rewarding way.
ETF’s – Exchange Traded Funds are a great way to gain some immediate diversification and build wealth through a passive investing style.
Bonds – Bonds are a nice tool to hedge your portfolio and to gain some stable income from their coupon checks.
High dividend – High dividend stocks (like utilities and real estate companies) can bring some great recession proof, high and stable income to the table.
Dividend growth – Dividend growth investing delivers the best of the best companies to your portfolio. These companies are recession proof and are able to raise their earnings and dividends year after year. Bonus points for dividend aristocrats and kings!
Bonus: writing covered options – If you have more than a 100 shares of company ABC, why not write some calls and puts around your position to earn some extra income each month. Before writing options, please make sure you understand the obligations you agree to.
Bonus: real estate – Real estate is a favorite amoung smart investors, first of all look at your own home, it’s a great long term and stable investment. If you’re able to get an extra mortgage, why not buy another house and have the renters pay your mortgage down!
I will be discussing a different allocation for the following groups
- €0,00 – €100.000
- €100.000 – €500.000
- Higher than €500.000
I’ve chosen these categories as these focus on building your wealth and I think once you reach a solid amount of assets you just rinse and repeat.
- €0,00 – €100.000
Assuming we start all the way at zero and you just started out reading about investing and retiring early. The best way in my view is to simply ‘pay yourself first’. After your paycheck comes in, you set aside as much as possible and invest it all in ETF’s, passive and periodically. This way you reach instant diversification and you avoid unneccessary risks.
ETF’s to consider are the ‘World Index’, ‘S&P500’, ‘Nasdaq’, ‘US Dividend Aristocrats’, ‘Emerging Markets’ and probably a small amount of ‘Government Bonds’.
By investing in these trackers each month you gain an instant diversification, with a bit of extra exposure on the stable American economy and the best of their companies, you have exposure to the high growth of the emerging markets and there is an absolute hedge in your portfolio by government bonds.
Note that to build wealth, stocks outperform bonds on the long term. I advise making bonds a small part of your portfolio if you are young and looking to build wealth.
Make sure to look at expense ratios, as management fees are something we don’t want. An ETF is meant to be passive and to closely track an index. If there are high costs it might suggest that the managers are overly active, and thus (highly likely) ruining profits. Fees that seem small will consume a big chunk of your profit and compounding interest, so make sure the expenses are as low as possible when chosing an ETF.
Generally iShares and Vanguard have the lowest costs and offer a wide range of ETF’s.
- €100.000 – €500.000
Once you’ve build yourself a solid portfolio consisting of ETF’s you might want to diversify a bit further. I’d recommend to keep adding to your current positions, just slightly less every month and instead acquiring some stocks. I personally would be interested to add ‘two seperate portfolios’, or at least stocks that fit these portfolios. These portfolios would consist of ‘high dividend’ stocks and ‘dividend growth’ stocks.
I would consider sectors like utilities, real estate, oil/basic materials and maybe even some corporate bonds as ‘high dividend’ and these often are quite stable investments too. ‘Dividend growth’ stocks would be stocks from any sector that increased their dividend for at least 10 years straight, but preferably companies that raised it 25 or even 50 years or more.
The reason to add these stocks next to your ETF portfolio could be that you’d be looking to retire earlier, and adding these high dividend payers and stable dividend raisers provides you a huge passive income stream. Your ETF’s provide a great diversification and stable overall growth, and the other two portfolios provide an ever growing stable dividend pay out.
Pro tip: reinvest all the dividends to make sure the magic of compounding interest does it’s work.
Once you’ve build up these three portions of your portfolio and you have some nice numbers of shares you could consider to write options around your positions. Options can be quite tricky but half of it comes down to agreeing to an obligation in exchange for a money premium. You could assign yourself the obligation to buy stocks you’re interested in owning at a certain price, and get some money for this agreeing to this obligation.
The other way around, you could agree to an obligation to sell your stock at a certain amount at the expiration date. You could earn a great deal of extra income by writing covered calls and puts around your own positions. If you have to buy or sell your stock for a certain amount you could take a profit from it and gain the extra premium.
NOTE: please be careful with options and make sure you fully understand them before agreeing to obligations.
- Higher than €500.000
Now this is where we are really getting wealthy, you’ve acquired over half a million already, well done!
While consistently adding to our ETF positions, high dividend positions, dividend growth positions and reinvesting all the dividends we’ve managed to build up quite the portfolio. Now it’s time to decide if you’re willing to become a landlord, meaning that you’ll have to take care of an extra house, the tennants, contracts, problems and management. It could be a great change from the daily grind of your day job, you could take one day per week off and spend it working for your new property for example.
If you’d manage to get an (extra) mortgage and invest it in a great property and rent it out to a nice starting family you could stand to earn quite a hefty sum of money. These people would pay your mortgage for you, and hopefully the rent covers extra expenses as well.
So while your dividend gives you a great deal of passive income, your ETF’s keep growing in valuation, your options bring in some extra income, your new house and tennants will provide an extra passive income stream paying down your house and maybe even a bit extra.
Now if you have no desire to become a landlord you could also invest heavier into the previous mentioned ETF’s and stocks. Or if you’re really feeling like a business man, you could decide to get active with investing in local businesses for example.
If you’re interested in the subject of portfolio management than this article might be great. If you’re quite a busy person with little interest in managing a portfolio, or even looking at single stocks and ETF’s, there is a quick workaround.
If you plan on spending as little time as possible you could simply invest all your capital into a world index and a government bonds ETF. This way you only have two (periodical) buys and you have the widest diversification within stocks and bonds. You’ll never have to look at them, and over time the compounding will really gain you a substantial amount of money, hopefully enough for you to retire when you want!
What current portfolio mangement are you using, and why, make sure to discuss it down below!