Three Big Investing Questions I’m Asking Now – And So Should You

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Well, that makes me katzenjammer even worse. In addition to a cold, as well as a hangover from trying to match dad – who just landed from Australia – on the shiraz front, my portfolio now trails the stock index by 60-80% in the table below, for the first time in this period. year.

As I wake up, less of a splash of water on my face and more of a slap. I long ago stopped hoping to beat the S&P 500 in 2024 – the AI ​​boom and the strong pound ensured that. But to beat a benchmark of my choice?

Two months ago, my portfolio was 250 basis points higher than the Morningstar year-to-date index. How did I do things? Well, for starters, he has a bit more stock than I do, and they keep rallying around the world.

But my weight of 74% is my decision, so I have no excuse. Another reason I follow the benchmark is that over half of my bond exposure is in sterling. Only Treasury comprises my fixed income fund.

While many saw inflation entrenched in the US, I was right in thinking that short-term interest rates would once again head south. The Federal Reserve’s half-point cut in policy rates on Wednesday fits that view well.

That being said, I haven’t thought about purchasing an exchange traded fund without a hedge. If I were correct about lower short-term rates, the dollar would likely fall against the pound. So my treasury is unchanged since January. And it’s in the red this week.

Two months ago, my portfolio was 250 basis points higher than the Morningstar year-to-date index. How did I do things?

Annoying or what? Especially since the returns this year on my UK and Asian equity funds are both in double figures. But a valuable lesson learned. It’s fine to make currency bets, but not if they contradict your core thesis.

Finally, Japanese stocks are still running from hiki-taoshi received at the beginning of August. As if pulling an opponent to the floor in sumo, the Nikkei 225 index fell by a fifth under the weight of a strong yen and investor nerves.

Onwards and upwards though! There is more than a quarter to go until the end of the year. So how do I assess the structure of my self-managed portfolio today – existing positions as well as gaps? What am I focusing on?

It seems to me that I need to answer three very important questions if I want to significantly increase the value of my pension before Christmas, let alone achieve an annual return commensurate with the goal of doubling my assets over the next eight years.

The first is: how much risk am I willing to take? Losing half of my chips on the first spin of a roulette wheel and then picking correctly the next two times also doubles my money — excluding the green pocket. But the trade-off between returns and volatility is terrifying (a Sharpe ratio of 0.5, in this case).

So yes, I could own one stock and be lucky. At the other extreme, a summer academic paper by Ronald Doeswijk and Laurens Swinkels – nicely summarized by my Alphaville colleagues – proves the value of extreme diversification.

Hypothetically a fund holder all not only would it have produced an excess return over cash of 0.3% per month between 1970 and 2022, but also a Sharpe ratio over each of the component assets. A real free lunch.

Still, they wouldn’t have my seven-figure portfolio with 60. So while I don’t want to put the lot in the black, I know I need to take on more risk to retire early. And that probably means the US government bond ETF has to go.

As an aside, I might go back to before November 5th, if you think the upcoming US election could lead to chaos or worse – and some pundits fear as much – adding to the risk makes no sense at all. Really, 100 per cash is the way to go.

Anyway, America is the second question I need an intelligent answer to. Long story short, one of my first columns urged readers to always own US stocks, but last year, in a bloodbath, I sold the lot when valuations became ridiculous. It was a mistake – as it usually is.

what do i do now As my kids know, I’m good at losing face and would buy again. However, to me, the S&P 500’s forward price-to-earnings ratio of 24 times is still crazy. Nvidia’s market cap is more than 50 times its book value. I’ve seen this technology movie before.

US mid-cap stocks make a better story, perhaps, being 25% cheaper on forward earnings than the S&P 500. And margins have held OK, as my old man Robert Armstrong pointed out this week.

But I worry about the index’s preponderance of banks. Sure, their mortgages are less likely to blow up as rates fall, as Robert claims. But if the US economy remains robust, lenders prefer higher rates because they mean wider spreads.

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However, we have recently seen large US companies investing more again, with the S&P 500’s equity-to-sales ratio returning to pre-Covid levels. AI spending in the Big Tech sector has a lot to do with it, but that money will eventually trickle down to mid-caps as well.

My third mega-question is China, the subject of an entire column soon. The word “Japanification” is now being whispered among professional investors. Will China repeat Japan’s lost decades of low growth, shrinking population, high debt and housing woes?

I need three mega-replies soon. He should have taken a summer break after all.

The author is a former portfolio manager. E-mail: [email protected]; Twitter: @stuartkirk__