While picking the right stocks is crucial, creating and managing a portfolio is even more important. Even if certain stocks in your portfolio are performing well, the losers can easily outweigh the winners, thereby causing your overall wealth to decline.
Even if you’re able to spot the next bitcoin years ahead, it may not matter if you didn’t allocate a large enough position to it or if all of your other investments went to $0.
Wondering where to invest $1,000 right now? Making the right allocation decisions is one of the smartest things you can do.
Portfolio Management Explanation:
If we lost you, let’s use a quick example to help explain how best to invest your $1,000 today so that you can start making smart investment decisions for yourself. Imagine you have $1000 and you allocate that $1,000 equally across four investments. Those four investments are:
- Investment A: Returns 100% over the next year
- Investment B: Returns -100% over the next year
- Investment C: Returns 0% over the next year
- Investment D: Returns 10% over the next year
If you allocated your portfolio equally ($250) into each investment, Investment A would turn into $500, Investment B would turn into $0, Investment C would remain at $250 and Investment D would turn into $275. Even though investment A doubled, if you add up all of your returns, you only made $25 – which equates to a 2.5% annual return.
Even though 50% of the investments you made performed very well, you significantly underperformed the market because you made poor decisions at the portfolio level.
Now take those same investments but let’s change our % allocated to each investment. Now let’s imagine that you put 70% in Investment A and split the remaining 30% equally between B, C & D. The results of this decision would be game changing.
If you were to do that, your total returns for the year would be 71%!
That means that even with the same exact investments, your returns would be drastically different because of the smart investing and allocation decisions you made. That is why it is extremely important to not only select the right investments but it is also extremely important to select how much to put into them.
The next question you may be asking then is:
- What should my allocation be?
- How much should I put in each investment?
The answer changes person to person but for us, we think about constructing portfolios at the asset class level before diving into the specific stocks, coins, debt, etc. What that means is that we construct portfolios by saying we want to put a certain percentage in US stocks, fixed income, etc. From there we then make decisions within those asset classes to the specific investments themselves.
While the creation of these percentages would be a massive lesson within itself (we’re releasing a course on this next week), we’ve skipped the heavy lifting and got straight towards publishing our Flagship Model Portfolio.
Introducing The Moby Flagship Portfolio:
The Moby Flagship Portfolio was created in order to help you think about how to invest smartly at the asset class level. What that means is that this portfolio will show you how we decide how much to allocate towards each asset class, thereby helping us choose our investment percentages at the stock level. This model portfolio was created using the following guidelines:
1) Aim to outperform the S&P 500 while taking on less risk
2) Use algorithms and big data to “test” these projections