As investors we give a lot of thought to what stocks, exchange traded funds (ETFs) and other assets we individually hold. But many of us fail to look at the bigger picture — which is the overall portfolio.
I structure my portfolio as a pyramid. At the base I have mostly diverse global ETFs held in my tax-free and discretionary accounts as well as some RSA retail savings bonds. This is about 55% of the portfolio and I am actively increasing that percentage, targeting closer to 65% in time.
I have such a large ETF holding to protect me from myself. Sure, a diverse global ETF will fall when global markets fall, but they’ll recover and they’re never going to zero.
Above the base I hold a core individual equity portfolio of about a dozen stocks which form about 30% of the portfolio. These are stocks I hope to hold for pretty much forever, unless the wheels truly come off. They are each about 2.5% of the entire portfolio, so even if I do end up holding a horror stock that goes to zero, the overall pain won’t be significant. But when I get the occasional 10-bagger (or more), the reward will be real.
I then have another 10% which goes into what I call second-tier stocks. They’re typically small or mid-caps that have a good story playing out and look great on the charts. These stocks I may hold for a few months or, if things go well, potentially many years. I decided many years ago that my crypto holdings go here as well, and the recent run in crypto has meant this part of the portfolio has become larger than usual.
Here it’s about five stocks, so about 2% each, again limiting downside but giving great potential.
The last few percentage points is my trading portfolio. Here I trade indices. Nothing fancy, no gearing and I can hold for months or years if the trend continues, but I exit as soon as the trend turns against me.
Now, this is all theory and the percentages get out of kilter at times when certain parts have an excellent year, such as crypto and tech in recent years. When that happens I don’t sell to reduce weightings, I just add the new money to other parts of the portfolio. This new money would be dividends, cash from a possible exit of a position and new deposits.
Notwithstanding the large weighting to ETFs, this is still a fairly aggressive portfolio because it has very little bond exposure. If you’re looking for less risk and volatility then add more bonds (directly or via ETFs); many champion the 60/40 portfolio that has 60% equity and 40% bonds.
The bonds provide good income and reduced volatility, and are ideally uncorrelated to equity markets.
Each of us would have a different structure, and that’s fine. The point is to know how and why you’ve constructed your portfolio so you really understand the risks.
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