Investment Diary #14: How to Build a Portfolio

I extracted the screenshots on Douban, and the overall netizen reviews are still good. To be honest, the first time I read this book, I found it to be very unreliable, it was written in a big way, the physicality of reading it wasn’t very strong, the benefits to the individual didn’t seem to be that obvious, and there was a sense of reading it as if I hadn’t read it

I can tell by reading some of the comments from users that they felt the same way as I did when I first read it. There are two reasons for this I think one is that there are more concepts in it, because it is translated, so overall the reading will be less smooth, and secondly, the book talks about less real-world experience

But in reality, this book is severely underrated. Since I recently constructed my own portfolio (and of course I referenced the Walking Wall Street book, which I’m going to read again), I re-read it again. This time I read it very slowly and thought hard about the logic behind it. I think it’s a good book to recommend.

There are a few things I would like to say about the Netflix review:

First of all, there is no 100% of the actual battle to provide you with, because everyone’s perception is different, and what I give you is not as good as what you understand and perceive on your own. Even if I give it to you, you don’t necessarily think it’s right, and it’s impossible for one person to give another person’s perception. So the netizens began to look at the time, in fact, is with practice or can immediately tell you the key to the treasure, lack of patience, so that is not to learn something.

Secondly, wealth accumulation everyone says long-term? Do you really understand what is long-term? Many people don’t understand this. Compound interest has a formula called the principle of 72, that is, 72 divided by your interest rate requirements, such as 8% interest rate per year, about 9 years to double your assets. If the interest rate is greater, say 12%, it will double your assets in 6 years. The author of this book did a 17% annual return, which is a doubling in 4-5 years. It’s pretty bullish. The two variables here are time + rate of return. Long term means the right allocation to all types of assets that can be stable and safe enough to yield high enough returns to succeed with time utility.

The gurus have actually told you the way to win, but many people don’t get it. The people who really understand is a minority, and those who understand to do, and few and far between. It takes a lot of knowledge and a lot of courage.

I think there are a few more important points that I’ve taken away from this book. To read a book thin is to internalise the knowledge, and writing is the best way to do that.

What is the source of investment returns? Simply two: one is market action one is speculative speculation.

You can make gains in the market through different asset allocations, timing trades, and security selection. The book refers to credible research showing that about 90 per cent of the variation in investment returns is due to asset allocation and 10 per cent to timing and security selection. That is, asset allocation plays a decisive role in the market. Investment allocation is based on three principles: 1) a focus on equity assets, 2) diversification, and 3) consideration of the impact of the tax burden.

These points are in line with common sense. But very, very few people actually do them. While hot stocks or timing trades are hotly talked about and in line with human nature. In reality, investing for income is a tedious and simple affair and these few principles are the most important.

Why favour stocks?

Stocks are a residual value/equity realisation, meaning that the company needs to pay off its creditors before it can distribute earnings to shareholders. That is, shareholders take on a higher level of risk. It makes sense that it would have a higher return on investment than bonds.

In fact, historical statistics also show this. Over the past 78 years in the United States, the annualised rate of return on the shares of large companies in the United States was 10.4%, while that on long-term bonds was 5.4% and that on short-term bonds was 3.7%. The difference between the two is 5 percentage points.

Even trivial differences in yields can evolve into staggering disparities in wealth when viewed over the long term. That’s the power of compound interest, and it’s all about valuing yield.

So, should I put all my “eggs” in stocks? Not really.

Historically, stock market crashes have cost you a lot of money. Historically, investment in small-cap stocks once reached 90%, only one day the stock market may plummet 20%, although in the long term, the stock will rise back, if the time is long, once 21 years to rise back, Keynes has a saying: “In the long term, we are already dead”. So diversification is a must. Diversification allows us to enjoy the “free lunch”, guarantees the rate of return under the premise of security, favouring stocks allows us to have the possibility of accumulating more wealth.

So? What is diversification. I buy 50% domestic stocks and 40% domestic bonds and cash, is that diversification? Firstly bonds and cash are over-represented here and not in line with the principle of favouring equities, and secondly nearly 90% of both will be affected by the level of interest rates in the domestic market, no real diversification. There is an over-representation of investment in domestic marketable securities. For true diversification, the percentage invested in domestic marketable securities is roughly 32%, with the rest invested in other diversified assets (e.g., real estate, developed/emerging countries, and bonds are also divided between U.S. and inflation-indexed bonds because in the short term, equities can’t combat the risk of inflation. U.S. Treasuries provide protection against deflation, and Inflation-Indexed Bonds provide investors with pass-through inflation protection that they can afford. When other types of securities fall sharply, Treasuries instead trend upward. bonds: with a full credit guarantee from the government and a very large number of government-issued bond certificates, they have the advantages of being non-repurchasable, having a longer maturity, and having no default risk. It is the most powerful investment tool for portfolio diversification, and can offset losses from fiscal crises and unanticipated deflation, but will suffer losses if inflation occurs, so only moderate allocations are made. Here if you have studied macroeconomics should be better understood, when deflation, the central bank generally through the purchase of bonds can improve liquidity. What is the relationship between bonds and interest rates? When interest rates increase, the discount rate of a company’s future earnings will also increase, which will lead to a fall in share prices. Similarly, the price of bonds will fall, which means that interest rates and bonds have an inverse relationship. The government and bondholders have an interest-consistent relationship. (Because if the government makes bondholders suffer, then it will have a hard time re-entering the credit market).

How to allocate various types of assets. 70% domestic equities, foreign equities and real estate and other high expected return assets. There is also a statistical requirement that no single asset comprise less than 5 per cent and no more than 30 per cent.

Diversification is a risk reduction measure, not a means of chasing performance. Therefore, it is important to maintain strong confidence in the portfolio you have developed and not to change course easily even if there are short-term setbacks. This confidence comes from a deep understanding of the portfolio, and is the result of a clear understanding of one’s personal risk appetite, co-ordinated with the basic investment guidelines and working in concert with each other. Simply put, it means firmly holding diversified assets and investing them rigorously to ensure that the ratio is always reasonable.

Speculation relies on short-term fluctuations without realising the true value of the assets, which in this case are mainly equity assets, such as stocks. Bonds, on the other hand, serve more as a means of diversification.

How do you choose a sensible ETF? This one is challenging for us. Look for securities that are well-structured, well-priced, and that have broad exposure to the six core assets. Maintain a cautious and sceptical attitude towards ETFs in the market. For example, single country or sector funds or portfolios that remain unchanged for long periods of time and fail to respond to index changes. Or offering the same services with very different fees.

How do we achieve rebalancing when we diversify our portfolio. We have to consider tax related matters, and a better way is through new cash put into a low percentage of asset classes, which can avoid the expense of fees when selling.