👷‍♂️Portfolio Construction Matters

Yes. This is the City Chad, your money captain, offering pearls of advice on how to invest in your dreams. Let's set sail for success!

In this week’s edition:

• Markets: 😬 Crypto Shaken

• Article: 👷‍♂️Portfolio Construction Matters

• News: 🫶 Gen Z Loves Alternatives?

• Chad of the Week: ✊ Jocko Willink

MARKETS: 😬 CRYPTO SHAKEN

Good day, dear readers! So what happened in the markets in the last week?

The “Goldilocks” scenario in the US seems to be the base case now. However, stock returns have been relatively muted recently.

And in fact, one of Warren Buffet’s favorite indicators is signaling that there could be trouble ahead and that stocks are relatively “overheated”.

I am certainly paying attention to this.

Crypto had a wild week, even for its crazy standards. Three big things happened.

One, Coinbase (a publicly listed US crypto exchange) reported that the SEC had asked them to delist all crypto tokens except Bitcoin. When Coinbase asked for clarification as to why, of course they got none.

I guess the “because I said so” your mom used, is also a useful argument for taxpayer funded organizations.

Two, a meme coin called “BALD” rug-pulled investors, when the main developer withdrew the ETH liquidity, which caused the price to plummet.

Some people think that disgraced former FTX CEO, Sam Bankman-Friedman may be behind the coin. It doesn’t get much stranger than this.

Three, Curve Finance suffered a hacking exploit where $47million dollars was lost. If this wasn’t bad enough, now the worry is that this could cause a DeFi implosion.

The founder of this protocol has a $100m loan backed by CRV tokens, which could be liquidated if the price keeps collapsing. No bueno.

Not the best week for crypto, to say the least.

ARTICLE:👷‍♂️ PORTFOLIO CONSTRUCTION MATTERS

TLDR: Portfolio Construction is the art of putting together your investment portfolio the right way for you. It is too often ignored despite being the key to optimizing your sweet returns and avoiding unforeseen risk. The traditional "100 minus age" rule can offer a great guideline but it’s just the beginning. It’s important to pick the right asset classes first, before delving into picking individual stocks or other assets.

• Upside Down Thinking

• The Basics

• 100 Minus Age Rule

• Implementation

Upside Down Thinking

I can’t remember how many times people tell me “Hey, I want to start investing, but I don’t know what stocks to pick”. That is the first red flag.

You are thinking about investing upside down. You first need to think about asset allocation when constructing your portfolio. So stocks vs bonds vs real estate, etc.

Then you can think about individual securities if you want to. But that is actually optional.

Are you one of those confused souls? Well, you are definitely not alone.

Read more to learn the basics of this critical skill called portfolio construction. It’s actually easier than you might think.

The Basics

Let's get down to the basics of portfolio construction.

Asset allocation is king when constructing your portfolio. It's the key to 90% of your returns as an investor. Yes dude, you read that right.

This is why it must be the main topic of our conversation.

Asset allocation basically refers to how you divide up your portfolio among different kinds of assets.

And which assets, you ask? Here’s a few:

• Equities, aka stocks or shares, where you own a piece of a company, and if it does well, your shares go up, but hey, they can also go down and can end up losing money. Some companies might even pay you some of its profits in the form of dividends.

• Bonds or fixed income. Bonds are basically loans that are traded on the financial market. You lend money to institutions, and they pay you interest on that loan. It's a more stable income compared to stocks.

• Alternatives. Here are other things that don’t fit in the classes above. We got Hedge Funds, Private Equity, Real Estate and even Crypto. These usually have high returns in the long run but can be riskier than traditional asset classes.

100 minus age rule

Here's the deal. What's better for your portfolio depends on the amount of risk you're willing to take. Stocks can be pretty aggressive and risky, while bonds are more of a safe haven with small returns.

There is a general rule for that and it’s called the “100 minus age” rule. It can give you an idea of how much you should have in stocks and how much in bonds.

As you get older, you can’t afford to risk it and lose it, so it helps you keep it steady.

So if you are 30 years old, you would invest 100 - 30 in stocks (70%) and the rest in bonds (30%).

Once you have this basic portfolio, you can then look at adding other types of investments if you wish. But remember to read the fine print and be wary of additional risks in these investments.

One thing that is very important to remember is liquidity risk. So, how quickly can you sell your investment if you need to. For example, direct Real Estate (like a house or commercial property) is normally relatively illiquid compared to say Bitcoin. You can’t sell it in a couple of clicks. Same with venture capital (investing in small companies).

So make sure you don’t overload your portfolio with risky illiquid stuff, despite the promise of great returns.

Also, when you add more risky stuff to your portfolio, make sure you are not taking away too much from the safer stuff like bonds.

Implementation

Now, you know what percentage you want to put into each asset class, roughly speaking. And you are adjusting your portfolio as time goes by. Ok, great.

But how do you go about actually investing? Do you start picking stocks for your stock allocation? Mmm, you can but maybe it is not the best use of your time.

Picking the “right” stocks is hard. Very hard to outperform the overall market. We will talk about this in another edition of City Chad but for now, take my word for it.

So what should you do instead? Probably the easiest way to implement your asset allocation is with an index fund or ETFs (exchange traded funds).

Imagine you want a 60% stocks and 40% bonds portfolio, but you don’t know how to divide that 60% internally (i.e. what stocks to buy or what bonds to buy).

You can just buy a total market index fund and forget about it. Those funds basically invest in virtually all the stocks or bonds in the market. So you get a lot of diversification and don’t have to worry about the individual company risks.

An added bonus is that those funds tend to typically charge very low fees compared to actively managed funds (e.g. funds that try to pick stocks).

Now, which index funds you should invest in will depend on your personal circumstances, such as where you live (i.e. tax residency). You should consult a financial advisor to see what suits you best. I cannot help you with that unfortunately.

However, I can say what I do for my personal circumstances. Being based in Europe, I invest in the Vanguard FTSE All-World UCITS ETF for part of my stock allocation.

This fund basically invests in around 3,900 stocks all around the world, covering more than 95% of the global investable market capitalization. So you can say it is as diversified as it gets

For bonds, I invest in the iShares Core Global Aggregate Bond ETF. This fund invests in investment grade bonds globally.

That’s a wrap boys and girls. In a nutshell, asset allocation is like the secret sauce to that killer portfolio.

Mix it up right, keep your risk in check, and you'll be riding high on those returns.

NEWS: 🫶 GEN Z LOVE ALTERNATIVES?

How often do you see a news piece on asset allocation? Not often enough, of course!

But anyway, it seems our prayers were answered.

Right on cue for our article this week, I came across this interesting piece highlighting how Gen Z and wealthy young investors are increasingly drawn to alternative investments rather than conventional choices (stocks and bonds).

To give you the long and short of it, younger people now have easier access to other types of investments like crypto and commodities. Technology has made it as easy as tapping on your phone to invest in even the most esoteric asset classes like wine or luxury goods.

The choice can be overwhelming and almost endless.

While it is not a bad idea to consider alternatives, remember to bear in mind the risks they can carry and not overallocate. A 20-30% allocation would be considered aggressive, so act accordingly.

CHAD OF THE WEEK: ✊ JOCKO WILLINK

We are very proud to present Jocko Willink as our "Chad of the Week," a living embodiment of unwavering discipline and resilience. He offers a refreshing and opposing perspective to the victim mentality so popular in today’s world.

Wanna learn how to be unstoppable through the power of discipline and take control of your life? Read on to see how Jocko does it.

A former Navy SEAL officer, bestselling author, and motivational speaker, Jocko has become an influential figure in the realm of personal development and leadership. Renowned for his no-nonsense approach and unbreakable mindset, Jocko has inspired countless individuals to embrace challenges head-on and overcome adversity.

After retiring from the military, he co-founded Echelon Front, a leadership consulting firm, helping businesses optimize their strategies and create high-performance teams. His book, "Extreme Ownership: How U.S. Navy SEALs Lead and Win", co-authored with fellow SEAL Leif Babin, became a bestseller, cementing Jocko's reputation as a force to be reckoned with in the leadership arena.

I would highly recommend reading this book front to cover and take the timeless lessons within them. The main message is: take ownership to find success and respect as a true leader.

Every Chad has to be grateful that people like Jocko exist. His unyielding dedication to excellence and his commitment to empowering others to reach their full potential is just incredibly inspiring.

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DISCLAIMER

The material on this email and our website is for informational and entertainment purposes only and we make no guarantees as to the accuracy or completeness of its content – it is subject to change. Please conduct your own due diligence and research.

None of this information is financial advice, and you should consult your financial advisor before making any investment decisions. Your capital is at risk and you may lose more than you initially invested. We do not provide any offer or solicitation to buy or sell any investment products, nor does this constitute an offer to provide investment advisory services.

The Chad index (“the index”) is a combination of historical returns for the following assets:

Equities: Vanguard FTSE All-World UCITS ETF USD Acc
Fixed Income: iShares Core Gl Aggregate Bd UCITS ETF USD Hgd Acc
Real Estate: iShares Developed Markets Property Yield UCITS ETF USD (Acc)
Gold: Gold Bullion Securities Limited
Ethereum
Bitcoin

The index is rebalanced quarterly to the target weights shown in the table. The target weights are subject to change. The index does not represent the performance of a real portfolio and does not imply a recommendation to invest in any of those assets. Past performance is not an indication of future performance.