# Disclaimer - Don't trust everything you read on the Internet or any expert. Do your own research. - The information contained on this site are for educational and informational purposes only. - The information on this site is not intended as, and shall not be understood or construed as, financial advice. I am not an attorney, accountant or financial advisor, nor am I holding myself out to be, and the information contained on this site is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation. # Introduction to Asset Allocation & Stock Investing ## The variables of investing - There are three variables in investing: - Your starting capital - Your annual return (CAGR) - You runway: how many years you will be investing - A fourth variable would be to include: how much you are adding every month or year. - The rule of 72 - This rule helps to compute quickly how many years it takes to double your capital with a given return. - Example: For a 10% return, you divide 72 by 10, that gives around 7,2 years to double. ## What to avoid - First steps: - Avoid mutual funds, as detailed in the next section. - Avoid anything that looks shinny or any get-rich-quick scheme. - There are two main investing styles: - Passive investing: You buy the indexes (S&P500, CAC40, DAX, etc.). Low effort & Mostly-average performance. - Active investing: You pick the specific companies you want to invest in. High effort & From-catastrophic-to-market-beating performance - One approach isn't necessarily better than the other. It depends on your needs, time available, skills, personal interests, risk sensivity, etc. Choose for yourself. # The two investing styles ## A. Passive investing ### Invest in ETFs if you aren't full time on investing - If you have less than 100% of your time to spend investing your money and if you are not an expert in the field you are investing in, then **ETFs are more suitable for you than you picking the right companies to invest in.** - ETF are trackers that reproduce the ups & downs of indexes like the CAC40 or the S&P500. - They usually have low fees (usually between: 0.05%-0.5%/year), which in the long term makes a huge difference versus fund managers or other mutual funds which have much higher fees (2-4%/year) and tend to have the same or even lower performance (always look at the performance of mutual funds after their fees). - **If you invest in ETFs like S&P500 (US) or ACWI (World-ish) ETFs, you basically bet on the economy growing.** - If the economy continually goes down, then anyway the financial system collapses. - So in a world where there is still something like money, you more or less can’t loose if you go for ETFs. - **Only invest money you don't need. AndInvest small amounts every months instead of one big time.** - It helps reducing risk and it creates a healthy habit of saving money. It will help you to not try to time the market, which you'll most likely fail at. - This is called "Dollar cost averaging" (DCA). This approach is used to avoid investing at a bad time. For instance, if you had invested all your money in the Nikkei 225 (main Japanese index) in April 1991, it would had taken you 29 years to just break even (2020). - If you do DCA for 15 years, the money you add every month will have grown/compounded by itself. - Also, if you have a good strategy, you will not have to sell your ETF stocks frequently. In the strategy I picked from an economist, I only rebalance my portfolio once a year. That means, I do 1 to 2 trades where I sell/buy some portion of my ETF. This strategy helps minimizing moves and thus taxes. More on this strategy in the next section; - For more details on why going for passive investing if you are not a full-time investor, read this great book: - [The Intelligent Investor - Graham, Benjamin - Amazon](https://www.amazon.fr/Intelligent-Investor-Rev-Ed/dp/0060555661/) - [The Little Book of Common Sense Investing - Bogle, John C - Amazon](https://www.amazon.fr/Little-Book-Common-Sense-Investing/dp/1119404509) ### How do I know what ETFs to buy? - **Picking ETFs can also be a full time job. So, we will go for the 80-20 approach here ([[Mental models & Cognitive bias]]).** #### 1. You need to decide on a strategy (Permanent portfolio, Golden Butterfly Portfolio, All-weather portfolio, Dual Momentum, etc.). - Choosing a strategy definitely depends a lot on you. - Some criteria that people have to pick a strategy that works for them: - What's my time horizon? 1 year? 15 years? 30 years? - Will I need some of the capital for other things during that period? Buying a car? A house? Children? - What do I want to optimize for? Performance? Low risk? Low volatility? Liquidity? Low tax? Other things? - The strategy I will talk about is for people that want: - Good performance, but not crazy beating-the-market over-performance. The strategy still need to be able compound my hard earned money, so that I beat inflation and a bit more. - Pretty low volatility, which means ideally low drop during crisis (easier to stomach) - Pretty good liquidity if the capital is needed at some point - Something that is easy to manage. A strategy where you just add money every month with your paycheck, and one rebalance every year. - Some diversification, to not be exposed to only one asset class - Something that you can keep for a long time without thinking too much about it - Something that is simple enough to understand why it works. - After some research with these criteria, I found two approaches that works for me and fits the criteria: - **The [[Permanent Portfolio - Investing strategy]]** - **The [[Golden Butterfly Portfolio - Investing strategy]]** - Another similar approach: [[All-Weather Portfolio - Investing strategy]] - A completely different approach based on momentum: [[Dual Momentum Portfolio]] - Going further - Why the classical 60/40 portfolio strategy (60% stocks / 40% bonds) is probably not a good portfolio strategy: [Balanced Portfolio Construction - Lyn Alden](https://www.lynalden.com/april-2024-newsletter/) - **Other portfolio strategies:** There are several well-known portfolios that can fit other goals: [Portfolios – Portfolio Charts](https://portfoliocharts.com/portfolios/). #### 2. Where do I buy my ETF? Opening an account. - Now that you know which strategy you're going for, you are going to need to open an account on some platform (online broker account or trading account). - There are several platforms. - Opening the account can take a few days. And you may need to answer some compliance forms to be allowed to buy ETFs and other asset classes. - You can read on it here: [[How to choose a broker (Choix du courtier)]] #### 3. How do I pick which ETFs do I buy? The criteria. - Even if you know that in your strategy you want to buy Gold, how do I buy 'Gold' on my trading account? - Well again, many options. But it is not that hard. - You can read on it here: [[How to pick an ETF (Comment choisir un ETF)]] ### Alternative implementation in 30 min: Robo-advisor - If you want to do even less work (and pay higher fees in exchange, but still less than mutual funds), you can use a low cost robo-advisor platform that picks & invests in ETFs for you. - It's a good option for beginners that don't want to learn too much. - The main robo-advisor platforms are: - In the US: Wealthfront or Betterment - In France: Yomoni. You can even open a self-managed 'PEA' with Yomoni and benefit from tax exemption. - More informations on Yomoni, how it works and how to open an account: [[Robo-advisor - Yomoni]] ## B. Active investing - Stock picking #### Explore stock picking only if you want to invest the time - It's not for most people, but you can still sometimes beat the index, if you want to put in the effort and/or have some domain-expertise. ### Exceptional asset allocators do exist - Sometimes you can beat money managers: [10 Reasons Why You Have An Edge Over Professional Money Managers - Twitter](https://twitter.com/BrianFeroldi/status/1318515244415750146) - ["Other People's Money": Is Yours? - GauchoRico Stock Investing & Personal Finance](https://gauchorico.com/other-peoples-money/) - "Personal finance is one thing but investing is a whole other level that takes much longer to learn. Most people have no idea what a good investment is. So we really have a society where most people are not great at managing their own personal finances and have no idea how to find good investments or distinguish good investments from bad or mediocre investments." - "What a great situation for the money management industry: there’s a whole society that is clueless about investing. So what ends up happening is that people, who establish a brand of trust and are able to convey a level of competence and skill, take control large sums of assets so that they can take a cut." - "**The most sad thing about this situation is that most people do not have the skill to distinguish between the huge majority of money managers who can’t consistently beat the market and those are exceptional asset allocators.**" - "They continue to believe that just because someone is associated with Goldman Sachs or is a professional stock analyst that the “professionals” will always be better at choosing investments. Most think that an ordinary person cannot possibly acquire the needed skill to pick better investments." ### Growth investing: an approach I picked #### What drives long-term stock performance? - 'In the _short run_, the _market_ is a _voting machine_ but in the _long run_, it is a _weighing machine_.' Benjamin Graham. - Based on different studies like the one below, revenue growth is the key driver of stock performance in the long term. - Basically in the short-term, the market does a lot of noise, based on news, events, geopolitical events, macroeconomic news, etc. This noise makes revenue multiple vary which moves the valuation of the companies. - But in the long-term it's the growth of the business that matters most to value a business. - So technically, if you identify company that have the potential to generate future long-term revenue growth, you would be a great capital allocator (20 years it would have been identifying: Apple, Netflix, Monster, etc.) - ![[Topline growth - Drive of stock performance.jpeg]] #### Want to learn about Growth investing? - If that something that interests you, here a several resources to get started and learn about Growth investing: - [Saul’s Investing Discussions](https://discussion.fool.com/c/investment-analysis-clubs/saul-s-investing-discussions/29): This forum has a Growth (or Growth Momentum) investing approach: - They trade for themselves with their own money (not for paid subscribers) and they talk about it. - They run concentrated portfolios (8 to 12 stocks) and explain their approach in details here: - [Knowledgebase 2019 Part 1 - Saul’s Investing Discussions - Motley Fool Community](https://discussion.fool.com/t/knowledgebase-2019-part-1/50332) - [Knowledgebase 2019 Part 2 - Saul’s Investing Discussions - Motley Fool Community](https://discussion.fool.com/t/knowledgebase-2019-part-2/50340) - [Knowledgebase 2019 Part 3 - Saul’s Investing Discussions - Motley Fool Community](https://discussion.fool.com/t/knowledgebase-2019-part-3/50345) - [Long-Term Mindset - YouTube](https://www.youtube.com/@BrianFeroldiYT): Interesting YouTube channel by Brian Stoffel & Brian Feroldi. - Good tools - [FinChat - Stock Research Platform](https://finchat.io/) - [Koyfin - Financial data analysis](https://www.koyfin.com/) ### Value investing: another way to look at assets - Value investing means looking at the fundamentals of a stock and buying it the stock looks mis/underpriced. - [[Value investing]] #### How to value listed companies - StockDelver - Lyn Alden [[StockDelver-Book.pdf]] [[StockDelver-Instructions.pdf]] [[StockDelver-Calculator.xlsx]] ## C. The ultimate form of active investing: Launching and/or buying businesses - [[Entrepreneurship]] # Going further ## Investing Principles: Templeton Maxims [[Templeton Maxims]] ## I have existing capital to deploy, how fast do I deploy it? - First, do as much DCA as you can (cf. above). - Second, if the market is dropping you can accelerate the deployment a bit (if you're buying ETFs like S&P500 or ACWI) - ![[How to invest during market crash.png]] ## Asset Allocation in 2021 - [Asset Allocation: The Ultimate Guide for 2021](https://www.lynalden.com/asset-allocation/) - Stocks: The biggest mistake I think investors make is concentrating their international holdings too much in high-debt low-growth markets like Japan and Europe, and not enough in some of the more robust emerging markets or strong developed markets. - Bonds: In fact, another way of putting it is that bonds are overvalued. Their interest rates are very low compared to historical levels for the various risks investors take on when they lock up their money lending to companies or governments. - Real Estate: If you have a large percentage of your net worth in your primary home and/or an investment property, then perhaps you don’t need much or any real estate in your liquid portfolio.