Building a winning investment portfolio is like assembling a successful football team. Not all investments, or players, are equally important, but they all have a role to perform. And as a team, the goal is to win trophies.
- The goal is to win trophies
- The Goalkeeper: Gold
- Defensive Line
- Midfield Line
The key to building a winning investment portfolio is to properly balance risk with potential reward. The best way to do that is by identifying good assets and properly understanding diversification.
A winning investment portfolio has many similarities with a successful football team. There are a few superstars, but all players are there to fulfil their mission. The goal is not to simply score goals, but to win matches and eventually trophies.
Before we start to analyze our lineup in detail, I want to emphasize the importance of the coach. Good players can win games, but a good coach is necessary to win trophies and build a dynasty. And keep in mind you are the coach!
The goal is to win trophies
Although it is very tempting to assemble a team with strikers only, the real goal of our team should be to win titles. If we only have strikers, we will probably score a lot of goals, but our defense will be weak.
This is like trying to build a successful portfolio and only own Tesla and Bitcoin. At times that combination may be glorious. But the moment things turn against us, we will suffer greatly.
A team with only a couple of very good strikers will be able to score many goals too. It will also make it possible to have midfielders, defenders, and a brilliant goalkeeper. All of those are needed to win trophies.
For this reason, we must think about portfolio construction in a more holistic way.
The Goalkeeper: Gold
There is no doubt that the goalkeeper is a key player if we want to compete and win trophies. The opponent will try to score goals no matter what. And even if we have good defenders, a goalkeeper will be very important.
A good goalkeeper can save goals and will make us win matches that eventually lead us to lifting the big prize.
Gold is a key asset. Not only is it capable of generating good returns under normal circumstances. It also offers a lot of diversification. Their best returns occur when most other assets are behaving poorly. Gold can be the asset that saves us when everything else fails. Like a great goalkeeper.
The defensive line is composed of two central defenders and two fullbacks. Their objective is to repel the attacks of the rival, like adverse macroeconomic conditions. Defenders can also score goals from time to time.
Our central defenders, cash and sovereign bonds, including inflation-linked bonds, can be very useful when there is a recession and risk of deflation. They allow us to gain interest just by holding them and can be deployed if there is a crash in the markets.
On the wings we have fullbacks that usually defend well but can also attack. They can shine their brightest when there is high inflation (commodities) or when the economy is a little weak but still ok (corporate bonds). These players have flaws, like everyone, but are instrumental in the team’s success.
The midfield line is where matches are usually decided. Consequently, we need good players here. The midfielders maintain control of the ball, defend, create opportunities for the strikers, and sometimes even score goals.
Our residential property would be the most stable asset at the center of the pitch. It gives us solid returns, stability, and lets us think how to score goals, i.e. build wealth.
Rental properties are more offensive than our residential home. We won them for regular cash flow and long term price appreciation, but they are not without risk if the economy goes into a deep recession.
We can also play with an attacking midfielder. We put him in front of the central midfielders. It is there to give assists to the strikers and score some goals. Developed market stocks can fulfil this role. The MSCI World index, with shares from the United States, Europe, Japan, and other developed markets, can play in this position.
Finally, we need a good forward line to score as many goals as possible. The game is about scoring more goals than the rival to win games.
On one side, as a winger, we have emerging market stocks, represented by the MSCI Emerging Markets index. They are less dependable than developed market equities but can score a good number of goals. They also add diversification to our portfolio.
The winger on the other side is silver. This player can perform very well, but its performance is not very reliable either. We need to be careful managing our allocation to this asset.
Finally, we need a striker. This will be our growth equities. It can be represented by the Nasdaq stocks. It does not score at every opportunity but ends the season at the top of the board.
Remember that the most important thing when it comes to investing, especially if we do it for the long term, is to achieve good returns while managing risk. We should not put all our eggs in one basket, no matter how often we watch that basket, as there are things that are outside of our control.
If you rely solely on the goals scored by your strikers, you are taking great risks. If either they stop scoring goals or your rival scores more goals than you, you will lose games and do not win any trophies. This is what happens when risk assets perform poorly. Because of that, we need more defensive players in the team.
Finally, I would like to add that while we have seen a team of 11 players, it is obvious that some positions are more important than others. As a result, the more important the position, the higher the allocation should be.
The goalkeeper and midfielders are probably more important than the wingers. But remember that sometimes a small allocation in a less popular asset can be extremely helpful.
If you would like to follow this portfolio structure easily with a handful of ETFs, I will give you some examples here:
Build diversified portfolio with ETF
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