Matti’s portfolio report, February 2022: How to build a ‘foolproof’ portfolio

MATTI

In his latest portfolio report, our country head for Finland, Matti Vansen, shares his insights into building a ‘foolproof portfolio’.

On 22.1.2022 I had the honor of being one of the keynote speakers at the Toomas Investment Conference in Tallinn. In today’s report, I thought I would provide a summary of the topics I covered in my presentation.

The focus of the presentation was how to build a ‘foolproof portfolio’ that endures through different market situations without taking too much of a hit, and hopefully even increases in value during turbulent times.

I have been investing for quite a while and I have done okay. And yet, I have learned many things the hard way. I share the following in the hope that I can help people to avoid the mines in the mine field, having walked into some of them myself.

The key things to bear in mind when building a portfolio are:

Being mindful of costs: don’t invest in products where the fund earns before you earn, especially if the fund is doing worse than the index.

Only invest in what you understand: never invest in anything that you don’t fully understand. If you don’t understand the fundamentals of, for example, options or cryptos, don’t invest in them.

Diversify in uncorrelated products: if you’re investing in similar products in similar markets, the portfolio fluctuates in the same direction in every market situation; if you invest in negatively correlated assets, the risk is somewhat hedged BUT it’s a zero-sum game. Therefore, invest in UNCORRELATED assets that don’t correlate with the other assets at all

Have a strategy: think about why you invest and what you want to achieve; figure out a strategy that suits you. Even if you follow someone else’s strategy, that’s better than having no strategy at all.

I always think that in order to emphasize the points that I mumble about, there should be a financial theory behind it. So here it comes:

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The only way to lower the market risk in a portfolio is to invest in different markets and different (uncorrelated) products.

The benefits of diversification decrease with the number of assets in the portfolio – generally the number of stocks is 20-25, after which the log linear line won’t decrease significantly anymore.

Having different income streams (dividends, fixed interests etc.) earns you money independently from the market situation.

If you want a greater understanding of the subject, I recommend familiarizing yourself with the concept of capital asset pricing model (CAPM,) and especially the efficient frontier. The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

Now that I have baffled you with some theory, I should probably tell you what this has to do with building your foolproof portfolio?

Before and after joining Estateguru, part of my job has been meeting with institutions, family offices and wealthy individuals. Generally, when I meet with particularly rich people, I ask a couple of things:

What is your strategy? What have you invested in?

What do you regret in your life or investments?

The answer to the first question is the same in 99,9% of the cases: rich people invest in such products that make them richer and richer independent of the market situation. The answer to the second question sometimes turns the meeting into a therapy session, if they say, for example, “I should have spent more time with my children” (yes, I have seen one of the richest people I’ve met crying because of that). Ideally, they rather respond with which investment they would have discarded earlier or provide some good advice.

The common denominator of their portfolios is the same in almost 100% of the cases: if you invest in stocks / equity, real estate and fixed income / interest rate products, your portfolio will be earning you money passively while you sleep. Think about the investor in Shark Tank, like Kevin O’Leary, Barbara or Daymond. What have they invested in? Absolutely correct, these aforementioned asset classes. How about Jeff Bezos, Bill Gates and other billionaires? Yip, you’re right: the answer is the same.

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Why have I invested in EstateGuru products then?

  • I make use of the anomaly in the market (there is no similar product with high interest rates and first rank collaterals in Finland).
  • It’s one of the uncorrelated assets in the portfolio.
  • It’s a fixed interest rate investment in the portfolio.
  • It’s an easy asset class (I just transfer in the money and put Investment Strategies “Auto Invest” on); I am lazy.
  • I understand the product .

Estateguru loans are generating income for me although the market has dipped during the past few weeks. Also, they are related to real estate but with the benefit of not being equity investments, which means that in the event of default, investors, me included, will get their money back before other debtors.

How’s my portfolio doing then?

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Currently, the Estateguru portfolio is passively earning me about € 340per month. When I check the future cashflows, the income is increasing closer to €400 per month during H1 of 2022 already. I have never sold anything from my portfolio (btw, that is forbidden for everyone working at Estateguru) nor bought anything from the secondary market (also forbidden for us). Therefore, the portfolio is au naturelle.

I have 317 active loans in my portfolio. According to the theory presented above, the benefits of having that many assets (loans) in the portfolio is close to zero, as after having 20-25, the log linear line reaches the market risk line as idiosyncratic risk has been diversified away. The reason for having that many loans is that I use Investment Strategies (Auto Invest) which diversifies the portfolio more and more every time more money comes in. Although the benefits of the diversification are marginal at this point, it does not do any harm either. 

All investments, including real estate, are speculative in nature and involve a substantial risk of loss. We encourage our investors to invest carefully. We also encourage investors to get personal advice from a professional investment advisor and to make independent investigations before acting on information that we publish.