Overall Investment Strategy
There are many investment strategies out there. Probably as many as there are investors, or perhaps more. Some promise “magical” triple digit returns, and advertise the ability for the investor to become rich overnight.Unfortunately the only people that seem to be getting rich are the ones selling the “magic” strategies.
When I look at my growth strategy, which I have actually invested in for more than 20 years, and backtested to 50 years with similar asset classes. With an average of just under 10% annual return (CAGR), average draw-downs of around 9%. And a one-time max draw-down of around 15% (2008), I think it’s very respectable compared to other strategies I have seen, but there is no magic here.
My Investment Strategy
My overall investment strategy is very simple in theory; Diversify, Protect, Preserve and Grow the wealth I have, and generate income to live on so I don’t have to go back to the 9 to 5 grind.
The above strategy points seem very simple to achieve in principle:
- Diversify: this is what I like to call “The Prime Directive” (yes, like Star Trek), and it simply means “don’t put all your eggs in one basket”, I’m sure you’ve heard that before? Not in the same investment, the same bank, the same broker, the same currency, the same country, or even the same continent. Spread that stuff around so if any one of the above fails, you’ll still live to fight another day.
Protecting wealth is different to preserving it, although it basically means the same thing. When I say “protect” I mean protect it from being stolen. Or taken away “legally” by some government though excessive taxes, or by possession. It could be eaten away by inflation, hyperinflation or from a failing currency or country. So I look for ways to protect against these and other unforeseen circumstances.
This should be easy! Just put it in a government-insured bank account (FDIC for USA, or FSCS in the UK), sit back and drink your margarita! Unfortunately it doesn’t work that way. What many people forget about is this dreaded, evil thing; inflation, you know, when the cost of living goes up, things get more expensive. Inflation on average, depending on where you live, has averaged 2% to 3% over the last 50 years, and that’s probably a conservative estimate.
If you just leave your money in the bank, it’s going to be worth 2 to 3 percent less every year. To put that in perspective, something that cost $100 in 1998 would now cost $154.60 (cumulative inflation last 20 years 54.6%, source). So our strategy must be sure to beat inflation.
Even if you can generate some interest on your bank account, unfortunately these days, its not much, not enough to cover inflation anyway. I use Peer to Peer investments to complement bank interest income, which which are a little more risky, but pay much better rates..
Again, easy! Just invest it in the stock market. That’s always made money in the long run! Well, if you’re 20 years old with a good job, then that actually could be a reasonably good strategy, because when you get those big dips in price (as in 2008 where many sock markets around the world lost 50% or more), and your stock portfolio takes a massive dip (also known as “drawdown”), you have the time to wait until it comes back, which it always has in that past.
However, what about when you’re 40 or 50 years old? A 50% haircut in your portfolio might not come back until you’re pushing up daisies. So the challenge for me is to grow wealth without the massive drawdowns that occur in the stock markets. The strategies outlined here usually beat stock market returns, with lower drawdowns in the long term anyway. So we can actually have our cake and eat it too 🙂 You can see a portfolio comparison here to see how that works.
Once we retire, this becomes more important. We need an income to live on, and pay for all those margaritas on the beach! Generating a decent income for a decent risk is the key. I tend to let money grow in the portfolios outlined here, then move small chunks in to bank accounts at times when it makes sense, so it’s no longer subject to market fluctuations or risk of loss. That way the income earned monthly stays in the investment portfolios taking advantage of compounding until I need it.
Is based partly on Harry Browne’s Permanent Portfolio – simply to buy and hold low cost index funds for stocks and bonds. It also includes precious metals and real-estate. Re-balance once per year and your done. Simple as that! It sounds too simple to be real, but I have personally invested this way for many years.
Involves a relativity new type of investment, peer to peer investments. Do you know anywhere right now where you can get anywhere from 3% to 20% interest per annum income on a relativity low to medium risk investment? If not, then perhaps peer to peer will interest you.
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