Step 3:
Optimize
Adapt your strategy as your wealth increases
Every investor should start with a simple and cost-efficient investment strategy as described in Step 2 – our invest into the “global economy light”-approach. Before you are able to invest at least 10,000 Euros using this strategy, it makes little sense to switch to more complex variants when building wealth. But at the same time, one should consider the following:
- Do I also want to actively leverage crises to build up wealth?
- Have I already achieved my financial goals or almost achieved them, and therefore no longer want to hazard the risk of high stock market fluctuations?
- Is my remaining investment horizon less than 10 years?
If you answered “yes” to any of these questions, then it may make sense to adjust your investment strategy a bit. Based on the following example starting situations, we would like to show you which considerations can be relevant for you to sail safely through stormy waters with your wealth.
Investment strategies for Marc, Elizabeth and Daniel
Marc
Age: 38
Occupation: Doctor
Assets: $85.000 invested globally.
Financial goal: Actively accelerate the path to financial freedom.
Motto: “I am nterested in the global economy and I want to take advantage of financial crises and consistently achieve the highest possible returns.”
Elizabeth
Age: 33
Occupation: Engine Driver
Assets: $100.000 in current account.
Financial goal: Finance her own home in a few years’ time and provide for family and old age.
Motto: „Investing 100% of my assets in stocks is too risky for my investment horizon. I don’t want to experience a 50%+ crash like in 2008/2009. I am happy to reserve one hour of my free time every month to invest my assets profitably.“
Daniel
Age: 42
Occupation: Entrepreneur
Assets: $500.000 invested globally.
Financial Goal: Asset preservation, passive income in addition to entrepreneurial activity.
Motto: „Money must be invested productively in the global economy, no interest/return is without risk. But I would like to use smart methods to achieve these returns with minimal fluctuations in the portfolio.”
Higher returns with lower volatility – is that even possible?
In Step 2 you made your first investment in the MSCI All-Country World Index. This simple and effective method of investing is the right choice for you if you want to start successfully with systematic wealth accumulation.
However, as your assets increase, there will be more reasons to optimize your investment strategy. For example, a 50% stock crash is psychologically harder to deal with when your portfolio is worth $400,000 and you are already close to your goal of financial freedom.
With the right portfolio management, you can not only reduce the fluctuation range of your investment, but you can also leverage crises to your advantage.
A side note about portfolio management – profitable investment in every market situation
Let’s think about the following: Suppose you can invest in two out of three available investment options.
Investment A and B deliver positive returns over the period under review with almost identical market cycles (left chart below). Investment C does not deliver a positive return over the same period, but its share price moves in the opposite direction to investments A and B.
Where would you invest? Below is the related visualization of Artemis Capital:
The charts above represent an ideal case, but illustrate the benefits of strategic portfolio construction with focus on the following factors:
- Maximizing Returns
- Reduction of maximum drawdowns and volatility
By combining non-correlated assets, a highly stable portfolio can be designed for any market situation. Have you ever heard of the 60/40 portfolio? This simple and widely used portfolio management strategy invests 60 percent in stocks and 40 percent in secure bonds. The adjustment to the target weighting usually takes place monthly or quarterly.
Bonds have historically generated slightly lower returns than stocks. Nevertheless, this strategy has delivered almost identical returns as a 100% equity portfolio for decades and with less volatility. The reason for this is the combination of assets visualized above, which are not directly correlated to each other. As a result, bonds were often able to improve the performance of the overall portfolio when share prices were falling because they generated positive returns even during crises.
But the 60/40 portfolio now faces a major problem – falling interest rates. Government bonds, which still generated yields of 3-5% a few years ago, are now paying negative interest in some cases due to the low-interest strategy of our central banks. For our optimal “Asset C” (see graphic), we want to look at the following options.
