Portfolio Construction for Different Risk Appetites

Mon Jan 17 2022


The  typical portfolio allocation today looks vastly different to how it did 10, 20 or 30 years ago. Aside from the different asset classes that are now available, the gamification of stock market and trading apps and the rise of social media has opened up investing to a new generation. Which is a good thing, right? Of course it is. One of the main criticisms in the past of the stock market and investing more broadly is that it is only accessible to those who have money and resources already. And this is changing: 15% of the retail market is now made up of investors who started in or after 2020.

What does this mean for retail investors?

However, one of the side effects of this phenomenon is that there have been a number of knock ons for the broader market. Let’s go deeper. The first, and most serious, is that investors have grown used to a market where everything goes up, and at a staggering pace. Yes, some of this is down to cryptocurrency gains but we’ve seen ridiculous growth from blue chips like Tesla and Nvidia, and IPOs from companies who haven’t even made a cent of revenue. This means that people are no longer satisfied with the steady, glacial growth of the S&P 500. Despite the fact that it’s up 27% YTD we haven’t heard a peep of it in several years. This is a bad sign — reaching a point at which people think they know better or are too advanced for index investing on a mass scale is usually around the time things start to pull back. It also means that portfolios are overweighted towards riskier assets that have done well over this 5 year cycle, but are certainly not guaranteed to do so in future. The other problem is that these assets have grown at such a weight that they now take up more than intended of an average portfolio. 


So what does this mean someone looking at their portfolio today should do? The traditional investing canon used to suggest an equity-bond split by age, where a 32 year old would have 32% bonds and the remaining 68% in equities, and so on up until retirement. This would change your risk profile as you moved through life, and thus had less time to recover from the sporadic economic shocks that can result in longer term pullbacks. However, a number of things are making this a little outdated. Firstly, bond markets are no longer providing the returns that they used to, and secondly people are living much longer, giving them more time to recover from price dips.

Here at Strabo, we like to hold predominantly equity funds, with a small portion of the portfolio dedicated towards self-selected individual stocks and alternatives like cryptocurrency and venture capital investments. This means we can scratch the itch of self selecting stocks, while leaving the majority of our portfolio to rumble along passively with the market. After all, more than 80% of even professional investors fail to beat the market. Although favour has been with retail of late, the pendulum will soon swing back towards passive strategies as we eventually return to a bear market. In the august words of George RR Martin, Winter is Coming!

So what?

With this in mind — by all means enjoy tech and crypto investments, but try to hold a strong exposure to the broader markets including US, European and emerging. These will be back in favour once the current madness subsides, and will serve you well with no stress or decision paralysis. Pound or dollar cost average into these monthly, and you’ll build yourself a good nest egg for retirement. Specific percentages are hard to dictate given it’s dependent on individual circumstances, but for anyone in young to middle age, a vast 80–90%+ equity allocation, the majority of which is passive (or wholly if you lack experience or desire to invest individually), is the most sensible options. Please do reach out with any questions, or simply to share your investing strategy!

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