22/04/2020
What up my party people, I felt inspired for this post today. I know there is a lot of doom and gloom around.
It’s important to know that now is the time!
Time for what tho?
My writing for the last month has been all over the gaff, maybe because internally I have been all over the gaff?
I was thinking about how tough this investing malarky is.
How murky it can REALLY REALLY get if you want it too. Psychologically you can find yourself making assumptions, reading articles that validate your assumptions, start to get excited…… all for the complete opposite to happen! lol
This month has been the first month in THREE years that I have not invested! It’s a big deviation from what I have been doing and I think this deviation has created some indecision in me.
So last night I took the time to just take a step back and look at how my portfolio is BEHAVING rather than performing.
Doing this I realised something…………… DIVERSIFICATION is SOOOOO important to me !
I’ve said this 300 times but eventually I will explain what my version of a DIVERSIFIED portfolio looks like but now is not the time.
What I am going to do though is explain why while my portfolio may be not performing well atm it is actually behaving the right way!
Please do not hold a gun to my head for this brief version and the definitions that follow:
A brief explanation of a Diversified Portfolio by Abhinav Thakore:
Cash –
This value should be ideally 3-6 months of your yearly wage. (Something of which I am nowhere near!!). Cash in a standard current account will never make money for you. Inflation makes the value of your cash depreciate because inflation is a wanker! I’m sure I heard somewhere that cash depreciates at roughly 4% a year.
So you could link me today and brag about how you saved 100K in cash, guess what if you didn’t add to it in a years time it might still say 100k in your current, but it’s actually only worth 96K!
Stocks and Shares-
This is where you buy into and become part of a company. You do this by buying shares which make you a shareholder in the company. If the company succeeds in making lots of money you are rewarded in two ways.
- “The market” gets all excited and the value of the Shares that you hold increase, this allows you to sell these shares at a higher price
- Some companies (not all) may reward their shareholders with something called a dividend, which is like a payout for being part of the company. These are usually bi-annually and the value you receive is usually based on how much profit the company has made and how many shares you have with the company.
IF (and this is a big if) the company you bought shares in is a FANTASTIC company, usually economic conditions, like recessions, bull markets and bear markets make no fucking difference.
If your company grows, so does the amount of money that you have to put into it.
However FANTASTIC companies are few and far between and the rest of companies and the shares that people own are privy to the whims of the storm that I like to call “Economic conditions”. Things like employment figures, GDP, Inflation and currencies all contribute to this “storm”.
This is where most people 20-40 years old may allocate the majority of their money (after debt, bills, and rent is paid). Why?
Because your money has the opportunity to GROWWWW. Now a lot of people liken stocks and shares to gambling but honestly if you do even a smidgen of due diligence then the two are not the same.
Gamlbling is all or nothing, sports gambling for instance is based on a number of variables and a few select individuals to win or lose.
Take my company for instance
Buying shares in Tesco, means you become part of Tescos, no one wants people to starve, no one wants all it’s employees to end up jobless considering Tescos employs a minimum of 100k people.
Most definitely you can still lose money but very rarely will you lose ALL your money.
Bonds-
Bonds are fucking weird. The only way for me to explain them is that you buy a bond at a fixed rate let’s say for 10 years. Every year that bond pays you that fixed rate on an yearly basis and if you still have the bond after 10 years, you usually get a maturity bonus.
For some reason bonds are much safer than stocks and shares but not as safe as cash. I’ll be straight up. My financial IQ is simply not strong enough to explain bonds any more than what I have.
Gold-
Gold is meant to be a “hedge” against inflation. Sometimes it can be used as a “safe haven” for wealth when shit like stocks and shares and bonds start going all over the gaff, many investors will switch parts of their wealth to gold when markets are volatile.
So there you have it: Abhi’s version of a diversified portfolio in a nutshell.
Now for how it should behave:
Cash- stays where the fuck it should be, whatever is in your account after debt and bills are paid, get distributed into the rest of your portfolio.
Stock and shares- Most of your excess cash goes into here. Mainly because for the last 10 years we have been on the biggest bull market ever so you just see your money make more money, but at the same time you think you’re really being a genius for “your” stock picks.
But when the market goes into turmoil…… most people start fucking flapping and want to protect their losses so they either sell and go back to cash or buy bonds and gold.
Bonds – This is usually a small percentage of your portfolio however when stocks and shares start to drop loads of the flappers start buying the same bonds. Demand outstrips supply so you notice the value of your bonds start to (or at least should) increase.
Gold: Again this should be a small percentage of your portfolio and again much like the bonds, flappers start to buy more gold and so the value of the gold you’ve bought starts to increase in value.
Okay tomorrow I will explain how my portfolio IS actually behaving the way it should be, why I should take confidence in this and why if you want to teach your kids about diversification, make them play Pokemon!