Trying to Explain Nassim Taleb’s Views on the Economy and Markets

Nassim Taleb just had an interview on Bloomberg discussing the latest topics in finance:

1 nassim Taleb

Modern Monetary Policy – Monetary Policy 3

Trade wars

Budged deficits

Market risk

How to invest

It is a great interview but as often with such interviews, things are not explained in depth. I’ll try to add facts to Taleb’s thinking and you will see how that affects your investing!

The biggest risk for Taleb – Deficits and no skin in the game

Let’s start with deficits, from the Wall Street Journal:

2 budged deficit

In an environment with full employment, thus with the economy doing great, budged deficits are increasing!

3 unemployment

Unemployment rate US, Source: FRED

With a strong economy, the logical thing should be to have budget surpluses so that when a recession or slowdown eventually comes, you have the room to increase government spending. If you check below, during the late 1990s, the budget had surpluses but it seems now most politicians think that debt is something not to worry about now.

4 budged deficitis

Source: FRED

Accumulating deficits mean higher government debt. Total public debt in the US had doubled in the last 10 years, DOUBLED.

5 public debt

Source: FRED

Higher debt, leads to higher interest payments. Despite historically low interest rates on government lending, interest payments have skyrocketed due to the large amount of debt.

6 interest payments

Source: FRED

The US government has to pay $550 billion in interest per year, and to do that, it simply borrows more as the deficits are now at almost $800 billion and expected to hit $1 trillion soon.

7 budget deficit

Source: FRED

Such a situation is unsustainable and for Taleb, and probably for every other rational being, a huge risk that is piling up and will at some point in time blow up. If you borrow just to pay interest on your debt, you are close to a Ponzi scheme and we know how those things usually end up.

In the next recession, budget deficits will explode that will probably increase the borrowing rate and create a spiral of trouble as raising rates will cripple debt servicing. To solve such issues, government tend to print more money and you soon have hyperinflation.

Further, if you increase interest rates, the cost of debt for the government exacerbates. So, a normal option to cool the economy is something the FED can’t use at this point in time.

9 treasury

Source: FRED

A longer term increase in rates where the US borrowing cost go to 5%, where those were in 2007, would double interest payments on the debt, further increasing budget deficits.

The main problem for Taleb is that those who make decisions, like politicians have no skin in the game. What harm will Trump have from current budget deficits if those create havoc in 2029? The main problem for Taleb is that there is no accountability in the current capitalistic system.

The plausible solution to the above problems creates another huge risk.

Taleb on Modern Monetary Policy – Monetary Policy 3

We recently discussed Ray Dalio’s views on the plausible next monetary policy moves that involve helicopter money and a coordination between government spending and money printing. Taleb is against such things because of the risks that pile up where the main risk is hyperinflation.

Even if inflation has been really low over the past years and contained between 1.5% and 2.5%, Taleb mentions how inflation doesn’t work linearly and how just because it hasn’t materialized, it doesn’t mean the risk isn’t there.

8 inflation

Source: FRED

At some point inflation will ramp up, that will make things not manageable; think of Venezuela, Argentina, Zimbabwe. Taleb really agrees with Charlie Munger on this issue.

Don’t own equities

On market risk, Taleb discusses how people should not even own equities and should focus on their jobs as source of income and invest only for capital protection. He says that if you must hold equities, you have to do that and be hedged in a proper way against long tail risks. The problem is that few know how to do that, i.e. buying some puts is not the strategy because of the large cost attached to it.

But, he is clear that what is going on will at some point crash and that we should be ready for it. He also says that if there is a crisis, he will be the first to buy.

How to invest

On how to invest, he advises to avoid the middle, thus the zone where most people invest chasing income and yield and how you should invest in a barbell way where you hold most of your money in safe, wealth protective assets where he excludes equity and especially bonds.

10 barbel investing

Source: Seekingalpha

He mentions how public pensions funds need to hedge properly because if not those are doomed as they promise 7% returns and a crash would require them to reach much higher returns in the long term.

His message is that if you don’t know how to hedge for tail risk protection, you should not hold equities.

He owns some gold, land, some other financial instruments(derivatives) and avoids stocks, long term bonds – hold short term. Tail risk hedging if you know how to do it.

Morale of the story, risks are piling in the form of higher debts, hyperinflation is the probable solution and one should be hedged against tail risks. More about what are tail risks and how to possibly hedge, if we can do that in future videos.

Trade Wars

Oh, on the hot topic, I almost forgot, Taleb says how he loves to chat about things that took him 20 years of thinking to get to have something to say, so he really has nothing to say on trade wars, next year there will be something else people will chit chat about.

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$13 Million-Dollar Investment Bank Managed Stock Market And Bond Portfolio Review

A month or something ago, I was contacted by an investor that had just set up a portfolio with an investment bank. He told them that his risk tolerance is minimal and that he would like some capital appreciation in the long term. He asked me to review the portfolio and that is what we are going to do now.

Here is the video version, while those who prefer reading, can find the article below.

The topics:

$13 million-dollar investment bank managed stock market and bond portfolio review:

  • US equity portfolio exposure & issues
  • International equity portfolio exposure
  • Fixed income portfolio

General banking fees and value for money

  • Discussion about fees and risk reward opportunities

Investment strategy

  • Portfolio management
  • Risk and reward
  • What would I do differently?

Stock market and bond portfolio review

Here is how the portfolio has been structured:

US equity is 22.74%, international stocks 25.52% and as the requirement was low risk, 48.5% has been placed into US fixed income. This has been done by putting the money into 3 different bank funds (more about bank fees later). The yearly management fee is 0.9%.

Let’s start with US equity exposure.

US equity portfolio exposure

The portfolio positions are listed from the largest to the smallest. The client automatically replicates the positions held by the 3 funds within his account.

us equity portfolio

The largest position is Advance Auto Parts (AAP). I don’t know whether the fund bought the stock at the bottom in February of 2018 or it was a long term holding as the unrealized gains and losses in the above table go back to when the portfolio investment was made, which is February 2018.

AAP, has had free cash flows between $300 and $500 million per year over the last 10 years on a $10 billion market capitalization. I would expect the return there to be around 4% in the future. Auto parts are a competitive business but can be recession proof.

The next position is Comcast (NASDAQ: CMCSA), a company that recently won its bidding war and acquired Sky Plc for $38.8 billion. The all cash offer will put more pressure on Comcast’s balance sheet that already has $114 billion in liabilities. Plus, Sky Plc has had operating cash flows of around $2 billion per year in the last 10 years. This makes it a stretched acquisition as the interest on the debt will be close to the $2 billion of free cash flow coming from Sky.

Intercontinental Exchange (NYSE: ICE) is another stable company with high free cash flows and a potential return of around 4 to 5%. Free cash flows are $2 billion on a $42 billion market cap.

Danaher is the 4th largest US portfolio position (NYSE: DHR) is another stable company with $3 billion in cash flows on a $70 billion market cap.

Progressive Corp Ohio (NYSE: PGR) is an insurer and Kroger (NYSE: KR) is a grocer with similar characteristics as the above businesses. All have dividend yields of around 2%, stable business models, we can call them recession proof business models, and price to cash flow ratios of around 20 that should lead to a return of around 4 to 5%.

If we look at other portfolio positions, those mostly replicate the above. All good companies and fairly priced by the market. The portfolio also holds Google or better to say Alphabet (NASDAQ: GOOGL), American Express (NYSE: AXP), Mastercard (NYSE: MA) and we could easily say that the US equity portfolio reflects the client’s wishes: safety and quality.

US equity portfolio potential issues

I have two issues I want to discuss. The first is the value added in relation to the charged fee and the second is the fund management cost environment and investment process which is possibly even more important than fees.

Investment fees and value added

The first issue with the US equity portfolio part might be that there are 26 positions. If we look at professor and 1990 Economics Nobel prize winner Sharp’s seminal work on risk: Risk, Market Sensitivity, and Diversification, published in the Financial Analysts Journal in 1972, we see that as soon as you pass 20 positions in your portfolio, the risk equals the market’s risk.

Source: Risk, Market Sensitivity, and Diversification – CFA publications

We have seen that the expected returns from a price to cash flow standpoint will be around 4 to 5%. However, if we look at the top positions of the S&P 500, their price to cash flows don’t differ much from the ratios of the analysed portfolio and the businesses in the S&P 500 can be considered of quality too.

Source: iShares S&P 500 ETF

Microsoft (NASDAQ: MSFT) has a cash flow yield on price of 3.75%, Apple (NASDAQ: AAPL) of 8%, Amazon (NASDAQ: AMZN) of 1.8% but we might argue that in 10 years, AMZN might have higher cash flows than Kroger. Berkshire (NYSE: BRK.A, BRK.B) is a diversified portfolio focused on US equity by itself, it holds great businesses and it has a price to free cash flow ratio of around 4%.

This leads me to the question, is the 0.9% yearly fee our friend is paying for the above portfolio justified? One can buy the S&P 500 for a yearly fee of 0.04% which is 22.5 times smaller than what is being paid to the investment bank or there is always the option to simply buy Berkshire and let Buffett and his fellows manage the money at no cost practically.

To conclude on the investment fees, I don’t think that in this case, paying a yearly fee of 0.9% adds any kind of value given that the stocks might look a bit more conservative than the S&P 500 but such bet is based on past performance and not part of a strategy. In this digital era world, one might argue that Amazon is more defensive than Kroger.

Investment fund behavior

The thing when it comes to banks is that there is a lot your bank is not telling you.

Aside from the 0.9% yearly management fee, the bank makes money as they buy and sell through their own broker, perhaps they are even the market maker for the security, they pay for research, marketing costs, administration etc. that might not be included in the first fee you pay but might be included in the costs of the second fund that you actually don’t see. In this case, as the clients owns the positions directly, only the brokerage, custodian and market maker fees come into account, but that is still something extra.

Investment fund management process

Now, there is another thing when it comes to investment funds that is not discussed much. When things go well, all is good, but when things go south, some clients might want their money back. The investment manager is put into a tough spot because he then has to make investment decisions based on external inputs which might not be in the best interest of other clients. For example, if I manage a $1 billion portfolio, there is panic in the markets and clients want to cash in on $300 million. Liquidity usually dries up on the market too at such moments and you cannot sell your positions easily, especially your bond positions. (Remember that the positions discussed above are part of a much bigger fund)

The investment manager has no option than to sell the most liquid assets which might be the best assets to hold in the long term. Further, an investment manager has to be invested 100% all the time. Investment managers, collecting a fee of 0.9%, don’t have the option Buffett has. Buffett has $114 billion dollars practically lying on Berkshire’s bank account waiting for a market panic so that he can buy stocks on the cheap. (Buffett’s cash is invested in short term US Government Treasuries with an average maturity of 4-months – can be considered as cash)

This is something few think about when things go well, but crucial when things go south. Our friend has no influence on that and unfortunately this is where things often go wrong with funds managed by investment banks. An investment manager has to do as ordered, not as he wishes or what would be in the best interest of the client.

International stock portfolio overview

The international part is 25.52% of the whole portfolio and has a total of 68 positions. Since the inception of the portfolio, the performance of the international part has been really bad as almost all the positions are down with some like Ryanair (LON: RYA) down 34%. This is nothing strange given that international stocks and emerging markets have really suffered during 2018.

international stocks 1

international stocks 2

The largest position is Medtronic (MDT), followed by Unilever (UN), Compass Group (CMPGY), Aptiv (APTV) and Ryanair (RYAAY). There is a little bit of everything there with Tencent (TCEHY), BHP Billiton (BHP), the Indian Icici Bank (IBN), the Russian version of Facebook – Yandex (YNDX) and some interesting Chinese stocks like (WUBA) or South American payment processors like Cielo SA (CIOXY).

Now, Medtronic (NYSE: MDT) – the world’s largest medical device company makes most of its revenues and profits from the U.S. healthcare system but is headquartered in Ireland for tax purposes. Thus, this is not an international stock but goes under the international portfolio. Free yearly cash flows have been around $4 billion over the past 10 years and the market cap is $120 billion.

Nevertheless, holding 69 stocks doesn’t move the needle and we can expect them to perform equally as the market does. Therefore, one can simply buy the Vanguard Total International Stock ETF (VXUS) for a fee of 0.11% per year.

If I compare Vanguard’s top 10 positions and the portfolio we are analysing, I see that Royal Dutch Shell pls (NYSE: RDS) is in both portfolios, same as Tencent (TCEHY), Novartis (NVS), Roche (RHHBY) and Taiwan Semiconductor (TSM).

Source: Vanguard

So, a portfolio I am paying 0.9% to be managed has 5 positions that are also in the Vanguard Total International stock ETF top 10 positions with a management fee of 0.11%.

Let’s see if there is more value added in the bond portfolio.

US fixed income portfolio

48% of the portfolio is placed into a bond fund and the holdings are the following.

bonds 1

bonds 2

The majority of the bond portfolio is in US Treasuries, 18% of it, with maturities ranging from 2021 to 2026. The yield on those is less then 2% or around that. Then there is a bunch of other corporate bonds with yields between 1% and 4% on average and maturities ranging from 2022 to 2028 on average.

Now, the first thing is that if 9% of the total portfolio is in Treasuries, why would you ever have to pay any fees on that as with a $13 million dollar portfolio you can simply buy them yourself. Or, if you want, the Vanguard Treasury ETFs has a fee of 0.07%.

Secondly, the investment grade US corporate bond ETF from Vanguard, offers much higher yields for minimal fees.

Source: Vanguard

On a portfolio of 66 bonds, 60 excluding the Treasuries, I simply don’t see any difference except the huge fees. The intermediate corporate bond ETF, has a yield of 4.35% and is managed by Vanguard.

Conclusion – portfolio management and risk reward

The holder of this portfolio hoped that I can manage part of his portfolio and perhaps create an all-weather portfolio for his holdings. I declined because my current investing focus accepts a little bit more risk as we are focused on long term return maximization which isn’t what the goal of this portfolio is. I am completely devoted to what I do and creating another portfolio alongside building mine would be impossible. On the all-weather portfolio, I am partly working on it, but an all-weather portfolio focuses first on neutralizing risk and not that much on maximizing returns. You cannot get high, Buffett like returns with an all-weather and that is why I cannot focus my whole work around it and this portfolio. I takes at least a year of hard work to build a portfolio.

Secondly, if I would have to manage the money as required, the way explained above would be one way of doing it. I cannot charge $117,000 per year for the above as the investment bank is doing, I simply can’t. Well, you have it above for free.

What we actually did is that we have created a smaller part of the portfolio to follow my portfolio that I manage on my Stock Market Research Platform. This should add a bit more diversification as it is focused on absolute value and not that correlated to markets. Plus, there are some hedges too.

Portfolio risk reward

Now, what we still have to discuss are the risks of the above portfolio in relation to the rewards. We have seen that the yield on Treasuries now should be around 3%, and the return on equities could be at 4%, up to 6% on the international portfolio. Given the 10-year maturity of the bonds, that is what the holder can expect, deduct 2% inflation and you have a real return of about zero on the bond portfolio which would be closer to 2% with Vanguard.

50% of the portfolio is in stocks and given that the number of stocks held is 90, one should expect equal to market returns, US equity markets and international equity markets. The biggest risk here is a contraction in valuations. If global investors start to require a 6% investment yield in place of the current 4%, that could lead to a decline of 50% on global stock markets and a similar decline within the equity portfolio. Also, as bonds are priced in relation to interest rates, I would expect a significant decline in the bond portfolio too.

Thus, the upside is limited but the downside is pretty big. This is because there is no strategy behind the discussed portfolio, it is over diversified, there are no hedges in place, no real diversification as we have seen bonds and stocks move in correlation during the turmoil of the last few months.

What makes me sad is that most pension funds are managed in the above way with outrageous fees. In a video on Canadian pension funds I discussed how fees go up to 2% per year for practically nothing. This is outrageous and the first thing I would tell people to do is to start educating themselves about what can be done when it comes to investing their hard-earned money.

Perhaps, individual stock picking the way I do it will not be for most, but lowering a management fee from 2% per year to 0.1% makes a hack of a big difference within a portfolio. Actually, it makes almost a 100% difference on a long-term portfolio over 30 years based on current market return expectations.

If all that you change in your financial life and investment portfolio is that you get a lower fee or even eliminate fees, the above is how much it affects a $1 million portfolio over a 30-year period and 4% market returns per year. The differences are staggering.

Investment strategy

From a general perspective, an approach like the one discussed above offers no strategy, it is a purely market following and extremely diversified investment. Thus, such a general approach certainly doesn’t deserve to charge a 0.9% fee. The lack of alpha, the lack of an investment strategy, a portfolio that resembles an index is just part of what is not good in story we discussed up till now.

The following chart shows how there are different investment strategies and the one discussed today is probably the most obsolete. However, banks still manage to sell it to clients due to a lack of financial education.

My opinion would be that the investor should first create a clear strategy about what is the goal for his funds and then put that goal into a risk and reward perspective within a well-diversified portfolio based on a well-balanced strategy.

Such a strategy is what we focus on so if you enjoyed this kind of investment educational content shared above please follow, subscribe, like and share.

About the author: Sven Carlin, Ph.D. is passionate about investment research and value investing. He also manages the Sven Carlin Stock Market Research Platform based on long term value and business investing principles.

How to invest in businesses with dr. Per Jenster

I recently had the privilege to interview dr. Per Jenster. He is a Fullbright scolar, author of many books, former dean of the Kopenhagen Business school, entrepreneur with more than 20 ventures of which many went public for hundreds of millions and he is an investor that has his own hedge fund. A person from whom we can learn very much. Enjoy the interview.

In case you want to reach Prof Jenster or know more about how he invests, please go to …

Here is the video and you can find the discussion topics below the video.

0:27 Who is Per Jenster

1:33 What to look when investing in a business

3:59 Fund based on a niche strategy

6:01 Companies we are investing in

8:30 Management


10:44 Index funds

13:10 Trading

14:24 Strategic focus

15:57 Current stock market

18:25 Diversification

20:31 Investing education

21:36 Modern investing

23:32 Learn to be better at investing


Nassim Taleb is warnings us – situation worse than in 2007

  • The US government has $21 trillion of debt, but few know and think about the $49 trillion in hidden debt.
  • The global economy is not stable because the core is cracking already, think Italy.
  • Taleb compares this debt environment with a Ponzi or Maddoff scheme.
  • The main message is to be protected (gold, real assets, puts).

In a recent Bloomberg video, Nassim Taleb, the author of Black Swan and probably one of the best estimators of risk, is warning us that the financial situation is worse than it was in 2007.

As Taleb doesn’t share much data in his interview, I have researched each of his statements and attached a few facts to them.

The topics he discusses and I dig deeper into are:

  • (0:00) Introduction
  • (1:23) The bigger debt pile that has just been transferred from housing to governments.
  • (4:16) The hidden debt few are taking into account.
  • (5:48) How the economy is already cracking in some places.
  • (6:32) The high probability of a global currency collapse.
  • (8:01) What will happen and how will it pan out? Inflation.
  • (9:36) 4 ways to protect yourself.

Enjoy the video.

Ray Dalio – Big Debt Crises – Summary (video/audio)

Ray Dalio, the legendary hedge fund manager is out with a new book. After the success he achieved with his book on Principles, he has now summarized Bridgewater’s research on debt crises in a new book called Big Debt Crises.

Ray Dalio – Big Debt Crises

The book contains 48 case studies on inflationary and deflationary crises and the first 61 pages summarize the findings. I urge you to read at least the first 61 pages but if you want an intro for it and perhaps prefer listening, here is a summary:

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Latest Canada Pension Fund Investing Strategy

This pension fund investing strategy is for a Canadian customer that asked for my help when it comes to her pension fund investing and the unfortunately limited options she has in her pension plan. This is the list of options she has in her pension fund:

figure 1 options

The options are really limited but you have to do what you can with what you have. In order to help with the extremely important pension investing strategy, I did some research, and the more I researched, the more pissed I became as I couldn’t believe what I found.

I became really mad, and this requires immediate government intervention in Canada – the pension fund investment environment has to be changed immediately.

So, call Justin, I hear he is he is a nice guy, so if he cares about his people he will intervene immediately and lower pension fund costs!


LET’s take a look at the funds and start with the money fund.

sla deposit fund

The bulk of a mutual fund is invested in cash and the management fee is 1%. The management expense ratio is at 0.56% but strange that it is below the fee.

figure 3 sla management fee

If I look at the yields, those are now a bit higher than the fee but still, the management fee of 1% and the management expense ratio of 0.56% on a money fund is outrageous! This means that the fund manager takes on average 50% of your gains!

Let’s take a look at a Fidelity fund that should have lower costs – Fidelity True North Fund!

figure 5 fidelity true north

The true north fund is charging 2.25% to its northern customers while its major selling point in the US are the low fees in the range of 0.04%. I think I missed profession, I need to become a fund manager in Canada and just live of the fat fees!

LET’s see a mixed fund like the SLF 2030 target date portfolio.

figure 6 slf milestone

This fund that invests almost 80% of its money in fixed income, charges a fee that is 2.28% of the assets under management. With the low yield environment, the returns will probably be negative by 2030, better give you money to charity.

figure 7 sla milestone 2030


If you don’t want to be a 70 year old waiter serving those rich money managers, it is time for Canadians to step up and do something, if not you will be working as a 70-year old bust boy or girl on Vancouver Island serving the fund managers and their kids that are living the rich life spending your pension!

Just an example!

THE AVERAGE EXPECTED RETURN ON STOCKS AND BONDS – a mix usually in pension funds will be 4%. If I invest $3,000 per year for 30 years the total investment is $90,000 and the final amount should be $174,000 without fees. With a 2% yearly fee deducted from my account, the final value is $123,000. This leads to a pension 30% lower than what it could be thanks to fees.


So, 30% of your pension will go to fees! 30% of your hard earned money! If we would put an average fee of 0.2% that you can get nice funds in the US for, on the same returns, it leads to a capital of $169,000.


That is just 3% of your pension. A difference of 30% on your pension is the difference between being miserable and sick and living the last quarter of your life with decency.

You, the voters in CANADA, solve this – your pension has to be 30% higher just from getting lower fees!


The first thing that comes to my mind is that I don’t want to pay such high fees. As those fees are fixed, whether they make money for you or not, you pay the fee, so the best way is to take just a little bit of advantage from such a situation, if we can call it an advantage.


Here I go back to Benjamin Graham – a defensive investor, or even an aggressive investor should balance between bonds and stocks (I would say safety and growth) in relation to what are the risks of investing in stocks.

A look at the market’s PE ratio shows that stocks are historically expensive and that we can expect are extremely low returns.

pe ratio spx canada

Historically, at such high valuations 10-year returns have been close to zero, put a 2% yearly fee on that and you can expect your capital to be 20% smaller in 10 years.

figure 4 tbill yields

I don’t expect much from such stocks in general – that is why I would not pay such high fees – so I would keep the cash position of my portfolio in the pension fund as I have to invest in that due to employee benefits, tax benefits etc. When stocks become cheaper again, or have a higher returns that doesn’t make the fee so outrageous, I would buy more stocks.

In the meantime, I would still make another portfolio where I would invest for the long term with better potential risk rewards, taking a bit more risk by investing in various stocks. If stocks fall, I have the money in the pension fund to buy more of those on the cheap.

So, the first pension fund strategy idea is to create your own counter balance portfolio!

If you are a bit more aggressive and still want to invest – again balance things out in the pension fund – just remember that Buffett has about 40% of his stock market portfolio in cash and he pays no fees on his stock holdings.

CREATE YOUR OWN DIVERSIFIED PENSION FUND – invest in businesses, stocks, real estate

There is no other option than to invest on the side, see what you own and how that will lead to your financial goals. It is extremely important to do so. Be hedged, because if you invest in the Canadian index you are really exposed to banks, that depend on the real estate market that consequently depends on your economy. However, you job too depends on the economy, so you are really only long the country and thus badly diversified.

As, said, think out of the box to create a better financial future for you! In this environment you have to take responsibility for your financial life and retirement because others it seems care only about fees.

Contact Justin and make him change the rules for your betterment!

Perfect Stock Market Portfolio

  • How to build a perfect portfolio
  • How to manage a stock portfolio
  • It is all about portfolio risk reward


Investing in stocks means you end up with a portfolio as having only one stock is too risky because you never know what might happen. Today, we’ll discuss MY PERFECT PORTFOLIO and 5 things to watch when building a portfolio in 2018!

Do you have a good investment portfolio?

Do you know what is portfolio management?

How to manage your portfolio?

Can you take advantage of market opportunities?

Is your portfolio hedged in a way?

Here is the video version of the article if you prefer:

I’ll try to answer those questions by showing how I go about portfolio strategy and the 5 key factors to watch when building a portfolio!

Best stock portfolio for 2018

We often discuss stocks, news, certain sectors but what is the perfect stock market portfolio in 2018? As I am building a Model Portfolio for my Stock Market Platform, I think an article on how to build a portfolio today would be really good. We don’t talk enough about portfolio management and how would my perfect portfolio look at this point in time!

What is a great stock portfolio?

A stock portfolio is a combination of various stocks that will lead you to satisfying investment returns no matter what happens in the economy and financial markets.

We are now in a goldilocks period, economic growth is strong, unemployment is low and stocks markets continue to go up. But as would ray Dalio say:

ray dalio

According to Dalio, there is a 60% chance for an economic slowdown prior to the next elections and we have seen Trump already preparing for that by putting the blame on the FED and higher interest rates.

So, a stock market or investment portfolio should be prepared for the financial world changing. Further, technology is changing the relationship between inflation and growth which is also something to think about when analyzing your finances and investments.

New interesting technologies include 5G, electric vehicles, data, etc. etc. So, apart from what might go bad, I also want to be open to what might go right in the next decade.

5 key portfolio management things to watch

Whether you only have a google finance portfolio or an actual money portfolio this exercise will help you understand the risk and reward you’re your stock market investments.

  • Focus on value investments

In an environment of low inflation, sky high stock prices, a long term investor has to keep his focus on value. What will be the things people will use also in a recession and what will be the technologies that will grow no matter what. Having value gives you protection from inflation and in case that stock prices drop you know you can easily buy more. A good example of such investments is where the price to tangible book value is around or below one. This means that the stock is trading at below what the company spent on its assets.

  • Portfolio valuations is key

Your long term returns depend on the earnings the stocks you have in your portfolio generate. The higher is the price to earnings (PE) ratio of your portfolio, the lower will be your earnings returns. The PE ratio of the S&P 500 is at 24.3 that implies a 4.11% earnings yield (100/24.3 = 4.11).

pe ratio

Historically, PE ratios have been lower, around 15, and this is why stocks market returns were higher than 6% in the last century.

stock market portfolio

So, if you can build a portfolio with better valuations but great assets, you will reach great financial results! Fortunately, there are great investing opportunities if you are willing to look for them.

  • Long term portfolio risk management is key

The stock market is usually very volatile, especially if you look at specific sectors. That is why you have to give yourself time to buy and prepare a portfolio. A few years, a healthy economic cycle, some market panics should do the trick. So, what I am doing with my model portfolio will take a bit to set up as it is a process and we have to wait for investment opportunities to come to us. Chasing stocks and buying just because it looks nice in a portfolio, simply increases the risk and lowers long term portfolio returns.

  • My Perfect portfolio exposure

The perfect portfolio exposure depends on volatility and risk and also hedges! It also depends on the risk reward of each position at the current moment so it is really a process through time, real portfolio management. But to give you an idea of how I see this at this moment in time, here it is:


20% DEVELOPED markets and global



8% ASIA (incl. Russia)





This will be around 20 stocks and a lot of those would be mixes. Further this does not include the cash balances in each position depending on the current opportunities and risk reward. Some stocks get hit extremely hard during a recession, while some simply continue to grow thanks to their amazing technology.

  • Portfolio risk and reward

In the long term, when it comes to stock market investing and portfolio management, even if only 5 things of 10 things only go right – the point is that you can make so much money on those five, if you do things properly, that you will not care about the losses. It is not rare that good stocks go up 10 or 50 times in a decade or two (multibagger stocks) that are the drivers of your portfolio returns. Careful risk reward portfolio management allows you to take advantage of such stocks.

Portfolio management – it is about risk reward and value

To conclude, with stocks and also with hedges – it is all about where can I get the most value for the smallest investment risk – that is what investing is all about.

For example, the risk reward of a portfolio hedge – a hedge is usually cheap when it is worth the most and the opposite way!

This is how I am going about building a stock market portfolio in 2018. Other things that matter are also your personal circumstances, the safety of your job, your monthly income, business, pension, country, wealth, healthy etc.

If you enjoyed this article please subscribe as I’ll continue with the portfolio management series where we still have to talk about things like:

  • Economic situation
  • Risk reward of investing at the moment
  • Likelihood of what might happen (technology, monetary easing)
  • Commodities (long term fair values)
  • Countries (some are cheap some expensive)
  • Sectors (some will implode some explode)
  • Portfolio weights (in the current environment)
  • Portfolio hedges
  • Currencies
  • Developed/emerging markets

It is all about buying when it is the best time to do so, selling around the positions when overvalued, or just reducing the portfolio exposure etc. at the and it all boils down to buying great businesses at the right time – the rest will take care of itself when investing.

Now, I will be opening positions when I find stocks that give me a 15% business return with limited downside and huge potential upside! For now, in my model portfolio, we have had one in commodities, one gold miner hedge, and two in Latin America with some more riskier plays in China.