How To Manage A Portfolio

Jul 10, 2021 | Investing, Risk Management

Managing an investment portfolio has many factors to consider. On this podcast, Karl Eggerss discusses some of the key items every investor must consider before constructing a portfolio for any situation.

Hey, welcome to the podcast everybody. Thank you very much for joining me. My name is Karl Eggerss. I am your host. This is Creating Richer Lives. Just a reminder, this show is brought to you by Covenant, Lifestyle, Legacy, Philanthropy. And if you want more information on our process and what we can do for you, just go to our website at You can also use the old fashioned telephone, (210) 526-0057. Well, I hope you had a great week. And on the show we’re going to talk about really how to manage a portfolio. And there’s lots of ways to skin the cat, but I’m going to give you some things to at least think about. I’m not giving you the perfect way to manage your portfolio. I don’t know who you are, and I don’t know your situation, but I do know some things that really apply to everybody.

They apply to almost every situation. And so that’s the key, is to take that information I’m going to give you today and then try to figure out how to apply that to you in your situation. And again, if you don’t know how to do that, where to start, just give us a call. We can certainly help you and guide you through that process because it is a process. There is no silver bullet. There is no perfect answer. But what we do try to do, is take everything we know about you, income, your expenses, your balance sheet, your tax situation, your goals in terms of leaving it to somebody else, or providing for your own lifestyle, or giving it away to charity, we take all that in consideration and then come up with a game plan. And taking in consideration what’s going on in today’s environment, right?

A portfolio today may look different than a portfolio 10 years ago, even if you had the same exact situation in your life. So you do have to adapt to the current environment. That’s why we manage portfolios. We don’t just set it and forget it. This isn’t the rotisserie chicken deal, right? This is a evolving portfolio. It evolves over time based on the environment and what we see, but we do have to start with your situation. And since I can’t speak to every one of you, knowing your situation on this podcast, what we can do is go over some basic things to start thinking about that can certainly apply to you and really make you start thinking about, am I doing this correctly?

And look, we’ve been talking about the last few weeks on the podcast. There’s a few little warning signs. We certainly saw volatility pick up this week. It could be because of these different variants going on with COVID. We saw obviously spectators eliminated from the Olympics in Tokyo. And so, there’s a little bit of fear that could pick up. And again, it could slow things down. We mentioned it in recent podcasts. We also mentioned that there were some warning signs in terms of the market getting a little choosier, investors getting choosier. In other words, very few stocks were really leading the way in the last few weeks. And so, that has culminated into what could be a correction. Now, as we’ve said for years, you can see a 10% to 15% correction in the stock market at any time.

In fact, most of the time the market’s in some sort of correction. And then when it does start to go back up, it tends to go up rather quickly. So, we know corrections are going to happen, and we may be in the middle of one, we will see. But certainly there’s been a few little warning signs. Things get a little stretched. The volatility index was very, very low, and that shouldn’t surprise anybody. And again, if you’re shocked by that, A, you haven’t been listening to podcast and B, maybe you’re over your skis as far as how much you have invested in the stock market and you are a little too risky. Because, again, if you have a balanced portfolio, you expect these bumps in the road and your portfolio can handle it. So, we’ll see where this takes us. We’ll certainly comment on it on the next few shows.

So, how to manage a portfolio. There’s a few things to consider. I mean, the first thing you got to think of, number one, is diversification. Okay. It does work. Now, there are some people in our world that have benefited from a lack of diversification. Those are people primarily that have started their own businesses, right? And we can even go to some of the most well-known examples, the Reed Hastings of Netflix, Jeff Bezos of Amazon, Michael Dell, right? Steve Jobs. These are people that took a lot of risk. Bill Gates. These are people that took a lot of risk. They had a concentrated position in their own stock, and they certainly benefited from that. And they made a tremendous amount of money. High risk, high reward. That correlation is there.

For most people they don’t take that path and can’t take that path. Now, there are some of you listening that are business owners that have made a fortune on your own business and had a heavy concentration in your own company. So it’s not just for the biggest companies in the world that that’s happened. But for the majority, the bell curve, people that may work for another company, diversification does work. And the reason it works is what’s interesting. It’s not just that you have some things going up when some other things in your portfolio are going down. I mean, you can do that by owning just a tremendous amount of things and you’re never going to really get anywhere, right? If you had perfect diversification, then you just wouldn’t go anywhere, because you’d always have something going down all the time while something’s going up.

The idea to diversification, is even within stocks or even within bonds, you diversify because we don’t know when our thesis will play out. We may buy a good deal in a stock, but we don’t know if it’s going to reward us next month or three years from now. Now we may have a timeframe we put on it that we want it to do that. If it takes three years, we need to have something else producing right now. So, diversification is not just owning different asset classes, stocks, bonds, commodities, real estate, alternative investments, right? Those are some asset classes and you certainly want to do that. But also within each of those, if you want to own commodities, you don’t just go buy corn, right? You typically will buy a basket of commodities.

And so it does reduce the risk. That’s where the phrase, don’t put all your eggs in one basket, comes into play. It does do that. But here’s the other thing that diversification does for you. It enables you to cherry pick where you’re going to get money from when you need it. So, for example, let’s think about the pandemic, February, March of 2020. You have a portfolio that’s $1 million. And let’s just say for [inaudible 00:07:44] 500,000 in stocks and 500,000 in bonds, just to keep it real simple, a 50-50 portfolio. And you all of the sudden need $100,000 for something. And when you need that money, and the stock market’s down 38% from its high, where should you get it from? Should you take it from stocks? Should you take it from bond? Should you take a pro-rata approach?

The idea is that you would take it from your bonds or cash, something other than stocks. You do not want to be a forced seller in the middle of a stock sell off, a stock market sell off. That’s why you see the market sometimes fall and then it speeds up because there are forced sellers that are buying stocks on margin, and they have margin calls and they’re being forced to sell. You are not a forced seller. Now, a lot of you might sell because you get scared but you shouldn’t be a forced seller. So when you see the market dropping and you need some money, you can take it from cash, from bonds, from something other than the stock market. That gives you the ability to let that come back without having to sell at a low.

And so, if you did not diversify and all you had was stocks, that may be the best investment over the next 30, 40, 50 years. It’s proven that. But sometimes you need to take money from various sources and you don’t want to be selling stocks at a bad time. So that’s a big reason why we diversify. It gives you a bunch of different options. Okay? Now, in regards to diversification, if you’re going to sleep at night comfortably without worrying about what the Dow Futures are doing overnight, then you need to think about correlations.

Now, when I say correlations, don’t turn off the podcast. This is a big math word, right? But it’s, how do each of these investments you own move relative to each other? Now they don’t have to move differently, but if they do, it’s smooths out the ride, it makes it more comfortable. For example, if your stocks have gone down recently and your bonds have gone up, which is probably the case in the last several, let’s call it few days and weeks, if that’s the case, because they’re doing that, the overall portfolio doesn’t fall as much and it makes you more comfortable. It makes you more confident to be able to keep those stocks. And so, correlations matter.

And what’s interesting about it, is that sometimes we have seen that stocks and bonds move together. So when we think about diversification, it’s not just stocks and bonds. That’s what we are preached to. That’s what all these target date funds and if you have a 401(k), they call them life cycle funds or lifestyle funds or target date funds, or retirement date funds, whatever they are, they’re usually some form of stocks and bonds. That’s it. Pretty much across the board. Some ratio. There is more to the investing market than stocks and bonds. As I mentioned, there’s commodities, which have had a great year because inflation has picked up. There is real estate, which many of you probably have in some form or fashion even outside of your primary home, you have some real estate as an investment. It moves differently than the stock market.

How about alternative investments? Again, this is a very big category that can mean a lot of things to a lot of people, but can move very differently than stocks and bonds. And that’s really important because when correlations go to one, meaning everything in your portfolio moves the same direction, it can feel really bad. It’s very comforting, psychologically helpful, to look at your portfolio after a really bad month and see that you had some investments that actually were up. And the reason they were up is because they’re not correlated with the stock market. And the only way to check that is to go back and look at how they did during some of those times. Go look at March of 2020, go look at the taper tantrums of 2014/15, and the oil falling, and the 2008/9 market, the dot-com bubble, go back and look at some of those, and see how did these different asset classes react to each other?

So correlation, again, helps. Because it helps you sleep at night with that portfolio and not be a forced seller, not do anything that is going to really alter your retirement. You’re not overdoing it. You’re not overthinking it. Now, I just mentioned bonds. Bonds still play an important role in a portfolio. So, look, if we go back and look at the last 100, 150 years, there’s no reason why you should own bonds versus stocks, because stocks have been the best performing asset class. However, we don’t invest for 100 or 150 years. We invest for 30, 40 years at times. And if you get caught in a period where stocks are doing nothing for 20 years, like they did from essentially the dot-com bubble, 2000 all the way to maybe 2015, where they did move sideways, bonds are helpful.

Now, even with interest rates as low as they are, many would say, “Well, why would I invest in bonds at this point? Well, guess what? They have gone even lower even though the economy has recovered the last several months. And we did that podcast a few weeks ago called, This is why we diversify, because we don’t know. And guess what? Many people are caught thinking interest rates have to go up and they’ve actually gone down recently. So, again, bonds give you a rebalancing tool. They’re a source of funds. They can provide some income and safety. They’re certainly a more low volatility. How much you should have may be lower than it was in years past because of where we are in the interest rate cycle. Don’t disagree there.

But bonds still play an important role. And there’s different types of bonds. Look, there’s not only treasury bonds, which are safe, but still have the risk of interest rates going up, but they don’t have the credit risk, right? Backed by the US government, but junk bonds, international bonds, private loans to individuals who, for example, are borrowing homes. Do you know you can be the bank for that? How about lending to businesses that give you as collateral an asset? So if they don’t pay you have the right to that asset. So there’s all types of “bonds,” right? You could even lend to a city, municipal bonds. That is clearly something that is tax-free, and typically has been pretty safe over the years, so there’s different types of bonds. That’s a diversifications within the bond market.

So that’s bonds. What about alternative investments? Have you thought about, look, when volatility picks up, that’s when everybody’s at their biggest fear, right? Their stocks are going down, volatility is picking up. And how about owning something that benefits from volatility. Now there’s different types of institutional funds and strategies out there that will do this. Some very bad ones and some very good ones. But the idea is that, when the proverbial crap hits the fan, you have something in your portfolio that is benefiting. And how much you should have, and the strategy and all of that, again, totally up to you and your advisor as far as how much of that makes sense.

But again, as a shock absorber to the portfolio. It makes you stay in the game without dramatically changing your overall strategy too much. And alternative investments can mean lots of things. There’s specialists out there who know how to short companies. In other words, they benefit from stocks falling. There’s people who feast on volatility as I just mentioned. There are people who benefit from and invest in mergers and arbitrage. There’s lots of strategies out there. And how about private companies? Right? Some of you may have a friend, and may have been burned by a friend trying to start a company and wanted you to invest in it and you lost all your money. But there are good private deals out there and they’re usually priced much more moderately than a public company. In other words, you’re giving up liquidity, but you’re investing in something that can make a lot more and is cheaper.

And you’re giving up some liquidity, as I mentioned, but it’s a great diversifier. So, alternative investments, which we’re going to talk a lot more about. We’ll probably do a webinar in the next few weeks on alternative investments, because they can mean a lot of things. It’s like saying I want to buy a car. Well, what kind of car? You want a truck, an SUV, a white car, a blue car? You want a four by four? You want one with front wheel drive, all wheel drive? You can’t just say you want a car. So, same thing with alternatives. But alternatives to me is an extremely important bucket to think about and to potentially have in this environment. It may be a substitute for some of your bond money that you used to have because interest rates are so low. So I’m not saying to eliminate bonds, I’m saying it may be a smaller portion of the portfolio.

So when you think about diversification, and you think about your portfolio, you have to think about all these things. But there’s one other one. Asset location. Where do you own these particular investments? In other words, if you’re in a very high tax bracket, you would probably prefer to have your capital gains oriented investments in your taxable accounts, things you’re going to buy and just hang on to and let appreciate versus things that pay you a bunch of income. Your interest bearing things you may not want in a taxable account if you’re in a high tax bracket. Or, if you say, you know what? If I’m going to sell stocks and reduce my exposure, I really would prefer to do that in my IRA. So maybe that’s where my stocks go. Your Roth IRA could be a place that is for very long-term gains and it won’t be taxed. So that may be your most aggressive money.

So asset location is really important. And again, one size doesn’t fit all. Has to be what makes sense for you going on and what’s going on in your life. But here’s the other thing about this. All of those things I just mentioned, you have to start with, what am I trying to do? Am I trying to earn 3%, 4%, 8% a year? What are my market expectations? What are my inflation expectations? Build a portfolio. And if you are at a point in the cycle where you feel like, Hey, I think the market’s extremely expensive. We’re probably going to have a correction at some point, and you can afford to be a little more conservative in your overall asset allocation, keep your mind open to upping that aggressiveness when the time comes. Now, that’s the hard part.

I’ve talked to many people who want to be more aggressive. And then when there’s a fat pitch, where the market has dropped, they back off and say, “Never mind. I really don’t.” Goes a little scary. So, the important thing is to have an asset allocation that you’re not having to change too much, but certainly if you can afford to err on the more conservative side and up the aggressiveness at times, that’s great. So, the diversification and the asset allocation is the number one thing. That’s the number one thing to really start with. But I can tell you this, as I’ve always said, it really does start with some planning, some financial planning, because you have to know what kind of return are you’re trying to get? You may want 10% per year, you may only need 5% per year, and your risk appetite is really, really closer to somebody that could stand 5% per year in this environment.

So, guess what? We’re going to build a portfolio that’s trying to make 5% per year. Because you won’t stick with the one for 10% a year. Now, the people that can stick with that are people that have gone through multiple corrections, multiple bear markets, they haven’t really needed the cash. And so, they have that experience. They’ve proven in the battlegrounds that they can withstand some of that. That’s okay for them. So, again, that’s one of those people that may be, they don’t need to diversify as much as most people. That’s okay. This is all customized based on your experiences and what you’re trying to do. So I’m talking, generally speaking here about how to manage a portfolio.

Now, there’s all the little nuances too of, do you buy individual bonds versus bond funds? Do you buy ETFs? Do you buy stocks, individual stocks, ETFs, mutual funds? How do you get access to private markets? How do you get access to institutional types investments? What are some of the big boys doing? Those are all discussions that are more one-on-one. Because, again, not everybody needs all of these different things depending on what your situation is. But they are out there, and that is how you have to start thinking about building a portfolio and certainly how to manage it. There’s a lot to this, right? And a tailwind, a bull market will cover up a lot of sins. You could be making a lot of mistakes, and when you’re in a bull market you don’t see them, you get bailed out by just more dollars flowing into the market.

So be careful because when more difficult markets come like 2020, that’s when you get exposed and say, “Oops, I had too much of this type of stock, of this sector. I had too much in, whatever it is.” Right? So, think about how that would feel going through that. Do some stress tests on your portfolio. And then again, then put a portfolio together. You’re probably never going to have a portfolio that is going up as fast as you would like, and your neighbors are going to be bragging. And more than likely they’re not making the money they even say they’re making. I’ve seen that a lot. People will tell me, “I’m making this, that and the other.” And I look at their portfolio, and it’s simply not true.

How they calculate returns is inaccurate. They’re tallying how many wins versus losses they have. It’s not accurate. I see that a lot with real estate investing as well, by the way. “I have this great investment down on the coast and I rent it out. It’s an Airbnb.” And I calculate the taxes, and the insurance they’re paying, and the maintenance, and the cost of going down there. And I put everything in there, and they’re making 2% a year. So, be careful about that. So, you always feel like, I need to keep up with the Joneses, but again, what are you trying to accomplish? If you put a portfolio together that’s proper for you, again, you can sleep at night, you can stick with it, which is really important, and more importantly, you can accomplish all those things you’ll want to do. The lifestyle aspect, the legacy aspect, the philanthropic aspect. All right? Well, hope that was helpful. And you guys have a great weekend. Don’t forget is our website.

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