What is your portfolio strategy? – Dalal Street Investment Journal


Iconic investor Warren Buffet once said, “We don’t need to be smarter than other people. We need to be more disciplined than others. Building the right mutual fund portfolio requires a disciplined approach and proper planning. Building a “good portfolio” may seem simple, but choosing a strategy to create a good portfolio or a constructive portfolio that is right for you is quite complex.

Therefore, it is crucial on your part to identify and implement a portfolio strategy that best suits your situation and needs. While it is important to know the objective of your investment before deciding on your portfolio strategy, it is equally important to know your risk appetite.

Permanent portfolio strategy

This portfolio strategy was devised by free market investment analyst Harry Browne in the 1980s. It was designed to work well in all economic conditions. Browne said that an even split between growth stocks, precious metals, government bonds and treasury bills (cash) would be an ideal investment mix for investors seeking security and growth. This means that growth stocks would thrive in expanding markets, precious metals in inflationary markets, government bonds in a recession, and treasury bills or cash in times of depression.

Such a portfolio strategy does not generate better returns than other portfolio strategies, as growth stocks only make up 25 percent of the overall portfolio. However, in the event of a decline in the stock market, this portfolio is the one that would contain your losses because only a quarter of the assets are invested in stocks.

Classic Balanced Strategy

This is one of the oldest portfolio strategies, according to which it is better to invest in equities and debt equally. This strategy follows the principle of growth when the market is booming and less slippage when the market collapses. If we had adopted this strategy during the period 2000 to 2019, the CAGR generated by this strategy would be 11.42% and its standard deviation for the period would be 0.14. If we compare this strategy with the permanent portfolio strategy, it becomes obvious that the permanent portfolio strategy turns out to be a better option in terms of downside risk. However, to achieve a reasonable balance between risk and returns, the classic balanced portfolio strategy is much better.

Dynamic portfolio strategy

This portfolio strategy is dynamic in nature. It depends on stock market valuations. If stock market valuations are high, they move your investments to a more conservative asset class and vice versa. This strategy enables portfolio risk to be dynamically managed and returns to be maximized. Suppose the market (Nifty) is valued based on its price-to-equity (PE) ratio. Thus, when the PE rises from its long-term median, part of the investment in equities is transferred to debt and vice versa. For the period between 2000 and 2019, the implementation of this strategy would have generated an annualized return of 13.65%. In terms of risk, the standard deviation and the bearish deviation were respectively 0.15 and 0.03.

This strategy attracts more risk but better returns. In this case, there is a limit to building and managing your portfolio as it cannot be assigned to any goal. This strategy is therefore well suited to people seeking wealth management. Note that the breakdown between equity and debt is based on the respective year’s PE versus a 20-year median PE.

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Don F. Davis

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