2024 marks the fifth anniversary of this portfolio. While five years may not constitute a long-term investment horizon, it provides a valuable opportunity for reflection.
When I rebooted my portfolio in 2020, I leaned towards a more income-focused strategy with an allocation of 60% to income counters and the remaining 40% allocated to growth stocks. My initial thought was that this approach should be able to yield me an annualised return of 8%, with a stretched target of 12%.
Following a change in my life path last year, I reframed the target to 10% for easier reference. This revised target also provides a comfortable buffer above the minimum annualised return of 6% required to sustain my projected spending needs and ensure I don’t outlive my assets.
Three Key Investment Lessons
Before reviewing my portfolio’s performance, I’d like to share what I learnt during this period.
Explore, But Be Selective
There are countless paths to financial success. While it’s beneficial to explore various investment opportunities, it’s equally important to identify strategies that align with your temperament, interest and financial goals.
I only ventured beyond Singapore in 2017, dabbling in Hong Kong and US markets. Recognising my preference for US-listed companies during this exploratory phase, I eventually divested my Hong Kong holdings when I established this portfolio.
Even within the US market, countless investment strategies exist. While I acknowledge the significant potential of micro-cap and small-cap stocks, their inherent volatility doesn’t align with my risk tolerance. Therefore, I’ve limited my exposure in recent years.
Similarly, given my preference lies in fundamental analysis of business, I do not dabble in alluring options trading and cryptocurrencies.
Investing is tough work, so be selective in how you want to spend your effort and time.
Stay Invested: Ride the Volatility by Strategic Allocation
This period presented unprecedented challenges, such as COVID-19 pandemic, soaring inflation, rising interest rates, and geopolitical tension. While these provided ample trading opportunities, as an investor, it’s crucial to focus on the long-term growth potential of businesses.
Time and again, well-managed companies have proven their resilience, and often emerge stronger from crises, seizing opportunities for future growth.
“But how do I maintain composure during market volatility?” You might wonder.
The truth is, despite years of experience, I still feel the pull of euphoria and anxiety. However, I’ve learned that the key is to acknowledge these emotions without letting them dictate my actions. By allowing my initial feelings to subside, I enable my rational mind to take control.
A significant factor in my approach is strategic asset allocation and position sizing. Currently, less than half of my assets are invested in equities. Furthermore, with the exception of Arista Networks (NYSE: ANET) and Oversea-Chinese Banking Corporation (SGX: O39), none of my positions exceed 10% of my portfolio.
While this conservative strategy may theoretically limit long-term returns, I believe it enhances my decision-making process. By mitigating downside risk, I’m able to make more rational choices, paradoxically leading to potentially higher returns over time.
Take Profits to Mitigate Downside Risk
The 2022 bear market was a painful reminder of the risks inherent in investing. My US portfolio, which had nearly doubled in just two years, eroded completely, a hard-learnt lesson about the volatility of the US market, especially micro-caps.
To mitigate future losses, I’ve restructured my US portfolio to focus on larger companies with positive free cash flow. Additionally, I’ve implemented a strategy of taking profits whenever my portfolio returns exceed 10% for the year. The specific amount I will realise depends on my future expenses.
Again, this approach may theoretically result in lower long-term returns, but it aligns with my personal financial goals. With a finite investment horizon, I prioritise preserving capital and generating sustainable returns over chasing maximum potential.
Now for the numbers.
Exceeded 10% annualised return
I’m pleased to share that my portfolio’s return of 10.6% exceeded my annualised target. With an XIRR of 11.1%, the positive impact of cash flow on returns is evident.
Additionally, both my SG and US portfolios outperformed their respective benchmarks, a satisfying achievement considering the significant REITs exposure in SG and the 2022 misstep with US micro-caps.
Currently, my portfolio comprises 32 stocks, evenly split between SG and US. Including dividends received and realised gain/loss, 23 are in the green, while 9 are in the red. This shows that you do not need to be correct all the time; you just need to have more winners than losers to achieve a good return.
As highlighted in the image, a few top performers can significantly drive overall returns. This reinforces the power of long-term investing in quality companies. Without leverage, the Maths is in your favour: the potential for gain is limitless, while the maximum loss is capped at 100%.
By combining the above Maths with position sizing, I further reduced downside risk. This is evident in my portfolio’s performance, where none of the bottom five losses exceeded four figures, while all of the top five gains surpassed five figures.
Though my top five gainers are all growth stocks, predicting their exceptional performance was like trying to pick the next popcorn kernel to pop. Some kernels surprise you with their explosive growth, while others take their time.
Interestingly, these top performers hail from diverse industries, demonstrating that significant returns aren’t exclusive to the “Magnificent Seven.”
You might be wondering why I don’t exclusively invest in growth stocks.
While I’d allocate more to growth if I were younger and had consistent fresh funds, a balanced approach is more appropriate for my current situation. The consistent dividends from my income stocks helps to mitigate portfolio’s volatility and provide a sense of comfort during market downturns.
For a deeper dive into specific stocks, do a search on my website.
If there’s one key takeaway, it’s this: Know thyself, strategise wisely, and put in the necessary effort.
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