Designing a Portfolio
This post is all about designing the ideal portfolio for you. Think of a portfolio as a nice dish. To prepare it, you need:
- The ingredients — those are your asset classes
- The recipe, which is what this post is all about!
It's important to clarify that, unlike truth, there's no Right Portfolio™. You should put one together based on what your unique requirements are.
Here are the most important factors to consider:
How much effort are you willing to put in to learn about and research opportunities, as well as general upkeep?
- No effort, I want to set it and forget it
- 5 hours+/week, or more … whatever it takes!
What time horizon are you investing for? (i.e. when do you expect you'll need the money)
- Under 5 years
- 5+ years
You'll notice that the time horizon for investing is not in days or months: it's years. That's because investing and speculation are two very different things, and we're here to focus only on the former.1
The answers to these 2 simple questions will decide the recipe you'll need to use to make your dish. Let's go through a few different answers to get a sense for how the portfolio changes based on them.
No effort, long term
If you're young, and looking to invest over a long period of time (think 10+ years), without the hassle of spending time tracking your investments — this is for you.
- 60% Equity ETFs2
- 40% Sukuk ETFs
The longer your time horizon, the higher the equity portion of your portfolio can be. (e.g. If you're 20, consider an 80/20 split between equities and sukuk). Equities generally provide higher returns than sukuk, but are also more volatile.
We'll discuss ETFs ('Exchange Traded Funds') in the next post when we talk about specific allocation strategies (again, this is the recipe — we still need to cook the dish!). For now, just think of them as a huge basket of all of the stocks in a segment of the market.
No effort, short term
If you're investing over a shorter timeframe, reverse the equity/sukuk mix so you have more sukuk in there. This helps protect you against the volatility of equities, come withdrawal time.
- 40% Equity ETFs
- 60% Sukuk ETFs
(👋 This is where I happen to be)
The primary difference between no-effort and moderate effort is a greater focus on individual companies. This introduces the opportunity for outsized returns (e.g. think about how Tesla has 5X'd in 2020 alone) but also requires ALOT of research. Essentially, you're studying investing opportunities inside-out, and making big bets on a given company's future.
This can be difficult to do across verticals, so many professionals focus on a select few (e.g. technology, transportation, etc) or even ultra-narrow (e.g. car companies or more specifically even: EV companies, instead of transportation) and operate on a global level.
The deep market-specific undertanding you gain from studying will enable you to uncover hidden opportunities to buy undervalued companies. I'll discuss how we can value businesses, and techniques to uncover such gems in a future post.
The bottom line is this: buy shares of a few businesses that you are knowledgeable about, and buy them on sale (i.e. before the market realizes they are undervalued). These opportunities tend to exist more among relatively small companies (typically under $1 billion in market cap).
Since you're willing to do more work, you can unlock a bunch of new asset classes that just would not be otherwise viable:
- Individual company stocks, including startups and pre-IPO investing3
It's difficult to prescribe specific allocations without a consideration of the risks inherent in each of the different constituents.
In the next post, we'll discuss risk & diversification, and how to ensure that the portfolio you build properly manages risk in a way you're comfortable with.
- Speculation is glorified guessing, and while there are people that try to dress it up as a science (I'm looking at you technical analysts), it's not. But, if you feel the urge to make small short-term bets on a particular event/stock, have at it! Set aside a small amount of money for these kinds of trades. Just make sure to heed the operative word there: small. And always remember: there's no such thing as short-term investing!↩
- While equities do provide indirect protection against inflation, you can also add some gold to your portfolio to offset that risk (or even cryptocurrency, if you're feeling adventurous).↩
- Consideration needs to be given to the 'halalness' of stocks, which we'll describe in detail later. Also, we'll cover how to value companies in a future post.↩