Introduction to Investment Visualization
When discussing investments, we often rely on graphs to visualize historical performance and understand the ups and downs of an investment. These graphs represent a long-term upward trend, with shorter-term fluctuations, peaks, valleys, and deep potholes.
The Misconception of Risk
Many people fear investment curves, especially during turbulent times. The 2018 financial crisis and the onset of the pandemic caused significant market drops. However, those with well-structured and diversified portfolios managed to maintain their course and ultimately reaped rewards.
The Importance of Diversification
While it’s tempting to view investing as a jagged line with ups and downs, this perspective is misleading. A successful portfolio should be thought of as a circle, encompassing various asset classes.
Diversification is an art; it involves finding the optimal combination of assets that maximizes potential returns without exceeding your risk tolerance.
Three Major Asset Classes
- Debt Instruments: Lending money to others who promise periodic interest payments and capital return at the agreed-upon term.
- Equity Investments: Investing in businesses that generate profits, such as public or private company stocks and personal businesses.
- Non-income-generating Assets: Purchasing items like art, gold, commodities, or virtual assets that may appreciate over time.
Real estate can be considered part of equity investments, as it generates income through rental or sale.
Historical Performance and Modern Considerations
Historically, equities in solid global companies have proven to be the safest route for long-term wealth accumulation (20 years or more). Other asset classes help manage the risk of a diversified portfolio.
However, long-term debt instruments currently offer lower expected returns than inflation and can be volatile. This evolution necessitates a reevaluation of their traditional benefits.
Building a Balanced Portfolio
My personal portfolio primarily consists of an efficient, low-cost ETF investing in over 9,000 global stocks, with an expected long-term return of 5-6 percentage points above inflation.
I’ve also incorporated UDIBONOS (with terms ranging from 10 to 20 years) when interest rates exceed 4% annually, making up a minor portion (10-15%) of my portfolio.
This approach ensures that even if the speculative portion of my portfolio were to fail, my long-term goals would remain uncompromised.
Key Questions and Answers
- What is the primary goal of building a wealth portfolio? The main objective is to create a balanced, diversified portfolio that maximizes returns while staying within your risk tolerance.
- What are the three major asset classes?
- Debt Instruments: Lending money with promised interest and capital return.
- Equity Investments: Investing in businesses that generate profits.
- Non-income-generating Assets: Purchasing items that may appreciate over time.
- How should one approach long-term investment strategies? Regularly reassess your portfolio’s performance and adjust according to market conditions, ensuring a balance between risk and return.
