Master the investment portfolio, navigating through turbulent clouds with calmness!

Entering July, market volatility suddenly increased, and the U.S. stock market experienced a significant sell-off. Investors concentrated in AI-related star stocks likely had a rollercoaster experience.

Facing market fluctuations, the old saying "Don't put all your eggs in one basket" remains effective; a healthy investment portfolio can help weather market ups and downs. This article will help mooers understand how to construct and run a portfolio.

What is a portfolio?

A portfolio refers to a collection of financial assets, such as Stocks, Bonds, and Commodities, diversifying investments based on the characteristics of different financial assets, aiming to maximize returns while reducing risks.

The most well-known portfolio is the "60/40 Portfolio." The 60/40 Portfolio means investing 60% of assets in Stocks and 40% in Bonds, a classic investment strategy with more than sixty years of history. When the economy performs well, corporate profits increase, and the main returns from the portfolio come from Stocks; when the economic cycle weakens, the Federal Reserve often lowers policy interest rates, leading to a rise in the bond market, which partially offsets stock losses.

In the long term, although the composition of the 60/40 portfolio is simple, it can still deliver good returns while smoothing out market volatility. According to Nasdaq statistics, since its inception in 1961, the 60/40 Portfolio has achieved an annualized return of over 9%, and has risen in most years.

Ray Dalio's Bridgewater Fund has also constructed a successful portfolio. The well-known All Weather strategy pioneered a robust, low-risk style, smoothly navigating through multiple market fluctuations, earning Bridgewater a great reputation in the capital markets.

Building a portfolio: Taking Vance as an example

At the recent Republican conference, J.D. Vance was nominated as Trump's vice presidential running mate, and his Hold Positions have attracted market attention. This provides an opportunity to see how a portfolio is constructed:

• Large-cap index funds as the "ballast":

According to Morningstar research, large-cap index funds are a crucial foundation for almost every portfolio, historically providing excellent returns, and they remain one of the best ways to achieve long-term financial goals. Morningstar states that U.S. large-cap stock funds can form the core of a portfolio's stock exposure.

Vance's portfolio also follows this principle: holding the highest proportion of$SPDR Dow Jones Industrial Average Trust(DIA.US)$、$Invesco QQQ Trust(QQQ.US)$and$SPDR S&P 500 ETF(SPY.US)$which respectively track the Dow Jones Industrial Average, NASDAQ 100 Index, and S&P 500 Index. The distribution is also relatively balanced, with each accounting for 24%, forming the underlying assets of the portfolio.

The Dow Jones Industrial Average consists of 30 large blue-chip companies, focusing on traditional industries such as industrials, finance, and consumer goods; the NASDAQ 100 Index is composed of the 100 largest non-financial companies listed on Nasdaq, concentrating mainly in the technology and pharmaceutical fields; the S&P 500 Index is made up of 500 large companies listed on major exchanges in the United States, essentially covering all economic sectors.

ETFs tracking major indices are usually larger in scale, more liquid, and have relatively lower fees. Taking the largest SPY as an example, as of July 25, its asset scale reached 531.3 billion USD, with a daily trading volume of over 33 billion USD, an annual operating fee rate of 0.09%, and it will provide dividends quarterly.

• There is a layout of multiple assets:

Major asset categories are divided into four types: Stocks, Bonds, Commodities, and Exchange Rates. In the commodities category, the allocation includes 6% of Efund Gold ETF ($SPDR Gold ETF(GLD.US)$) and 2% of Crude Oil Product strategy ETF ($Proshares K-1 Free Crude Oil ETF(OILK.US)$); in the bonds category, there is a holding of 6% of long-term Treasury Bond ETF ($iShares 20+ Year Treasury Bond ETF(TLT.US)$）。

The risks and returns of different assets generally show a positive correlation. For example, cash has the lowest risk and also the lowest return; stocks and commodities have higher risk coefficients but also higher returns; bonds are positioned in between. Diversifying into multiple asset classes in a portfolio can help smooth out market fluctuations.

Although the risk-return characteristics of commodities and stocks are similar, the different properties of the assets themselves can also provide hedging protection. Gold and Crude Oil Product often rise in high inflation environments and escalating geopolitical risks, while the stock market is likely to experience turbulence.

Commodity ETFs provide investors with a convenient way to access the commodity market without the need to directly purchase and hold them. For example, GLD tracks Gold prices, with each share representing a certain quantity of physical Gold. It is listed on the NYSE, has a high trading volume and liquidity, and can be bought and sold at any time during trading hours.

Bonds can also be invested in a similar manner. The TLT held by Vance tracks U.S. Treasury Bonds with maturities of 20 years or more. If the Federal Reserve enters a rate-cutting cycle as expected, the bond market, sensitive to interest rates, should perform accordingly. The U.S. stock market also offers Treasury Bond ETF products with varying durations, from short-term Treasury Bonds with maturities of less than one year to long-term Treasury Bonds with maturities of over 20 years, each with corresponding products.

Vance also holds 6% of a Bitcoin ETF ($Fidelity Wise Origin Bitcoin Fund(FBTC.US)$). Due to the volatility of Cryptos being much higher than traditional assets, Morningstar indicates that for most investors, the allocation of Cryptos in a portfolio should not exceed 5%, and some investors choose not to include Cryptos in their portfolios.

• Individual stocks account for a relatively low proportion.

Vance's investment portfolio only holds one stock, with 6% of the position allocated to the right-wing social platform Rumble, closely related to Trump.

Vance's portfolio is mainly composed of passive index funds, predominantly large-cap index funds, and includes other major asset classes. For mooers new to the market, this configuration is relatively easier to grasp.

Of course, investment portfolios are unique to each individual, and this is just an illustrative example. In practice, one should consider their own risk tolerance, return objectives, and other factors when making judgments. For example, Pelosi, known as the 'Stock Wizard of Capitol Hill', has a more aggressive investment portfolio. While favoring large technology stocks like Broadcom and NVIDIA, she also uses options and other tools to enhance potential returns. This naturally means greater volatility.

Running of the investment portfolio.

To prevent excessive drift of the portfolio assets, the investment portfolio should be reviewed regularly and a rebalancing strategy should be implemented.

Taking the 60/40 portfolio as an example, if the stock market performs well over a period while the bond market fluctuates little, the proportion of stocks in the portfolio will continuously increase. Assuming the ratio has changed to 75/25, the exposure in stocks of the entire portfolio is too high. At this time, investors can use new funds to purchase bonds, increasing the proportion of bonds to 40% of total assets. If they do not want to inject new funds, they can also choose to Sell stocks and Buy bonds to rebalance the asset proportions. The rebalancing operation also somewhat mitigates the risk of 'buying high and selling low'.

Research by Vanguard indicates that for investors who do not strictly track benchmark portfolios (such as those primarily investing in passive funds), implementing annual rebalancing may be the best strategy. Most of the gains from the rebalancing strategy come from the stock market while allowing reasonable portfolio drift. High-frequency adjustments lead to trading losses, and excessive style drift caused by not rebalancing can detract from portfolio performance.

Potential Risks

While a portfolio can resist market risks, it will not allow you to achieve "easy profits". Even the historically long-standing and well-performing 60/40 portfolio experienced significant drawdowns in 2022. The Federal Reserve's rapid interest rate hikes led to a double blow for the market, where the bond assets within the portfolio failed to provide protection during the market decline and instead followed the stock market downward.

mooers can also monitor their investment portfolios in real-time, paying attention to changes in the market environment, and continuously adjusting their strategy in conjunction with their goals and circumstances.

Risk Disclosure: This content does not constitute a research report, is for reference only, and should not be used as the basis for any investment decision. The information contained herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of information are considered reliable, the accuracy or completeness of the above content is not guaranteed. Furthermore, there is no guarantee regarding the accuracy of any statements, viewpoints, or forecasts provided in this article.