Drunk on Covid Stimulus: Positioning Your Portfolio for What Comes Next

 

I went to talk once by a thrice-divorced angel investor. He declared that he reserved 10% of his wealth as ‘play money’. For speculative investments in start-up businesses. Most would fail, he said. But he only needed one or two to get a home run.

Anyway, the organization hosting him was about to introduce a fund of angel investments. You could invest in the fund, and they would pick various start-up businesses to invest in. They would build a portfolio for the speculative ‘play money’ of wealthy and sophisticated investors.

We didn’t invest. While funding a start-up can be a great opportunity, the success and de-risking of such an investment often involves the investor contributing more than just money. Expertise. Introductions. Industry background.

The angel investor also told us that his average return over many years was around 15 to 20% after the winners flew and the bulk of losers sank. Which was about what the new angel fund might expect after some years too.

Now, this is a great return. But for the risk taken of often total loss, it is not so great.

Over the past few years, it appears we’ve also achieved around this return, but with downside-protected investments. In larger companies where we can identify substantial assets (usually property) supporting their valuation or significant and growing revenue.

Still, even in a long-run portfolio — as we’re building here — you still need some ‘kickers’ from time to time. Speculative picks. New innovations or concepts that could jumpstart an entire new industry.

In our portfolio under monitoring, of the 44 companies that are active, closed, or under watch, only 8 of those are speculative — or around 18%.

Of course, within this mix, 10 or so with the most potential will be more actively watched and added.

You end up like a dairy farm — focusing on a herd of prime productive cows, with a flock of sheep on the sidelines.

 

How much of a portfolio should be speculative?

 

This depends on your wealth and outlook. Your risk profile.

I’ve said before, since Covid, I see a heightened VIX. Sitting more around 15 than 12. Last week, it was spiking toward 20 as the market fears China’s IPO tech crackdown, Covid’s Delta variant, and still a very uncertain growth outlook.

So we are taking a very cautious approach to speculative stocks.

We are watching our investment environment like a hawk. Making adjustments. Calibrations. Optimisations.

Here’s how our balanced, risk-managed strategy is looking right now…

 

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Simon is the Chief Executive Officer and Publisher at Wealth Morning. He has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge-fund industry in Europe. Before this, he owned an award-winning professional-services business and online-learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book, and manages global share portfolios. Simon is a shareholder of Wealth Morning.


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