How Bond ETF Portfolio Protection fits into your Stocks Investment Process — Best Fixed Income ETFs
Below we investigate the best Bond ETF and Gold ETF Portfolio Protection Strategy based on your needs:
- Understand your time horizon. Is it 1 year, 5 years or 10+ years?
- Invest in Stock Index Funds. Equities will bring returns in terms of dividends and price appreciation.
- Consider Stock Portfolio Protection. General rule is to consider protection if you need to withdraw money before the next 5 years or your investment horizon is shorter. Because in that case Stock returns are not guaranteed to be positive
#1 YOU WANT TO INVEST IN EQUITY INDEX FUNDS
“It takes a huge investment in introspection to learn that the thirty or more hours spent “studying” the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world.”
- Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the MarketsTweet
Why you are already ahead of most investors:
- First and foremost, you know that Index Funds are the best way to get exposure to Stocks which generate passive income (excellent piece on this here). You read websites where intellectually honest analysis is presented and you skip most Stock picking recommendations that lose money vs. S&P 500 over the long term (ask yourself: even if some get lucky, how repeatable is it?). However, Index Investing works consistently over and over again. In fact, Warren Buffett instructed the trustee in charge of his estate to invest 90 percent of his money into the S&P 500 for his wife after he dies
- Perhaps, you follow Stoic philosophy or did meaningful research and understand there are lots of aspects in investing (and life!) you have no control over (despite what most investors think). You don’t ignore the role of randomness in markets (see graph below)
Influence things you actually control — don’t waste time on things where you only have an illusion of control
- You know that the Pareto 80% 20% rule applies to investing. What does it mean? You probably know deep down that most investors (including Professional Investors) waste their time picking stocks. Stock picking has almost no influence over long term returns. It’s been researched heavily and proven correct. Crucially, the decision whether you allocate 80% to Equities as a whole (e.g. S&P 500) and 20% to Bond will matter much more than picking individual stocks (in fact, allocation to the right asset class determines over 90% of investing performance)
- Finally, you may have heard that Einstein famously said compound interest is the 8th wonder of the world. You understand that people who bet on single name stocks won’t be able to outperform in the long term. They may also quickly lose money. Because of the power of compound returns Warren Buffett follows two rules: “№1: Never lose money. Rule №2: Never forget rule №1″
The main reason why Warren Buffett keeps winning
Einstein famously said compound interest is the 8th wonder of the world. You understand that people who bet on single name stocks won’t be able to outperform in the long term. They may also quickly lose money. As a result they are incurring a massive opportunity cost. Einstein concluded: “He who understands it, earns it … he who doesn’t … pays it”
Buffett’s first rule is based on that concept. “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
- Warren BuffettTweet
#2 … BUT YOU WANT TO PROTECT YOUR STOCKS PORTFOLIO …
Why most people fail — you can’t afford to lose money
You know that Stocks outperform (and always go up) over the long term e.g. 10+ years. However, you are also aware that it’s not bullet proof when your time horizon is shorter (e.g. 5 years). Because of shorter time horizon you are looking for Stocks Portfolio Protection. As illustrated here adding a Safe Haven asset (like Gold or Bonds) can not only protect your portfolio but also increase returns
Investing in Stocks can be risky over a short and medium time horizon
#3 … AND THAT MEANS YOU WANT TO UNDERSTAND BOND ETF AND GOLD ETF PROTECTION STRATEGIES
Current Relative Attractiveness of Safe Haven Assets for Portfolio Protection
BOND ETF GUIDE
Click here to understand the types of Bonds that can provide diversification benefits to your Stocks Portfolio
