Yesterday I decided to make some changes to the portfolio. I will give more context on Wednesday’s webinar and later on in the article, but the main objective behind these changes was to maximize the risk-adjusted return of the portfolio by following the risk-reward matrix.
I unveiled my portfolio management tool (aka: PMT) through a Webinar and in NOTW#93 (published in May this year). The PMT is a comprehensive spreadsheet (in HTML form) that contains features such as…
My portfolio with weights and returns
A transaction log
Portfolio industry and factor exposure
A watchlist
…
By far the most relevant feature within the PMT is the risk/IRR matrix. This matrix plots my positions across two axes (one is risk and the other one is expected IRR) which eventually result in four different quadrants. The basic idea of this matrix is to help me maximize the risk-adjusted return of the portfolio by understanding that I need to allocate a greater amount to the bottom-right quadrant while “avoiding” the top-left quadrant. Here’s how it looks like after all the portfolio changes:
Worth noting that nothing in investing should be black or white, so I don’t think that simply allocating 100% of the portfolio in the bottom-right quadrant while completely ignoring the top-left also makes sense. The objective is to find a balance that maximizes the risk-reward return while not putting all eggs in one basket. I shared this not long ago, but a good chunk of my YTD winners have come from quadrants that I wouldn’t have expected. This is not unusual because valuation is a poor leading indicator of 12-24 month returns. Valuation always matters, we just don’t know when it’ll start to matter.
So, what I’ve done this week is reposition the portfolio to maximize the matrix you see above. You shouldn’t expect these kinds of portfolio adjustments to happen recurrently but rather very very rarely.
So without further ado, let’s jump right into the changes.
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