How I structure my stock portfolio?
Active vs. Passive - why not both?
'Don’t look for the needle in the haystack. Just buy the haystack!' — John C. Bogle
«Stock market experience level: Beginner»
I have worked in different investing environments where multiple billions of dollars are put to work on behalf of individuals, including at an insurance mutual, a private bank and for a wealth management company which manages personal investment portfolios for the mass affluent market. The latter of which is why I am best able to distil for you, the retail investor, the appropriate information vs the mass of financial news and insights out there. These organisations all invested with different strategies due to their respective objectives and so should you. Everyone has different return objectives, risk tolerances, liquidity, time and other constraints and these change in different times in our lives. This is why I personally believe in a setting up a flexible approach for the non-professional investor (and is how I invest myself).
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Passive - a great place to start.
My approach is built on investing a proportion of my stock portfolio in a passive 'tracker' (either an index fund or ETF) which aims to deliver a return close to a specific stock market. The late father of passive investing John Bogle founded Vanguard which launched the popular Vanguard S&P 500 index fund that tracks the largest 500 American-listed companies. It is referred to as passive exposure because you are essentially copying the index and thus getting diversified exposure to a specific geographic (or even world) stock market.
However, you will still need to decide on what markets to get exposure to, (there are many out there!), what indices to use for a specific market (as they can vary in their construction, as well as have different fees associated with them) and when to deploy cash, take profits and rebalance.
The UK's FTSE 100 index and the MSCI World Index has lagged the S&P 500 by 66% and 25% respectively, over the last 40 years, not currency adjusted).
Active - over time opportunities will present themselves.
This passive exposure is accompanied by a proportion of my portfolio that I choose to invest in individual stocks (sometimes funds) which deviates my portfolio from a market index and is considered active exposure. What that proportion is between passive and active depends on your thoughts on general stock market performance, if you want to aim to beat the market, how long your investment time horizon is and how much research and management of your portfolio you or are prepared/want to do or give to someone to do.
The S&P 500 as a proxy for the US market has averaged 9% per year in the past 40 years, 11% with dividends reinvested. Not bad if you ask me.
Despite the decent results of passive investing, a benefit of investing actively is the ability to take ESG (environmental, social and governance) considerations into your portfolio more easily. Unfortunately, ESG indices which aim to incorporate a companies' performance of these sustainability and social responsibility 'ESG' factors are not well-defined and so can still include emissions-producing oil & gas companies for example. Recently, companies which have faced boycotts from the public due to their actions or perceived actions, may not be removed from indices and thus leaves you exposed.
For Muslim investors, more index products are coming to market to reflect the exclusion of companies with impermissible business operations (such as gambling) and/or use traditional interest-paying debt (above a certain agreed upon amount) in accordance with the Islamic faith. However, most are more concentrated than you would think. For example, BlackRock's iShares MSCI Islamic US ETF has 26% of its exposure in Microsoft, which is huge for a market index! So, again you need to be aware of this.
I can do a review of the popular Islamic products in future, just ask.
It is worth mentioning also that going more active doesn't necessarily mean you are taking on more risk. It just means you are differentiating yourself from the market index. So, if you think a specific market, sector (like tech) or style of investing, (as indices can reflect not only geographies but groups of companies with similar chosen characteristics), will under/overperform in the next 12 months you might want to change allocation to a different index (a strategy known as smart beta) or increase the active exposure of your portfolio by picking individual stocks in those specific groups.
You can even decide to put money in other asset classes (a completely different consideration altogether and I’m happy to go through in future posts how I think about balancing my savings and investments). I personally differentiate myself from the index through buying individual stocks. Why? Well, because that's been my job for over half a decade and I have a long time horizon with limited liquidity constraints so can withstand greater bouts of volatility. This of course might be different for you.
However, as the saying goes ‘there’s no free lunches on Wall St’ and consistently outperforming passive strategies by going active is no easy feat! Hence, I would advise taking a small number of active decisions to gain confidence. Moreover, I have found that in times of panic and market sell offs, if you are holding an individual company that you know well, and are comfortable in because you have done the research, then you definitely sleep better at night, maybe not by much but at least a bit better. From there you can also reinvest in that active idea if your confidence in the performance of the company has increased despite what the share price has done. This is particularly fruitful if you invest in domestic focussed small or mid-cap stocks and markets have sold off because of a more international risk such as a geopolitical risk. Investing is as much about the numbers as it is about psychology and human behaviour. (More on my investing philosophy and process and how I pick individual stocks in later posts).
"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros
We've introduced a lot in this post and I hope it has given you an insight into how I structure my personal stock investment portfolio. For paid subscribers, I discuss a further current hot topic on passive investing and the Magnificent 7.
Feel free to reach out if you have any questions at theislamicinvestor1@gmail.com. Or you can use Substack's chat function and/or comment below and I should pick it up.
Happy Friday.
More for paid subscribers below