Hello to all.
Today I want to share with you this investment portfolio I created as a long-term accumulation plan.
I state that I do not want to sell you anything, take you to register at some service, or get out money for anything. What I want to do in this discussion is to simply share an investment plan I created to build something up in the long run. I do not dwell on complicated issues regarding the creation of the portfolio because this would lead me to make an absurd bum about statistics and risk management. I will therefore try to simplify as much as possible, but at the same time to be as clear as possible.
What does an equity investment portfolio mean?
An equity investment portfolio is essentially a portfolio made up of stocks (shares) of companies in a given market. In this case, the chosen market is exclusively the US one. It is therefore easy to understand that the performances will be positively correlated (not perfectly) to the performances of the US market (NASDAQ, sp500, etc., etc.).
Why invest in more stocks instead of putting all my money on a stock that I believe is performing?
The creation of portfolios allows you to implement what is called diversification. To put it simply: don’t put all your eggs in one basket. If the basket breaks, you break all the eggs. If, on the other hand, you put your eggs in several baskets, if one shatters, you will still have eggs left on your back.
The idea behind the wallets is the same. Diversify the risk of stock by investing in multiple stocks. In this case, the portfolio appears to have a good degree of diversification as it is made up of more than 15 stocks.
All of these actions require a pool of capital. How Much Should I Invest?
Today, thanks to the development of stock markets and thanks to recent technological innovations, some markets allow you to buy fractions of stocks. So you can decide to buy a tesla share at $ 1096 (today’s price) or you can decide to buy a fraction of a tesla share, obviously paying the percentage you are buying on the final price.
A little hint of how the wallet was created?
As I said, I don’t want to go too far but I want to give you a quantitative idea behind the portfolio. The portfolio was created using my knowledge in quantitative finance and python programming. The risk management model used is called VaR Historical and allows us to assess the riskiness of our investment by looking at the past. This model gives us a value called Value At Risk and tells us what is that sum of money (as a percentage of our portfolio) that will not be exceeded in n days (n is the interval under consideration) with a given confidence level, which in the case in question was set to 95%. The alternative is 99%, but not being a personal investment portfolio, 95% is just fine. Simply put, there will be a 5 percent chance in n days that the loss of the proto-sheet will exceed this threshold value. In my very personal case, I invested 310 dollars and the var is equal to 4 euros. This means I have a 5% chance of losing more than 4 euros in one day.
Ok I’m getting convinced. For each stock, what fraction do I need to purchase?
I used python to create an algorithm that calculates the var of simulated wallets. By simulated I mean that I have created a vector of weights whose sum equals 1 (which means that I want the sum of the fractions of stock purchased to be equal to all my capital) and I have calculated the var for each simulated portfolio. After that, I chose the wallet with the smallest var. Here are the weights:
The weights are those highlighted in yellow. Example: NFLX 0.064386 means we need to invest 6.44 percent of our equity in Netflix stock. I’ll leave the rest to you …
With the pie editor, you set the weights and with a simple button, you can invest as much capital as you want. The tool will automatically allocate your capital according to the percentages you set.
A graphical representation of the other portfolios for completeness
Ours is on the far left of the x-axis. Of course, more can be achieved in terms of income, but that means taking on more risks. We will shop here as totally risk-averse people.
A little backtesting of this portfolio
Unfortunately, at the time of writing, I haven’t implemented the backtesting function in my python model yet, but it should be ready soon. At the moment I used a site called portfolio visualizer, which is not very precise, but in summary, it is just fine.
According to the site in question, the trend of the portfolio over time is as follows:
The site in question gives us a Sortino ratio of 4.74. If you search the web, the value of this optimal ratio is greater than 2 and the portfolio in question doubles it abundantly.
Looking at the side of the losses suffered during the period, the site gives this percentage of 95% var:
I use that of the site because I have to be consistent with the losses, which are measured on the site. When I calculate the losses suffered by the portfolio thanks to my model, I will be able to use the percentage of var that I calculated.
As you can see, the largest losses suffered from 2019 to date do not exceed the percentage of var. We have always remained in the 95%, except in Feb Mar 2020. However, you know well it happened in this period. The covid is considered to be almost on par with the 2009 crisis, so such a loss is more than normal in such a period. During 2009 it will certainly have been much worse. These abnormal shock periods are called stress periods. They tell us how bad things can go if they exceed this 95% and we are actually in the worst 5% of cases.
Having said that … let me know of any doubts, questions, etc., etc.
Always remember that investing is a risk. I am just displaying my investment portfolio. Invest only what you can lose. I take no responsibility for any losses you will suffer as a result of this discussion.