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The 4 Most Common Portfolio Mistakes
Tuttle Ventures investment takeaways for our readers
Welcome to +20 new subscribers this week & +400 over the last 90 days.
This issue is a little late because today’s my birthday!
I’ve been enjoying my 33rd birthday with family, friends, and football.
Quick Newsletter Rundown:
What we are seeing and feeling
4 Most Common Portfolio Mistakes in 2022
Focused FAANMG Flop
Lotto Ticket Graveyard
What we are seeing and feeling
Are you feeling less than confident about your portfolio?
You're not alone - many investors struggle to put together a portfolio that they can trust.
Throughout the year, we have seen many advisors and potential clients send over investment portfolios, asking our team to “fix it”.
Some are conservative investors who blew way below their max drawdown.
Others are growth oriented and curious about how they can seek opportunities in a down market.
Luckily, we feel that no investment portfolio is ”broken” beyond repair.
Understanding these common portfolio mistakes will put you ahead of the pack.
4 Most Common Portfolio Mistakes in 2022
The first step to get a portfolio back on track is to open the lines of communication.
Most investors don’t know what they own or why they hold certain investments.
Getting an investor and their investments are on the same page should start with a reevaluation of expectations and priorities.
While every situation is different, we have found four common portfolio mistakes this year that come across our desk.
#1 Fund Frankenstein
The “Fund Frankenstein” portfolio is inspired by Dr. Henry Frankenstein as he attempts to create life by assembling a creature from body parts of the deceased. The unrecognizable creature is built from a modern laboratory experiment.
This is common for pre-retires with a moderate risk profile, who have been investing for twenty years or more.
This Frankenstein portfolio typically has 25-30 holdings pieced together with odd-sized positions of mutual funds with dozens of small holdings, the sizing of each seemingly chosen at random.
This haphazard approach is the result of years of an Advisor’s never crafting a long term plan of rebalancing and tax management. Most will have 50%+ in unrealized long term capital gains. The client falls victim to an Advisor’s “modern experiments” with your money as the “lab rat”.
Chasing short term trends, the portfolio tends to have many overlapping or redundant exposures. Without a distinct coherent direction, each fund is added without respect to the other causing the creature to awkwardly waddle along.
Over time, the portfolio tends to be a walking zombie, mirroring a cookie cutter 60/40 global market allocation with a higher price tag, and beta with the S&P 500 TR index of 1.
Remember beta provides a measurement of the sensitivity of the asset returns to the market as a whole.
A beta of 1 means the portfolio is no different than the passive global market portfolio. There was no incentive to be truly diversified because it would be a drag of potential returns in an up market.
When stocks and bonds sold off, all the pieces of Frankenstein rotted together.
#2 Duration Dumpster
The Duration Dumpster portfolio is a common mistake for conservative income investors in 2022 who have an outsized allocation to fixed income.
Remember, as yields go up, the price of a bond goes down.
After more than 30 years of declining interest rates, these investors ignored the warnings of inflation and rising interest rates. They fell victim to a false sense of security and complacency.
The duration dumpster collected an extended modified duration of 7+ in an effort to gain higher income payouts in a low interest rate environment.
Remember, duration is a measure of the sensitivity of the price of a bond to a change in interest rates.
As interest rates have risen, these high duration portfolio’s dropped more in price short term because of their higher sensitivity.
In the long run, these higher interest rates on newly issued securities will produce higher income. The income will offset the immediate price drop as an investor holds the bonds all the way to maturity. That being said, it could take 7 years or longer on average to play out.
#3 Focused FAANMG Flop
The Focused FAANMG Flop portfolio in 2022 is most common among investors with an above average risk tolerance and a growth oriented portfolio.
This portfolio was top heavy in only a handful of stocks.
FAANMG stands for (Facebook, Apple, Amazon, Netflix, Microsoft, Google) and usually make up 60% or more of an investors’ holdings.
60% of your portfolio in six companies… What could go wrong?
While we believe the market is always trending toward efficiency, the top heavy portfolios could hardly be called diversified or efficient.
It didn’t matter what a fund was actually named, each fund was essentially the exact same mix of these six companies.
With a beta of 1.5 or more, these portfolios performed great in 2020 and 2021, when money was free and tech could do no wrong.
Neglecting to update your portfolio regularly is a mistake that can leave it feeling stale.
Advisors were happy to overload the mega-cap top to chase returns on lofty valuations.
These portfolios were rug pulled during the tech selloff in 2022 and sold off hard.
#4 Lotto Ticket Graveyard
The Lotto Ticket Graveyard is common among undisciplined investors, a victim of chasing pipedreams and getting rich quick stories.
The portfolio is overweight the highest risk assets— crypto, emerging market small cap, biotech, or unprofitable tech.
If your portfolio only contains a few holdings in the riskiest of growth stocks, it is overly shallow of the fundamentals like earnings or cashflows that support long term growth.
Now that profitable companies are popular again, the lotto ticket stocks are the most depressed this year.
Many of the meme stock investors will shift to the next shortcut, never taking a moment to stop and evaluate their long term strategy.
By addressing these common portfolio mistakes, you can create a dynamic and impressive portfolio that holds up in a challenging investment environment in the best light possible.
What do you think of these portfolio mistakes, do you think any describe your investing style? Were there any mistakes that I missed?
Let me know in the comments down below.
Darin Tuttle, CFA
NOTE - This is not investment advice. Do your own due diligence. I make no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in this report. Any assumptions, opinions and estimates expressed in this report constitute my judgment as of the date thereof and is subject to change without notice. Any projections contained in the report are based on a number of assumptions as to market conditions. There is no guarantee that projected outcomes will be achieved. Unless there is a signed Investment Management or Financial Planning Agreement by both parties, Tuttle Ventures is not acting as your financial advisor or in any fiduciary capacity.