May 25th, 2019

Constructing A Portfolio

Now that I have officially launched the Smart Money Math portfolio, it’s time to get down to the nuts and bolts of how it (and this blog) will work! While things may change over the course of time, my initial construction will consist of the following setup described below.

The Portfolio

As mentioned previously, the starting value for the Smart Money Math portfolio will be the hefty sum of $1,000. While this is by no means a small amount of money, it does tend to be on the smaller side of general investment portfolios However, knowing this, I must be aware that the risk when managing a smaller portfolio are different than the risks when managing a larger one.

Small Portfolio Risks

  • Lack of ability to adequately diversify investments
  • Transaction costs can be significant for smaller share trades
  • Depending on the share price of investments, might not be able to fully invest the portfolio

This does not mean that smaller portfolios are riskier necessarily than larger ones. One of the main risks associated with a large portfolio is large order volumes moving the market against trades you make. Most of us don’t have to worry about this, but large investors like Warren Buffet do.

Handling Risks

In order to mitigate some of these risks, I am going to use a low-cost broker (hello Robinhood) to keep my transaction costs from eating into any potential profits from my trades. While Robinhood does not charge for trades they do make up for it by selling my orders to other firms which scalp cents from each transaction. However, I can combat this as well. Instead of sending my orders as market orders I will make all transactions limit transactions which will prevent Robinhood from giving me a price which I do not intend to accept.

There is not much I can do about my lack of ability to adequately diversify. The investments I choose to enter will be strictly based on math and not tied (necessarily) to stock price. Thus, I could end up purchasing expensive stocks which tie up a large chunk of my funds. As my portfolio grows, I will slowly be able to better diversity and decrease my levels of idiosyncratic risk.

Lastly, I need to set a baseline portfolio from which I will move in-and-out of math-based investments. Since I will be using the S&P 500 as my target baseline it makes sense to use a low-cost S&P 500 ETF for my “not invested” position. Unless I discover a math-based approach to market timing, I will shift all of my investments to Vanguard’s VOO ETF when I have not committed to another investment strategy. If there is any money left over that will not purchase whole shares of VOO, I will use it to buy IUSB which is an ETF that tracks the Barclays index of USD-denominated taxable bonds.

Here's to starting!