Please critique my possible investment strategy.

J

jbax

Registered User
Messages
17
Hi,

Myself and a friend will be setting up an investment fund during the summer, with initial capital of c.€20,000.

We haven't spoker much on possible strategies but have reached an initial agreement that our portfolio will be made up of mostly shares.

I'd prefer that we look for high-risk-high-return shares but I'm not sure as to whether he feels the same. If not, I feel the following would be a suitable compromise.

Y1 Capital - €20,000. 80% in low-medium risk shares, 20% in high risk shares.

This way, I'd feel we would suitably off-set/minimalise losses while having the possibility of greatly increasing our fund value.

We're new to investment, and are both still in full-time education, but we're both confident and intelligent individuals and I'm quite positive we'll do well.

At the moment, there is little more I can add as I have further research to do, but I would ask that you add as much as possible and I thank you in advance.

Regards,
jbax.
 
Do you have a suitable legal/partnership agreement in place to cover this joint investment venture? Are you aware of the tax implications?
 
I think you would both be better off splitting the 20k and pursuing your own fancied shares.... might save a friendship ! if commitments like relationships/kids/house purchase comes up in your life and one needs /wants to sell the other may feel let down. only one thing is for sure, and thats Life is full of unexpected events thats what makes it so interesting ;)
 
you need to hold shares for at least 10 years to optimise your chances of making money. Are you aware of this and is it ok for you to keep this money at arms length for this period?
 
markowitzman said:
you need to hold shares for at least 10 years to optimise your chances of making money. Are you aware of this and is it ok for you to keep this money at arms length for this period?
Click to expand...
I'm in no way am I trying to be smart but I'd love to know your reasoning.

Massive and ignorant generalisation.
 
I'm in no way am I trying to be smart but I'd love to know your reasoning.
Click to expand...
modern portfolio theory by harry markowitz who got a nobel prize in economics in 1990 for his troubles.
Massive and ignorant generalisation.
Click to expand...
asset allocation by roger c gibson will help your own before you invest.
will help you understand the difference between investing and trading.
 
I would counsel you read the book first prior to offering a review.
The book is based on the works of Markowitz.
 
I’d say you’re undercapitalised with €20,000 for short term investment. If you wish to limit your maximum loss on any share to 2% of your capital it implies buying shares in lots of €400, so the cost of buying / selling individual shares will eat significantly into your profits. Also it’s by no means axiomatic that ‘high risk’ guarantees high returns. All it implies is high volatility. With €20,000 you could spend some time developing an asset allocation strategy then split your capital according to your strategy over various index trackers. This would be for the long haul. If you want some fun you could always try spread betting but beware it is very easy to lose your entire capital this way (unless you know what you are doing, have a good money management and risk management strategies, etc.).
 
If it was me and I was looking for a high risk / high return strategy with only 20K I'd do a lot of research and put all the cash on 1 or 2 companies. Take your time, do your research, try and find a company (or commodity) whose business you know and understand and who you feel are underpriced by the market.

Diversified portfolios are not high risk as, by definition, diversification takes the risk out of them. Similarly with any index linked fund. Diversification also implies higher transaction costs.
 
I’d say you’re undercapitalised with €20,000 for short term investment. If you wish to limit your maximum loss on any share to 2% of your capital it implies buying shares in lots of €400, so the cost of buying / selling individual shares will eat significantly into your profits.

Limiting one's losses to 2% of one's capital is a good idea for active traders but the actual mechanics involved are different to what is suggested above. The max loss is €400 but one's purchase can greatly exceed this.

Suppose you buy a stock at €40 and put a stop loss order at €36 – your risk is €4 per share. Divide your total permitted risk (€400) by your risk per share (€4). €400 divided by €4 comes to 100 shares, or a purchase of €4,000. Were the stop loss to be placed at €28, then a total puchase of €8,000 would be allowed. The position size will vary on where the stop is placed.

Obviously, bad news may cause a stock to gap below one's stop loss and create a loss greatly in excess of 2% of the account but you can mitigate against this risk by exiting in advance of earnings dates, news events, etc.

If the OP is not willing to use stop loss orders...then yes, strict adherence to the 2% rule would mean a purchase of just €400.
 
markowitzman said:
modern portfolio theory by harry markowitz who got a nobel prize in economics in 1990 for his troubles.

asset allocation by roger c gibson will help your own before you invest.
will help you understand the difference between investing and trading.
Click to expand...

Winning a Noble prize is no guarantee of success - the guys who engineered the trading mechanism for LTCM in the 1990's were also Noble prize winners. Their collapse might have destroyed the worlds financial system, were it not for the intervention of Alan Greenspan.
 
Markjbloggs said:
Their collapse might have destroyed the worlds financial system, were it not for the intervention of Alan Greenspan.
Click to expand...

That might be putting the role of Easy Al Greenspan in a little too much of a heroic light. How many times did he save the world during his tenure? LTCM and the Russian defaults, Asian currency crisis? Y2K? 9/11?

What was his response each and every time there was perceived threat to the banking system?
 
What do you think of this? What I'm suggesting is adding the year end gain from outside money, i.e., I'm not just using the starting capital (10,000), but doubling it using my own money (eg. 10% increase in year 1 equals gain of 1000. So I take 1000 from outside income streams and add it to the actual gain of 1000, meaning I take 2000+10000 forward to the next year).

The annual % gain is obviously not accurate, and will fluctuate both as an increase and decrease. When the fund starts, I'll be starting college (for 4 years) so I think that a % gain of between 10-14% is realisitc. I then intend on getting a job in Merrion, Davy, Goodbody, Goldman etc., where I'll learn more and get vastly greater experience, thus allowing me to increase gains to the level seen after Y6+.

Is this a realistic possiblity?

Year-%Gain-SOYT-- EOYT-YG

1 ---10-- 10000---- 11000 (+1000)
2 ---11-- 12000---- 13320 (+1320)
3 ---12-- 14640---- 16396 (+1756)
4 ---13-- 18152---- 20511 (+2359)
5 ---14-- 22870---- 26071 (+3201)
6 ---15-- 29271---- 33662 (+4391)
7 ---16-- 38053---- 44141 (+6088)
8 ---17-- 50229---- 58767 (+8538)
9 ---18-- 67305---- 79419 (+12114)
10-- 19-- 91533---- 108924 (+17391)
11-- 20-- 126315--- 151578 (+25263)
12-- 21-- 176841--- 213977 (+37136)
13-- 22-- 251113--- 306357 (+55244)
14-- 23-- 361601--- 444769 (+83168)
15-- 24-- 527937--- 654641 (+126704)
16-- 25-- 781345--- 976681 (+195336)
17-- 25-- 1172017-- 1465021 (+293004)
18-- 25-- 1758025-- 2197531 (+439326)
19-- 25-- 2636857-- 3296071 (+659214)
20-- 25-- 3955285-- 4944106 (+988821)

Total after 20 years: 4,944,106
Total invested after 20 years: 2,971,374
ROI: 1,972,732

SOYT - Start of year total
EOYT - End of year total
YR - Year gain

PS. Could someone please calculate the % return on investment? I've got two figures somehow...
 
No offence but your projected gains in later years look ridiculously inflated. There is no reason to think that working in finance will increase your RoR, most actively managed funds underperform their benchmarks despite all the knowledge and experience of their managers. I think you mightn't realise the difficulty in getting the returns you hope for.
 
Don't forget that the larger your fund gets the harder it is to make an outsized return. Warren Buffett being an extreme example - sitting on large amounts of cash because he can hardly find anything worth investing in given the size of his fund.
 
agree the returns entered arehigh bearing in mind the pros quote 6-8% (pension funds).
I think 20k is a very small amount to build a diversified share portfolio.
Why not buy a few etfs and sit back and let it beat 90% plus of all active investors. If you want thrillsand spills you could maybe trade few covered options as a hedge on your portfolio although you need to research the options landscapediligently. Only trade options with money you can lose. To be honest though 20k is too small a portfolio to warrant hedging with options.
 
jbax said:
Hi,

Myself and a friend will be setting up an investment fund during the summer, with initial capital of c.€20,000.

We haven't spoker much on possible strategies but have reached an initial agreement that our portfolio will be made up of mostly shares.

I'd prefer that we look for high-risk-high-return shares but I'm not sure as to whether he feels the same. If not, I feel the following would be a suitable compromise.

Y1 Capital - €20,000. 80% in low-medium risk shares, 20% in high risk shares.

This way, I'd feel we would suitably off-set/minimalise losses while having the possibility of greatly increasing our fund value.

We're new to investment, and are both still in full-time education, but we're both confident and intelligent individuals and I'm quite positive we'll do well.

At the moment, there is little more I can add as I have further research to do, but I would ask that you add as much as possible and I thank you in advance.

Regards,
jbax.
Click to expand...

I would suggest paper trading / investing for, say, a year,
learn without real risk.

learn the difference between "trading" and "investing",
and these different strategies,
eg options vs "long-term buy and hold"

Sure, you may experience regret when one of your paper trades does well,
but you will have to learn to deal with and learn from this emotion ANYWAY!! both for gains and losses

20k sounds alot, are you prepared to lose it all? (or 50% at least)
- how much of your whole nett worth is this 20k?

as mentioned in other posts you are also risking your friendship!
- keep your own dealings seperate, but share ideas and support the other

stick the 20k in high interest depost account (5%)
and start your learning!

otherwise you may as well take it to casino :)

JR.
 
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