1. Advanced and Edge Cases

This cluster covers topics that go beyond traditional investing frameworks, including currency risk, sector strategies, and alternative investment vehicles:

• Currency and International Risk – How global markets affect your portfolio

  • Lazy portfolios: the risk of currency…

  • Currency devaluation

  • Currency risk

• Sector & Niche Investing – Exploring specialized approaches

  • Why I like sector investing

  • Unveiling the mystery of hedge funds

  • REITs vs real estate crowdfunding

• High-level Investor Considerations

  • Accredited investors

  • Is value investing truly the best…

2. Deeper Dives

Here you’ll find posts that provide detailed analysis and insights into market behavior, economic transformations, and portfolio implications:

• Market Behavior & Opportunities

  • How a drop in the market can be good

  • How to predict a market crash

  • Market drop waiting

• Economic Context & Global Scenarios

  • Economic scenarios

  • Economic transformation in Europe

  • Differences between world countries

• Index & Passive Investing Insights

  • Index investing economy

3. Tools and Practical Resources

These posts focus on practical frameworks and tools to manage your portfolio efficiently and make informed decisions:

• Portfolio Analysis & Review Tools

  • My honest review of Portfolio Performance

  • Real estate investment rental yields

• Taxes and Inflation Protection

  • Withholding taxes on dividends (EU investors)

  • Anti-inflation investing: protect your portfolio from loss of purchasing power

4. Less Commonly Discussed Topics

This cluster highlights investing topics often overlooked, providing unique perspectives for more sophisticated investors:

• Observations on the possible arrival… – insights on emerging trends and unusual market developments.

• Lazy portfolios: the risk of currency… – also fits here, illustrating hidden risks in “set-and-forget” strategies.

• Sector and alternative vehicles – exploring approaches not often covered in mainstream guides.

5. How to Use This Compendium

1. Begin with Advanced and Edge Cases to expand your perspective beyond traditional portfolios.

2. Explore Deeper Dives to understand market dynamics, economic scenarios, and behavioral implications.

3. Use Tools and Practical Resources to manage your portfolio effectively and mitigate risk.

4. Refer to Less Commonly Discussed Topics for unique insights and strategies that aren’t part of standard investing advice.

This structure ensures that you can explore advanced topics progressively while keeping access to practical frameworks and tools to sharpen your investing approach.

In this review, I’ll walk you through the strengths, limitations, and my personal opinion after using it consistently for several months.

What is Portfolio Performance?

Portfolio Performance (PP) is a free, open-source software designed to help you monitor, analyze, and evaluate your investment portfolio over time. It’s especially popular among European investors but works globally as long as you have access to accurate price data.

It supports tracking for:

✔️ Stocks

✔️ ETFs

✔️ Bonds

✔️ Mutual funds

✔️ Cryptocurrencies

✔️ Even cash positions and deposits

Unlike typical broker apps, PP offers a holistic view of your investments, combining performance analytics, dividends, transaction history, and detailed charts—all in one customizable interface.

Main Features That Stand Out

1. True Performance Calculation:

PP doesn’t just show portfolio value; it calculates Time-Weighted Return (TWR) and Internal Rate of Return (IRR), offering a clear picture of your portfolio’s real performance, independent of cash inflows or outflows.

2. Extensive Customization:

You can manually input every transaction, dividend, fee, or tax. Yes, it’s work, but the result is full control. You also choose how to group assets by type, region, sector, or your custom logic. Not everytime it can categorize all the assets (ING is my €35,000 liquid money bank account so no classification, and it has also some problems with Gold and Private Equity ETF).

Here are some examples:

3. Historical Data Import:

You can import data from CSV files, brokers, or external sources to retroactively build your portfolio history. Price updates can be automated via Yahoo Finance or other APIs.

4. Dividend and Cashflow Tracking:

One of the best features for income-focused investors is precise tracking of dividends, interest payments, and other cashflows—down to the cent.

The Downsides – Let’s Keep It Real

While PP offers impressive functionality, it comes with trade-offs:

Manual Data Entry:

If you expect an “automatic sync” with your broker, think twice. Most data entry is manual or semi-automated through CSV or PDFs. For me, this wasn’t a dealbreaker, but it can feel tedious, especially with frequent trades.

Steep Learning Curve:

It’s not the most user-friendly at first glance. Setting up your portfolio, understanding TWR vs. IRR, configuring imports—these require patience and a bit of financial literacy.

Mobile Access – A Step Forward, But with Limitations:

Portfolio Performance recently introduced a mobile app, addressing one of its historical weaknesses. However, it’s important to note that the mobile app isn’t yet designed for full portfolio management. You can’t create a portfolio from scratch on mobile — the app only allows you to view and track an existing file.

A smart approach? Set up your portfolio on the desktop version, save the file to a cloud service (like Google Drive, Dropbox, or iCloud), and access it on your mobile device whenever you’re on the go. It’s a great improvement for quick checks and monitoring, but serious editing and analysis still require the desktop version.

Occasional Bugs:

As an open-source project, you may run into minor bugs or quirks. Fortunately, the active community and developers usually address these quickly.

My Personal Take

Overall, Portfolio Performance is one of the most robust free tools for investors who want detailed control and visibility. It shines for those managing multiple asset classes or long-term portfolios with dividends.

It’s not designed for “lazy” investors who want plug-and-play apps. But for data-driven individuals who enjoy analyzing their investments—and don’t mind a bit of setup—it’s a fantastic solution.

Personally, I appreciate that PP is:

✔️ Private (your data stays local)

✔️ Customizable

✔️ Financially precise

✔️ Not tied to any commercial broker

That said, I wouldn’t recommend it to complete beginners. If you’re just getting started, a basic broker app is enough. But if you’ve reached the point where you want to track net worth, optimize performance, and fully understand your returns, PP becomes an indispensable tool.

Final Verdict:

Pros:

✅ Completely free and open-source

✅ Powerful analytics and reporting

✅ Excellent for dividend and cashflow tracking

✅ Total control over data

Cons:

⛔ Manual setup and maintenance

⛔ Steeper learning curve

⛔ Mobile app complex

Ideal for: Serious investors, dividend trackers and anyone seeking transparency beyond broker dashboards.

Not ideal for: Total beginners or those wanting a fully automated, mobile-first experience.

Would I keep using it? Absolutely.

As someone who likes understanding the full picture, Portfolio Performance gives me the confidence, clarity, and detailed data I need to stay aligned with my financial goals. That said, I also like to complement it with my own custom-built Excel file, wher I personally track income, expenses, investments, key metrics, projections, and personal notes in a more tailored format.

For me, the combination of Portfolio Performance’s deep analytics and the flexibility of Excel creates the ideal setup — structured, insightful, and fully adapted to my needs.

If you want to try Portfolio Performance yourself, you can download it for free here:

👉 https://www.portfolio-performance.info/en/

It works on Windows, macOS, and Linux, and now, with the new mobile app, you can also monitor your portfolio on the go — provided you save your file to the cloud and access it from there.

While lazy portfolios have many advantages, such as ease of management and cost-efficiency, they also come with their own set of risks. One of the most overlooked yet crucial risks is the currency exchange risk, which can significantly impact both the returns and the volatility of a portfolio, especially when dealing with global investments.

The Volatility of Lazy Portfolios: A Deeper Dive

The volatility in lazy portfolios can typically be attributed to two main factors:

1. The Type of Underlying Assets: The more equity-based the portfolio, the higher its volatility. Stocks generally experience higher price fluctuations compared to bonds or other asset classes, and a portfolio with a large portion of equities will naturally be more volatile.

2. Currency Exchange Risk: This is where many investors miss a crucial piece of the puzzle. The more a portfolio holds in assets that are denominated in foreign currencies, the greater the exposure to currency fluctuations. A portfolio consisting of international stocks, for example, will be subject to the risk of currency depreciation, which can lead to significant volatility.

In particular, the currency exchange risk is something that is not widely discussed in mainstream financial literature, especially when it comes to lazy portfolios. For example, a European investor who invests in US-based equity funds may find that fluctuations in the USD/EUR exchange rate impact the value of their investments in addition to the performance of the underlying stocks. This is because the returns from foreign investments are not only influenced by the performance of the market but also by changes in the exchange rate between the investor’s home currency and the foreign currency in which the asset is denominated.

Why Is Currency Exchange Risk Overlooked?

There are several reasons why currency exchange risk is often neglected, particularly by US investors:

1. Less Exposure for US Investors: For American investors, the currency risk is typically lower. This is because a significant portion of global equity markets (approximately 60%) is denominated in US dollars. As such, the average US investor does not face as much currency exposure. Even if they invest in international markets, the impact of currency fluctuations is less significant, with about 40% of the portfolio being potentially exposed to currency risks. Furthermore, many US investors tend to focus on domestic investments, which effectively mitigate this exposure.

2. Lack of Awareness: The concept of currency risk is often misunderstood or oversimplified by many investors and financial advisors. Most discussions around currency risk focus solely on its impact on returns—how exchange rate fluctuations can lead to either gains or losses—while the impact on the portfolio’s volatility is seldom explored in detail. This is particularly problematic because volatility is a key factor in determining the overall risk profile of an investment strategy.

3. Simplification by Financial Advisors: Many investors and advisors prefer to minimize the complexity of currency risk by assuming it is not a significant factor for long-term investors. The idea is that currency fluctuations tend to “average out” over time, meaning the investor is likely to experience little to no impact on long-term returns. This assumption, however, is flawed. While it may hold in some instances, the reality is that currency fluctuations can have a pronounced effect on the value of investments, particularly in shorter-term periods or during times of market stress.

Examining the Currency Exchange Risk in Lazy Portfolios

To understand the real impact of currency exchange risk on lazy portfolios, it’s important to analyze how it affects both the returns and the volatility of a portfolio. The following approach can help illustrate this:

1. A Deep Dive into 40 Lazy Portfolios: By performing backtests on 40 different lazy portfolios, we can assess how currency exchange risk impacts each one. The analysis will include portfolios in US dollars (USD), USD portfolios converted into euros (EUR) based on the daily exchange rate, and EUR-based portfolios designed for European investors.

2. Rolling 5 and 10-Year Returns: By analyzing the rolling 5-year and 10-year returns of each lazy portfolio, it becomes clear how the currency exchange risk can significantly affect long-term performance. These rolling returns give a clearer picture of how the portfolio would have performed across different periods, smoothing out short-term market fluctuations and showing how currency risk can impact overall returns.

3. Volatility of Currency Exposure: In addition to looking at returns, it is crucial to assess how the volatility of each portfolio changes when currency exchange risk is taken into account. Currency fluctuations can increase the volatility of a portfolio, making it more difficult for investors to maintain a steady and predictable performance, especially during periods of high market uncertainty.

Why Currency Risk Should Not Be Underestimated

The key takeaway here is that currency exchange risk should never be underestimated, especially when investing through a lazy portfolio. Ignoring currency risk can lead to unintended consequences, including higher-than-expected volatility and unpredictable returns. When building a lazy portfolio, investors should consider mitigating currency risk through strategies like diversification within the eurozone or hedging certain portions of the portfolio.

Furthermore, it is essential for investors to be aware of how currency exchange can impact their portfolios over the long term. By diversifying across asset classes and regions and carefully considering the currency exposure in each investment, investors can reduce the negative impact of currency fluctuations and achieve a more stable and predictable investment outcome.

Conclusion

In conclusion, lazy portfolios offer a simple and cost-effective investment strategy, but they come with risks that are often overlooked, particularly when it comes to currency exchange. By carefully considering the impact of currency fluctuations, investors can better manage the volatility of their portfolios and improve their long-term investment outcomes. As the old adage goes, “Don’t put all your eggs in one basket”—and in this case, that means not ignoring the risks posed by currency exchange.

In future articles, we will delve deeper into the nuances of lazy portfolios, provide more detailed analysis, and explore practical ways to manage and mitigate currency exchange risk for investors seeking a well-rounded, risk-managed portfolio.

The question of whether a new financial crisis is imminent is one that has sparked much debate and speculation. While it’s impossible to predict with certainty, there are several key observations that provide valuable insights for anyone navigating the financial markets. Here are three critical ideas to consider:

No One Knows if and When the Next Financial Crisis Will Arrive

Financial crises are inherently unpredictable. If market timing truly worked, there would be a select group of investors who could foresee and capitalize on these events. Yet, this is not the case. Even the wealthiest and most seasoned investors, like Warren Buffett, rely on the Buy and Hold strategy, which is the opposite of attempting to time the market.

Historical Examples:

• The 2008 subprime mortgage crisis and the 2020 COVID-19 financial crisis caught nearly everyone by surprise. Very few investors predicted either of these events, and even fewer managed to exit the market at their peak or re-enter it at the bottom.

• The reality is that even those who foresee a crisis often misjudge its duration. For example, many investors expected the 2008 financial crisis to last much longer than it did, and some still didn’t re-enter the market until it had recovered significantly. Timing the market is not only difficult but rarely leads to better long-term outcomes.

It’s important to understand that crises are part of the market’s natural cycle. Trying to predict exactly when a crisis will occur often leads to missed opportunities rather than enhanced returns.

More Money is Lost Due to Fear of a Financial Crisis Than the Crisis Itself

Fear of a financial crisis often causes investors to take action that leads to greater losses than the crisis itself. Many stay on the sidelines waiting for the “perfect” moment to re-enter the market, but this is usually a costly mistake.

Market Fears and Missed Opportunities:

• In the years following the 2008 crisis, there was widespread speculation that another financial disaster was just around the corner. Between 2011 and 2012, many investors stayed out of the market, worried about the possibility of another crash. Yet, the market continued to rise steadily, with only occasional minor corrections.

• 2020’s COVID-19 crisis was also unforeseen, primarily a health crisis with secondary financial consequences. While markets dropped rapidly in response, they recovered just as quickly. Most investors didn’t anticipate this, and many missed the opportunity to buy at rock-bottom prices.

The key takeaway here is that sitting on the sidelines out of fear of a crisis can be more damaging than the crisis itself. When the market eventually recovers, it’s often too late to get back in at lower prices. In fact, market timing frequently results in worse long-term outcomes than simply riding out the volatility.

The Costs of Exiting the Market Are Often Higher Than the Crisis Itself

Exiting the market out of fear of a crisis means triggering capital gains taxes and transaction costs, even when you don’t need the liquidity. This decision is often driven by panic, rather than a strategic approach to long-term investing.

The Hidden Costs of Selling:

• Capital Gains Taxes: If you sell securities to “escape” a crisis, you might be subject to capital gains taxes, reducing your returns.

• Transaction Costs: Buying and selling securities incurs transaction fees, which also erode your wealth.

• Lost Opportunity: Once you liquidate your portfolio, you must figure out what to do with the cash. Do you wait for the market to drop even more before re-entering? The “right time” will never come, and by the time you re-enter the market, prices are often higher than when you left.

Rather than letting fear dictate your actions, it’s better to stay invested in the market, especially if you don’t need immediate liquidity. The costs of exiting, whether due to taxes, fees, or missed opportunities, often outweigh the benefits of avoiding a crisis.

Staying Calm and Strategic During a Crisis

While it’s certain that financial crises will continue to occur, predicting their timing is an impossible task. The markets will experience downturns, but they will also recover. The best course of action when a crisis hits is to remain calm, stay patient, and stick to your long-term investment strategy.

• Financial Crises Are Normal: Crises are a natural part of the market cycle. They happen, and while they can be unsettling, they are not something to be feared. Overcoming the instinct to panic and sell can help investors avoid costly mistakes.

• The Power of Consistent Investing: For those building a Capital Accumulation Plan, market dips can actually provide opportunities to buy assets at lower prices. During a crisis, additional contributions to your plan can purchase more units of the underlying asset, thereby taking advantage of the downturn.

• Stay the Course: When markets are volatile, media reports often exacerbate fears, with headlines touting billions of euros “lost” in the stock market. This sensationalism can make the situation seem more dire than it really is. However, it’s important to remember that markets will recover over time, and staying invested is often the best strategy.

• Making the Most of Market Declines: For those with limited liquidity, continuing regular payments to their Capital Accumulation Plan allows them to keep buying at lower prices, potentially enhancing returns when the market eventually rebounds.

In summary, while the future of the market is uncertain, patience and a long-term perspective are essential tools for successful investing. When the next financial crisis arrives, keeping a level head and staying invested will put you in the best position to navigate the downturn and capitalize on future gains.

What is Value Investing?

At its core, Value Investing is about identifying the intrinsic value of a company’s stock and comparing it to its market price. The strategy assumes that the market often misprices stocks, providing opportunities to buy undervalued assets at a discount. The goal is simple: find stocks that are trading below their intrinsic value, hold them, and wait for the market price to eventually align with the true worth of the company, leading to long-term capital appreciation.

This approach is based on the premise that stock prices do not always reflect a company’s true worth. If the market price is lower than the intrinsic value, the stock is considered undervalued. Investors then aim to purchase these stocks, expecting that over time, their value will be recognized by the broader market, resulting in price appreciation.

Challenges of Value Investing

While Value Investing may appear straightforward, it is far more complex in practice. The strategy demands significant skill, expertise, and experience in financial analysis, making it suitable for a select group of highly proficient professionals.

Some of the key challenges of Value Investing include:

• Sector Selection: Identifying which sector to focus on and understanding its dynamics.

• Company Selection: Choosing specific companies within the sector that are worth analyzing.

• Financial Statement Analysis: Deeply analyzing financial statements to assess a company’s health and intrinsic value.

• Valuation Models: Selecting the right valuation models and methodologies to determine intrinsic value.

• Understanding Intrinsic Value: Accurately calculating and interpreting intrinsic value, which is an inherently subjective measure.

These challenges demand a level of expertise and attention to detail that can make or break the success of a value-based investment strategy.

Backtesting and Look-Ahead Bias

Another important aspect of Value Investing is the process of backtesting, which involves testing investment strategies using historical data. However, one common pitfall in backtesting is the presence of look-ahead bias. This occurs when investors use information that would not have been available at the time of the analysis, distorting the results.

For example, when backtesting a strategy using price-to-earnings (P/E) ratios, an investor might base their decision on P/E ratios from year X and execute trades as if they had this data on the first trading day of the following year. This introduces look-ahead bias, as financial statements (which provide crucial data like earnings) are not available until after the fiscal year ends.

This bias undermines the integrity of backtest results by allowing investors to make decisions based on future knowledge. To avoid this, backtests must rely only on information that would have been available at the time of the analysis, ensuring the results are reflective of actual decision-making conditions.

Why Look-Ahead Bias Occurs

The reason look-ahead bias is so prevalent is that companies typically release their financial statements months after the fiscal year ends. As a result, any trades made using data that would not have been available in real time compromise the validity of the backtest. To ensure the accuracy of backtest results, investors must strictly use data that would have been accessible during the period being tested, thereby avoiding this critical flaw.

Conclusion

While Value Investing has a long history of success, its relevance and effectiveness have been questioned in recent years due to periods of underperformance, especially during market cycles driven by momentum and growth investing. Rather than debating whether value investing is still the best strategy, it’s more important to acknowledge the complexities and challenges involved in applying it effectively.

Value Investing is not a strategy for everyone. It requires deep expertise in financial analysis, a profound understanding of markets, and the ability to navigate complex valuation techniques. For those willing to put in the work and develop these skills, it remains a potent and time-tested strategy.

In conclusion, while Value Investing may not suit all investors, it remains a powerful approach when executed by those with the necessary experience and knowledge. Aspiring investors should approach this strategy with caution, fully recognizing the challenges and intricacies involved in its successful implementation.

I have found that US-domiciled ETFs generally have lower management costs (TERs), but that they cannot be purchased by European investors unless you become an accredited investor. Another consideration is that US companies do not pay the withholding tax on dividends paid to US ETFs. But what are withholding taxes (WHT)?

1. Withholding Taxes on Dividends 101

Gain a clear understanding of withholding taxes by breaking down Level 1 and Level 2 Withholding Tax (L1WHT and L2WHT) scenarios.

I take in consideration the US because the majority of stocks in the market are from there. But you can apply the same concept to the other countries in the world.

• L1WHT: it applies when a company distributes a dividend to another entity, with a different tax domicile. Common case example: Apple distributes a dividend to an Ireland ETF.

• L2WHT: it applies when an ETF distributes a dividend to another us, with a different tax domicile. Another common case example: XDWL (domiciled in Ireland) distributes a dividend to us.

2. Strategies to Optimize Withholding Taxes

Explore a range of strategic approaches to minimize the impact of withholding taxes on dividends for European investors:

• Example 1: Tax Treaty Benefits: European investors can take advantage of tax treaties that exist between their home country and other jurisdictions. For instance, the US-Ireland tax treaty reduces the withholding tax rate on dividends paid from US companies to Irish domiciled ETFs. By holding Irish domiciled ETFs, you can leverage this treaty to benefit from the reduced withholding tax rate, effectively optimizing your returns.

• Example 2: Blend of Low and High Tax Jurisdictions: Consider a scenario where you hold a combination of securities from low withholding tax jurisdictions and higher withholding tax jurisdictions. The dividends from securities in low tax jurisdictions can offset the potential tax burden from securities in higher tax jurisdictions. This balance can help you achieve a more favorable overall withholding tax rate, enhancing your dividend income.

• Example 3: Combining Accumulating and Distributing ETFs: Investors can diversify their portfolio by combining accumulating and distributing ETFs. Accumulating ETFs reinvest dividends automatically, while distributing ETFs pay out dividends to investors. By allocating funds across both types, you can manage your tax liability effectively. For instance, you might hold accumulating ETFs in a tax-advantaged account and distributing ETFs in a standard account to optimize your tax efficiency.

US based Accumulating ETF doesn't exist. I don't know why but they cannot be found neither on etf.com nor on etfdb.com. The funny thing is that Americans who want an accumulation ETF have to buy it in Europe.

Let's see the Irish Domiciled ETF to reduce Withholding Taxes on Dividends for European Investors

3. Irish Domiciled ETFs: The Tax-Efficient Solution

Irish domiciled ETFs offer a compelling tax-efficient solution for European investors seeking to maximize their returns. Let's explore this concept with examples and numbers to showcase the tangible benefits of investing in these funds:

• Suppose you are a European investor holding a US-based ETF that tracks the S&P 500 index. If this ETF is domiciled in the United States, you might be subject to the standard US L2WHT rate of 30% on dividends. US ETF has 0 L1WHT from US companies. However, if you opt for an Irish domiciled ETF tracking the same index, you can take advantage of the US-Ireland tax treaty, which reduces the L1WHT rate to 15%. Often the L2WHT for European investors with Ireland ETF is 0. Suppose also that all the dividends received from the companies is turned from the ETF to the investors.

Example:

• US Companies Dividend: $1,000

• L1WHT: $0

• US Domiciled ETF Dividend: $1,000

• L2WHT (30%): $300

• Net Dividend Received: $700

Now, let's consider the same scenario with an Irish domiciled ETF:

• US Companies Dividend: $1,000

• L1WHT (15%): $150

• Irish Domiciled ETF Dividend: $850

• L2WHT (0%): $0

• Net Dividend Received: $850

By choosing an Irish domiciled ETF, you save $150 in withholding taxes on the same dividend amount. This reduction directly contributes to a higher net dividend received and enhanced overall returns. In the example it is not considered the dividend tax of the own country.

4. Irish Domiciled ETFs: The Estate Tax Exemption

Another significant advantage of Irish domiciled ETFs is the exemption from the US estate tax. Suppose you have a substantial investment in US-based securities. In the unfortunate event of your passing, your beneficiaries could potentially be subjected to the US estate tax on your US assets. However, by holding Irish domiciled ETFs, your investment is exempt from this tax, providing protection and preserving your wealth for future generations.

Example:

• US-Based Assets: $1,000,000

• Potential US Estate Tax (40%): $400,000

Irish ETF example:

• Irish Domiciled ETF Assets: $1,000,000

• Potential US Estate Tax (0%) (Exempt from US estate tax)

In this scenario, by allocating a portion of your investments to Irish domiciled ETFs, you can shield that portion from the US estate tax, resulting in substantial savings for your beneficiaries.

5. Irish Domiciled ETFs: The Accumulating ETFs for Compounding

Irish domiciled ETFs also offer accumulating options that automatically reinvest dividends, allowing for seamless compounding. This eliminates the need for manual reinvestment, reducing transaction costs and enhancing the growth potential of your investments.

Example: Assuming an investor holds an accumulating Irish domiciled ETF with an average annual dividend yield of 2%. If they invest €10,000 over 10 years:

• Initial Investment: €10,000

• Annual Compounded Growth (2%): €200

• Total Value After 10 Years: Approximately €12,190

Compared to distributing ETFs that pay out dividends, the accumulating ETF enables more efficient compounding, leading to higher long-term growth.

6. Evaluating Irish Domiciled ETFs: The tradeoffs

When it comes to Irish Domiciled ETFs, it's important to acknowledge a couple of tradeoffs that exist alongside their tax advantages. These considerations offer a balanced perspective for investors to make well-informed decisions.

1. Bid-Ask Spread and Trading Volumes: Irish Domiciled ETFs may exhibit lower trading volumes compared to their US counterparts, which can lead to a slightly higher bid-ask spread. Think of this as a subtle cost that investors need to be aware of.

2. Commission Differences: Another aspect to consider is that the commissions associated with trading on the London Stock Exchange (LSE) might be slightly higher than those on US markets.

3. Average higher TER: It's worth noting that the Total Expense Ratio (TER) of ETFs in Ireland is generally higher compared to those in the US.

While these tradeoffs are worth noting, the overall benefits of Irish Domiciled ETFs should not be overlooked. Their advantageous aspects, such as lower withholding taxes, exemption from substantial estate taxes, and the option of accumulating funds, contribute to a more cost-effective investment strategy over the long term.

Conclusion:

Ireland ETF remains the best solution to avoid Withholding Taxes on Dividends for European Investors. If you not seeking for ETF the best solution are again the Ireland ETF (Accumulating).

US ETF are not efficient for our continent.

Site tip for Swiss investors:

• Swiss tax guide for investors in ETFs (USA, Europe, Ireland, etc.)

• Technical factors of ETF investing for tax-exempt investors

Purchasing Power Erosion

The economic transformation sweeping across Europe is palpable in the diminishing purchasing power of its residents. This phenomenon has precipitated shifts in consumer behavior, with indulgent products like foie gras and red wine in France, olive oil in Spain, and organic foods continent-wide experiencing a decline in demand. As consumers tighten their belts, these shifts reflect a conscious effort to navigate financial constraints.

Sustainable Energy Initiatives

Against the backdrop of rising energy costs, several European countries are embracing innovative energy conservation approaches. Finland's initiative to encourage sauna usage on wind-generated electricity days highlights the practical strategies being implemented to mitigate the financial burden of energy consumption. These initiatives underscore Europe's proactive approach to addressing economic challenges through sustainable practices.

I am completely in favor of finding new ways to produce clean energy. I am completely in favor of finding new ways to produce clean energy. Unfortunately this leads us, at least in the short term, to higher costs and social clashes. All of this reduces our potential.

Changing Dietary Preferences

A notable transformation is underway in Germany, a country historically associated with hearty meat and dairy consumption. With meat and milk consumption at their lowest levels in three decades, the economic realities are prompting a reevaluation of dietary preferences. This shift reflects not only financial considerations but also a growing awareness of the ecological impact of dietary choices. Especially in Italy, meat or other types of foods with a high ecological impact are our excellence. But we insist on letting the US produce cultured meat.

Economic Recession and Broader Concerns

The erosion of purchasing power and evolving consumption patterns have contributed to Europe's recent entry into a recession. This downturn amplifies the overarching sense of relative economic, political, and military decline that has been looming since the early 2000s. As Europe grapples with these challenges, it is prompted to consider strategies that bolster its economic resilience and global competitiveness.

Policy Responses and Adaptations

Addressing the multifaceted economic challenges requires a holistic approach that combines short-term alleviation with long-term strategies. Governments, policymakers, and business leaders are compelled to reimagine economic structures, invest in innovation, and foster adaptability. Initiatives that prioritize sustainable growth, technological advancement, and international collaboration are crucial to steering Europe's trajectory toward greater economic stability.

Prospects for a Resilient Future

While the economic transformation presents formidable challenges, it also offers an opportunity for Europe to reposition itself for a resilient future. By leveraging its legacy of innovation, cultural capital, and global collaboration, Europe can forge a path toward economic rejuvenation. The lessons learned from navigating these current challenges will guide the continent toward a more sustainable and prosperous future.

As Europe grapples with the complexities of its evolving economic landscape, the decline in purchasing power and shifting consumption patterns are undeniable signals of change. Sustainable energy practices and evolving dietary preferences underscore Europe's adaptability and capacity for innovation. The recession serves as a reminder of broader concerns but also prompts a renewed commitment to resilience and growth. I hope by embracing a multifaceted approach that integrates short-term mitigation with long-term strategies, Europe can emerge from this transformative period stronger, more dynamic, and better equipped to face future challenges.

I leave you below a detailed analysis carried out by Ecipe, where the comparisons are more detailed with graphs and comparisons between the US member states and EU member states. Really interesting!

Site tips:

• Comparing economic growth between eu and us states

Currency Devaluation in Theory

Before analyzing the three currencies in question, it is important to understand the concept of currency devaluation. In simple terms, currency devaluation occurs when the value of a currency decreases relative to other currencies on the global market. In other words, a devalued currency requires more units to buy the same amount of goods and services.

There are several reasons why a currency can depreciate relative to other currencies. Here are some of the main reasons:

• Monetary Policy. A nation's monetary policy, such as interest rates and money supply controls, can affect the demand for the nation's currency. If a central bank cuts interest rates, for example, this can increase the money supply and cause the national currency to devalue relative to other currencies.

• Economic Factors. Economic factors such as GDP growth, inflation, foreign trade, and the balance of payments can affect the demand and supply of the national currency. If a nation's economy has low GDP growth or a deficit balance of payments, this can cause the demand for its currency to decrease and cause it to devalue against other currencies.

• Geopolitical Factors. Geopolitical events such as trade tensions, general elections or economic crises can affect the supply and demand of the national currency. For example, if a political or economic crisis occurs in a country, investors may try to sell the national currency and buy safer currencies, causing the national currency to devalue.

• Financial Market Speculation. The currency market is also influenced by trader speculation on exchange rates. If investors expect a currency to depreciate, they can sell that currency early, depreciating it further.

Let's see the evolution of 3 important currencies in the western world from the 2000.

US Dollars

The US dollar (USD) is the world's reserve currency and has been the most widely used currency for global trade for decades. However, since 2000, the dollar has depreciated by 20% against the euro and nearly 50% against the Swiss franc. There are several reasons for the devaluation of the dollar, including:

1. The US Trade Deficit. The US has had a growing trade deficit in recent years, which means that it imports more than it exports. This has led to a decrease in demand for dollars on the global market, causing the value of the currency to fall. A weak currency incentives US citizens to spend less in foreign products.

2. United States monetary policy. The Federal Reserve cutted interest rates to zero from 2008 to stimulate the economy following the global financial crisis. This policy has led to an increased supply of dollars on the global market, which has caused a devaluation of the currency.

3. US Public Debt. The United States has a large and steadily increasing public debt. This increased investor concern about the creditworthiness of the United States and led to a decrease in demand for dollars.

EURO

The euro (EUR) is the second most used currency in the world and was introduced in 1999. Since 2000, the euro has depreciated by 30% against the Swiss franc, but has gained 15% in value against the US dollar . Reasons for the devaluation of the euro include:

1. Eurozone crisis. The euro underwent a significant devaluation as a result of the eurozone crisis, which began in 2009. The crisis led to a decrease in investor confidence in the European economy, causing a decrease in demand for euros on the global market.

2. Monetary policy of the European Central Bank (ECB). The ECB adopted monetary policies to stimulate the European economy following the eurozone crisis, including a reduction in interest rates and the introduction of asset purchase programmes. These policies have increased the supply of euros on the global market, driving down the value of the currency.

3. Political uncertainty in Europe. Political uncertainty in Europe, including Brexit and the election of populist governments in some European countries, has increased investor concern about the stability of the European economy and led to a devaluation of the euro .

Swiss Franc

The Swiss franc (CHF) is a strong and stable currency, which has often been used as a safe haven currency in times of crisis. Since 2000, the franc has appreciated by more than 80% against the US dollar and by 50% against the euro. Reasons for the devaluation of the franc include:

1. Monetary policy of the Swiss National Bank (SNB). The SNB has implemented monetary policies aimed at keeping the value of the Swiss franc low against the euro to protect the Swiss economy from the consequences of the eurozone crisis. This policy led to a devaluation of the franc against the euro.

2. Global monetary stimulus. The accommodative monetary policy adopted by major global central banks, including the Federal Reserve and the ECB, has led to an increase in the supply of currencies on the global market. Swiss franc it was seen as a reserve currency as its monetary supply was not being raised.

3. Geopolitical Factors. The global geopolitical situation, including trade tensions and political crises in some countries, has led investors to seek refuge in currencies away from conflicts such as the Swiss franc.

If the world continued in this direction, the Swiss would always have a strong currency. Unfortunately this is not the best thing for the Swiss economy as it does not help them to export. Of course, the value of currencies is not always in line with the cost of living. I'll leave you something below.

Site tips:

• How CPI Affects the Dollar Against Other Currencies

What is currency risk?

Currency risk refers to the possibility that the value of an investment will be affected by fluctuations in the exchange rates between two currencies. Let's take the case an investor buys an ETF that invests in US stocks. Assume the day after the exchange rate between the US dollar and the Euro changes unfavorably. Put a 10% less, the value of the ETF will decrease of 10%. In other words, the investor could suffer a loss despite the stock in the ETF doing well.

How does currency risk work in ETFs?

Most ETFs have implied currency exposure, which means investors may be exposed to fluctuations in exchange rates even if they haven't actually purchased a foreign currency. For example, if an ETF invests in shares of US companies traded in euros, the investor indirectly holds dollars, even if the money is converted into euros when the ETF is purchased.

We have 3 definitions to learn:

• Currency of denomination. Expresses the currency underlying the ETF. For a S&P500 ETF is always US dollars.

• The quote currency. The quote currency for instruments listed on Borsa Italiana (for example) market is always the Euro. In the event that the Currency of denomination is different, which is very frequent, the asset is converted on Euros.

• Effective exchange rate risk. It summarizes the two previous information and explains the exposure to exchange rate risk to which the Italian investor is subject. In some cases, ETFs are of the hedged type. That is, they have assets denominated in foreign currencies in their portfolio but which, do not present exchange rate risk for the Italian investor. This is made through hedging implemented with the appropriate use of derivative instruments.

Exchange rate risk can be magnified in some situations. For example, if an investor buys an ETF that invests in a country with a currency that is relatively volatile or subject to unpredictable fluctuations, the currency risk may be greater. Also, if the investor uses leverage to invest in ETFs, the currency risk could be magnified.

How to manage currency risk in ETFs?

There are several strategies investors can use to manage currency risk in ETFs.

• Currency hedging. One of the most common strategies is currency hedging. Which involves using financial instruments such as futures contracts to protect your investment from fluctuations in exchange rates. Currency hedging can be particularly useful for investors who have strong views on the direction of exchange rates and want to protect their investment from adverse movements. But that is hardly our case. On the contrary currency hedging also has one main disadvantage. It is more expensive, as the ETF has to pay a premium for using the futures contracts. Moreover over a long period of time the same investment can see it's return reduced by more than 20%.

• Currency diversification. Another strategy for managing currency risk in ETFs is currency diversification. The idea is to physically hold some currencies to be able to buy/sell in case of a strong spread between 2 of them. The solution is quite simple, but expensive in the case of large assets and could lead to additional risks, such as that of holding currencies.

Does hedging make sense?

The answer to the question of whether or not to choose hedged ETFs is not unequivocal and depends on 2 considerations. The function that the instrument has in the portfolio and on the strategy one is following. To be precise, the choice of whether or not to hedge currency depends both on the type of instrument we buy and on the time horizon.

Assume the example of buying Brazilian government bonds, the impact of the exchange rate will be much greater. For the simple reason that the variability of the exchange rate itself greatly affects more on total return. When we buy bonds in currencies, in essence, our investment becomes almost entirely a "bet" on the exchange rate.

And if we buy stocks ETFs?

Hedged ETFs generally have the suffix HDG or Hedged in their name.

In the short term, the exchange rate may be material to overall return and hedged instruments may outperform non-hedged instruments.

iShares MSCI Japan UCITS ETF (Dist)

iShares MSCI Japan EUR Hedged UCITS ETF (Acc)

Instead, in the long run the situation appear reversed. On the one hand, non-hedged ETF instruments generally return much higher returns than hedged instruments.

This happens, first of all, because hedged instruments allow for an automatic and natural compensation of the underlying that hedged instruments do not have (implicit hedging costs).

In addition there are also the explicit costs as hedged instruments cost much more than non-hedged instruments. In the short run, this higher cost may even be sustainable, but in the long run it risks being too high and weighing too heavily on returns.

Summing up, whether to buy hedged bond ETFs or equity ETFs, currency hedging may not make sense. All depends on our investment strategy.

Exchange rate risk analysis

Finally, investors can use currency risk analysis to identify the specific risks associated with a particular ETF. This may include analyzing correlations between currencies and assessing geopolitical risks that could affect exchange rates. For example, if an ETF invests in Chinese companies, the investor should be aware of China-specific political and currency risks, such as the volatility of the Chinese yuan.

For the way I invest, in the long run, hedging makes little sense. Losing part of your earnings for temporary coverage makes little sense. In the long run, hard currencies tend to keep each other in balance as they help states to maintain their economic power.

In any case, for temporary coverage with respect to particular crisis situations, I think I could consider it in the future.

Site tips:

• How Currency-Hedged ETFs Work

• Do Currency-Hedged ETFs Have Merit for the Long Term?

What is Sector Investing?

Sector investing consists of buying shares in companies operating in specific sectors of the economy, such as the technology, finance or utilities sector. The idea behind this investment strategy is that companies within the same sector are influenced by the same market forces. Therefore their performance is related to the overall health of the sector.

For example, if the technology sector is growing, then technology companies will typically experience increased demand for their products and services and see an increase in their stock price. Similarly, if the utilities sector is having a tough time, utility companies could experience a decrease in demand and their stock prices.

The sector investing strategy is particularly popular with investors looking to diversify their investment portfolio. Investing in different sectors can help investors balance risk in their portfolio, as the performance of one sector can offset any losses in another sector.

Additionally, investing in sectors can be a winning strategy for investors who follow a value investing philosophy. These investors seek out companies that are undervalued relative to their true value. Often they find investment opportunities in sectors that have been underpriced by other investors.

For example, assume the utilities sector is having a difficult time due to falling interest rates. Value investors may find utility companies that have been overly penalized by the market and therefore offer an attractive investment opportunity.

How to choose the sectors in which to invest?

Choosing which sectors to invest in can be a challenge, but there are a few things investors can do to streamline the decision-making process.

First, investors should seek to understand macroeconomic trends. For example, if the economy is expected to grow, consumer-related sectors could benefit from higher revenues. Similarly, if oil prices are expected to rise, the energy sector could have growth potential.

Additionally, investors should seek to understand which sectors are leading in terms of performance and valuation. For example, the technology sector has been a leader in recent years and many stocks in this sector have been well rated. However, this could mean that valuations have become too high and shares could be subject to a correction.

Correlation between sectors and economic cycles

Another aspect to consider when choosing which sectors to invest in is the correlation between these sectors and economic cycles. Economic cycles represent the periodic alternation between phases of economic growth and phases of recession. Each sector of the economy can be affected differently by these fluctuations.

In general, cyclical sectors, such as the technology, tend to have more exposure to economic cycles than non-cyclical , such as health care or utilities.

Cyclical sectors can benefit from an economic expansion. As demand for non-fundamental goods and capital increases. While in an economic downturn, consumers tend to cut back on spending and investment, affecting these sectors significantly.

On the other hand, non-cyclical sectors are less affected by economic fluctuations, as their products and services are considered essential. People demand them regardless of the economic environment.

These information can be used in two ways:

• To balance risk in the portfolio, choosing sectors that are negatively or lowly correlated between them to build a diversified and balanced portfolio.

• To make a tactical asset allocation in a way to gain/protect temporarily in a particular phase of the market.

How do I use sector investing?

I strongly believe that correlations between sectors exist and that the economy is bound to repeat itself. I am also convinced that some sectors are "stronger" than others. This is due to several factors in my opinion.
Healthcare sees our survival instincts at play. utilities our desire to stay in our comfort zones. Technology is our intellect and desire to innovate. I think these 3 sectors demonstrate our human soul in a comprehensive way.
This is why I continue to accumulate positions in these 3 sectors through accumulation ETFs.

Also unlike simply buying a global index with the various sectors within it, I can average their carrying price over the months/years that those sectors are despised by other investors.

Site tips:

• Sector Business Cycle Analysis

History of Wealth Management Firms

Wealth management firms have a long history dating back to the late 19th century when the first investment firms were founded. However, it wasn't until the 1950s that the wealth management industry really began to develop. At the time, wealth management firms primarily had institutional clients such as pension funds, insurance companies, and governments.

In the 1980s, wealth management firms also began to expand into the private market, thanks to the increase in individual wealth and the growing complexity of financial instruments. In the 1990s, the industry underwent further expansion, thanks in part to globalization and the growth of emerging markets.

Investment strategies

Wealth management firms use different investment strategies to manage their clients' portfolios. One of the most common strategies is portfolio diversification, which involves investing in a broad range of stocks, bonds, and other financial instruments to reduce overall portfolio risk.

Another common strategy is investing in high quality companies, i.e. companies with a strong track record of growth and profit. This strategy aims to invest in companies that have a competitive advantage in the market and are capable of generating long-term profits.

Other investment strategies include investing in bonds, investing in value stocks, investing in growth stocks, and so on. The important thing is that asset management firms select the investment strategies that best suit their clients' needs.

Investment philosophies

Wealth management firms also have different investment philosophies. Some focus on long-term value and undervalued companies, while others seek quick returns by investing in growth companies. Still others are focused on responsible and sustainable investing, i.e. investing in companies that comply with environmental, social and governance standards.

For example, US asset management firm Vanguard has a low-expense investment philosophy. Vanguard is known for its low-cost mutual funds, which seek to track market indices rather than trying to beat them. In this way, the company seeks to offer its customers high returns at low costs.

Other asset management firms, such as BlackRock, have an innovation-driven investment philosophy. BlackRock is known for developing new financial instruments, such as ETFs (Exchange Traded Funds), which offer its clients greater access to the financial markets.

Examples of wealth management firms

In addition to Vanguard and BlackRock, there are many other successful wealth management firms around the world. Some examples include:

• Fidelity Investments. Founded in 1946, Fidelity is one of the largest wealth management firms in the world, with more than $4.9 trillion in assets under management. The firm is known for its broad range of mutual funds and its personalized financial advisory services.

• Allianz Global Investors. Headquartered in Germany, Allianz Global Investors is one of the leading wealth management firms in Europe. The firm has a broad range of investment products, including mutual funds, ETFs, pension funds, and custom portfolios.

• PIMCO. Pacific Investment Management Company (PIMCO) is an asset management firm specializing in bonds. Founded in 1971, PIMCO manages over $2 trillion in assets under management and is known for its expertise in investing in high quality bonds.

• UBS Asset Management. Headquartered in Switzerland, UBS Asset Management is one of the largest asset management firms in the world, with more than $1.2 trillion in assets under management. The firm offers a broad range of investment products, including mutual funds, ETFs, and custom portfolios.

• T. Rowe Price. Founded in 1937, T. Rowe Price is an American asset management firm specializing in equity investments. The firm manages over $1.6 trillion in assets under management and is known for its research-based investment philosophy of high quality companies at reasonable prices.

• Fundsmith. Founded in 2010 by Terry Smith. The firm specializes in long-term investments in high-quality businesses with lasting competitive advantages. Fundsmith currently manages over £30 billion of assets under management through a range of mutual funds. His funds have achieved very positive results in recent years. Fundsmith is also known for its transparency and clear and easy communication with its clients. The firm regularly publishes its results and investment philosophy on its website.

My opinions

Wealth management firms can help you get exposure to specific investment strategies. This can help us use those strategies without the effort of the study behind them. Furthermore, the professional management of these companies is certainly superior to ours and they use fundamental and technical analyzes to select the best companies to invest in.

Site tips:

• What To Look For In A Wealth Management Firm

• What is wealth management and do you need it?

What is a Hedge Fund?

A hedge fund is a type of investment fund that is actively managed and seeks to generate high returns. It is done through a variety of complex and often speculative investment strategies. Unlike traditional mutual funds hedge funds are typically open only to accredited investors, such as institutional investors, high-income individuals, or qualified investors. This means that hedge funds are reserved for a select group of investors who meet certain financial requirements.

The characteristics of hedge funds

Hedge funds are known for their distinctive characteristics, which differentiate them from traditional mutual funds. Some of the key characteristics include:

• Investment Flexibility. Hedge funds have a wide range of investment options at their disposal, including classic assets as stocks, bonds, options, futures, currencies. But also derivatives and uncommon asset classes. Thus their flexibility allows them to adopt different investment strategies and to adapt to different market conditions.

• Leverage. Hedge funds can use leverage to magnify potential investment returns. This means they can borrow money to invest in assets that could generate higher returns. However, the use of leverage also carries an increase in risk and can lead to significant losses.

• Complex fee structures. They often employ complex fee structures. Traditionally it includes a combination of management fees based on the amount invested and a percentage of the profits generated. These fee structures make them expensive to manage and affect net returns for investors.

• Active Management. Unlike ETFs, which follow a passive approach to investing, hedge funds are actively managed and seek to generate returns through active asset selection and adopting different investment strategies .

Who can invest in hedge funds?

Hedge funds are generally open only to accredited investors as we said before. This can include investment companies, pension funds, universities, foundations, high-income individuals and other entities that meet the financial requirements established by law. Theoretically, accredited Investors are considered able to understand and assume the risks associated complex and speculative investments. However, laws and regulations relating to investing in hedge funds may vary from country to country. It is important to consult local laws and seek professional advice before investing in a hedge fund.

Costs of hedge funds

Hedge funds can be expensive to manage due to their complex fee structures. Hedge fund management fees are usually based on the amount invested and can range from 0.5% to 2% or more of the annual investment amount. In addition, many hedge funds also operate a fee structure based on the profits generated, known as a "performance fee", which can range from 10% to 30% or more of the profits generated by the investments. These fees can reduce net returns to investors and affect the overall profitability of a hedge fund investment.

How do hedge funds make money?

Hedge funds seek to generate profits through a variety of complex and often speculative investment strategies. Some of the common strategies used include:

• Long/Short. Hedge funds may take long positions in assets they believe have appreciation potential and short positions in assets they believe have depreciation potential. In this way they try to take advantage of both upward and downward movements in the market.

• Arbitrage. They may seek arbitrage opportunities, which involve exploiting differences in price or value between related assets or markets. For example, they may seek to exploit price differences between the price of the stocks in two different exchanges.

• Quantitative trading. Hedge funds can use mathematical models and complex algorithms to identify trading opportunities based on statistical analysis of market data. This strategy is based on predicting future price movements and executing trades quickly to take advantage of these opportunities.

• Event Driven. Hedge funds may seek to exploit specific events, such as mergers and acquisitions, corporate restructurings or geopolitical events, to generate profits. This strategy is based on predicting the effects of these events on the financial markets and taking investment positions accordingly.

• Alternative Investments. Hedge funds may also invest in alternative assets, such as real estate, commodities, art or other non-traditional assets, in order to diversify their portfolio and seek to generate profits from different sources.

Performance metrics

Performance metrics are used to evaluate the success of hedge funds and include how they are performing over time. Some of the common performance metrics are similar to the ones used for portfolio and include:

• Absolute Return. This is the simplest measure of a hedge fund's performance and is based on the total return generated by the investment over a specified period of time, usually expressed as a percentage.

• Sharpe ratio. This metric measures the ratio of a hedge fund's return to the risk it takes. The Sharpe ratio takes into account the return and volatility of the investment and is often used to evaluate a hedge fund's ability to generate returns in excess of a risk-free interest rate, such as the yield on a government bond. A higher Sharpe ratio indicates better risk-adjusted performance.

• Sortino ratio. This metric is similar to the Sharpe ratio, but focuses only on the negative or "risky" volatility of the portfolio, excluding positive volatility. In other words, the Sortino ratio measures a hedge fund's ability to generate positive returns in the presence of negative volatility. A higher Sortino ratio indicates better risk management capability.

• Drawdown. This metric measures the maximum loss in value incurred by a hedge fund since its all-time peak. A large drawdown may indicate greater volatility or greater risk associated with investing in a hedge fund.

• Alpha. This metric measures a hedge fund's excess return relative to a benchmark index or risk-free interest rate. A positive alpha indicates an ability to generate returns in excess of the reference market or risk-free rate, while a negative alpha indicates underperformance.

The Biggest Hedge Funds and How They Work

Hedge funds are managed by highly trained portfolio managers and can vary widely in size and investment strategies. Some of the world's largest hedge funds manage billions of dollars in assets and are known for their influence on global financial markets.

One of the largest in the world is Bridgewater Associates, founded by Ray Dalio in 1975. Bridgewater Associates is known for its "debt machine" investment strategy that seeks to identify and exploit economic cycles and market movements. The fund also uses a number of algorithms and mathematical models to make investment decisions. Bridgewater Associates has achieved a high level of success and has been a major player in the hedge fund industry for many years.

Another large hedge fund is Citadel, which was founded by Ken Griffin in 1990. Citadel is known for its diversification of investment strategies, including trading stocks, bonds, options, currencies and more. The fund also uses a number of advanced technologies, such as artificial intelligence and machine learning, to make investment decisions. Citadel has a global presence and has been a major participant in the international financial markets.

The two examples make us understand how these giants move with different logics. The two hedge funds above are too big for us as they require a few million as entry capital (7.5 for Bridgewater Associates).

Unfortunately there are no hedge fund ETFs and I don't think they ever will. My advice is to look for some smaller hedge funds, analyze them and figure out how they can fit into your portfolio. For example, if your strategy is based on business cycles, then a contrarian hedge fund will complement very well. It will support you during downturns even though you may lose some returns during the upswing.

Site tips:

• If you want to follow the movement of hedge funds go here

• Hedge funds 101: What are they and how do they work?

• Hedge fund performance – explore our live data to March 2023 <-- very interesting have a look to the charts

Who is an Accredited Investors?

An accredited investor is an individual or entity that meets certain financial standing requirements set by the regulatory authorities in a given country. Obviously, these requirements vary from country to country. But in general, an accredited investor is a person or entity that has demonstrated a high level of financial knowledge. Also, people that have the financial capacity to bear the risks associated with investments can access this status. Moreover, the status of accredited investors authorize to invest in certain types of financial instruments and participate in investment opportunities reserved for professional investors. Obviously, this open new opportunities to us to diversify our portfolio.

Who can become an accredited investor?

The rules and requirements for becoming an accredited investor vary from country to country. In many countries, accredited investors must meet certain financial criteria, such as a minimum income or net worth, or have a certain amount of financial experience or knowledge.

I created a table to compare different requirements in various countries. At the day I write the post these are the requirements, thus they may change in future. Accredited investors are also known as qualified, experienced or High Net Worth investors in the various countries. The meaning is the same for this article as it concern us only in seeing the opportunities unlocked. Obviously, some taxation and/or legal liability requirements may change.

If not specified the same value is applied to individual or marital status.

Only 1 of the requirements is needed to became and Accredited Investor.

European Union has a different method to establish if you can became and accredited investor.

There are three tests to determine if an individual is an accredited investor. The first is a qualitative test, evaluating the individual's expertise, knowledge, and experience to determine if they are capable of making their own investment decisions. The second is a quantitative test where the individual must meet at least two of the following criteria:

1. Has carried out transactions of significant size on the relevant market at an average frequency of at least 10 transactions per quarter over the previous four quarters.

2. Has a financial portfolio exceeding EUR 500,000.

3. Works or has worked in the financial sector for at least one year.

Additionally, the client must state in writing that they wish to be treated as a professional client. At that point, the firm they wish to do business with must provide notice of the protections they may lose.

Pros and cons of being an accredited investors

Being considered an accredited investor offers some opportunities and benefits, but it also comes with some risks and challenges. Here are some pros and cons of accredited investors:

Pros:

• Access to Restricted Investment Opportunities. Therefore, this may include investments in startups, venture capital, private equity and other high-yield investment opportunities. These opportunities may offer greater portfolio diversification other than potentially higher returns.

• Greater Investment Flexibility. Accredited investors often have more investment options than non-accredited investors. They may have the ability to invest in complex and sophisticated financial instruments such as derivatives, hedge funds, alternative investments. Accredited Investors can make combination of these instruments or invest with leverage or debt easily.

• Portfolio Diversification Ability. Being an accredited investor can allow for greater portfolio diversification. Thus, accredited investors may have access to a wider range of investment opportunities, which may offer greater risk diversification and better protection against financial market volatility.

• Recognition of financial knowledge and experience. Being considered an accredited investor can be a recognition of your financial knowledge and experience. Of course, this can be rewarding for investors who have invested time and energy into studying and understanding the financial markets and different investment instruments. Yes, a little ego doesn't hurt, but it can also open doors for new people and improve your networking.

• Greater Bargaining Power. Accredited investors often have greater bargaining power in negotiations with fund managers and other financial industry professionals. Thus, it is done as they are considered sophisticated and well-informed investors. This can result in more favorable investment conditions and better trading opportunities.

Cons:

• Risks associated with complex investments. Accredited investors may have access to complex and sophisticated financial instruments that involve higher risks than traditional investments. Failure to understand or properly manage these risks can result in significant financial loss. Pay Attention!

• Liquidity Constraints. Some investments reserved for accredited investors may have liquidity constraints. Thus, it means that it may be difficult or expensive to redeem or sell such investments quickly if you require liquidity.

• Possible lack of diversification. As accredited investors have access to more unique investment opportunities. Because of this investors may be tempted to focus a significant portion of their portfolio on higher risk alternative investments. This could lead to a lack of portfolio diversification and an increase in overall risk.

• Less regulatory protection. Accredited investors are generally excluded from some of the regulatory protections offered to retail investors. This could include less regulatory oversight and less legal protection in the event of litigation or financial loss. Accredited investors should therefore be aware of their rights and any regulatory restrictions that may apply to their investments.

Instruments that can be accessed as an accredited investor

As we said before, being an accredited investor can offer access to a number of advanced financial instruments and investment opportunities. So, explore more some of the key tools accredited investors can access include:

• Startup and Venture Capital Investments. They are investment opportunities in emerging companies with significant growth potential, but with also higher risks. Sincerely, I'm not a big fan of. On one hand, being an accredited investors doesn't give the knowledge to understand the complexity of new business. On the other hand, if you worked in a sector for many years and possess an outstanding knowledge about it this can be a good option for you.

• Hedge Funds and Private Equity Funds. I don't particularly like active funds, but hedge funds don't have the goal of beating the market, but of keeping the value stable over time. In the next post I will elaborate on them better. In my opinion, beyond a certain threshold of net worth it is an excellent weapon to have in your ranks.

• Commercial Real Estate Investments. As I said in previous posts, I'm interested in Real Estate investments. Thus, being an accredited investor would give us access to private REITs. You will find more information in the Site tips.

• Investments Complex Instruments. High yield bonds, convertible bonds and other forms of financial derivative instruments are good example. These instruments may offer the potential for higher returns, but also involve new types of risks such as liquidity, leverage or creditor risk.

• International Investments. Accredited investors may have access to investment opportunities in international markets, both through mutual funds and direct investment in foreign securities. This can offer opportunities for portfolio diversification and exposure to emerging markets, but also carries risks related to currency fluctuations, local regulations and economic conditions in the countries involved.

Conclusion

Site tips:

• Guide to Private REIT Investing

• Accredited Investor

Real Estate: A little bit of history

Real estate investment has been one of the greatest wealth generators in the history of the last century, thanks to the economic boom. Although we are no longer in the roaring 70s and 80s, we may still consider real estate as part of a portfolio strategy. Also we usually think of real estate investing in terms of residential properties. But commercial real estate may offer even greater investment potential.

It's not hard to see why commercial real estate is such a popular choice, especially for large scale investors. Over the 25 years 1994-2019, commercial real estate has delivered an average annual return far higher than S&P 500. Not only does commercial real estate yield slightly more than equities, it also offers an opportunity to diversify into an entirely different asset class.

But we have to look into the correlation between REIT and U.S. Stocks.

Depending from the period it varies from 0 (Dot.com Bubble) to more than 80% (2008 crisis).

In any case for most of the time the correlation is positive. It is due to the fact that Real Estate grow more during expansion economic cycle. And the same does the stock market. So they are positively correlated.

On average 0.45.

Other than buying commercial property yourself, there are two ways to invest in commercial property.

The most common are Real Estate Investment Trusts (REITs). But a new class of commercial real estate investments has emerged rapidly over the past decade. Commonly referred to as real estate crowdfunding. This is an investment method that allows you to invest in individual properties, offering greater investment choice. All is correlated with the potential for even higher returns than those offered by REITs.

Let's take a closer look at REITs versus real estate crowdfunding.

What are REITs and how do they work?

REITs are public companies that own and operate commercial properties. These may include office buildings, retail spaces, warehouse facilities, hotels, apartment complexes, retirement homes and student accommodation, industrial spaces and other properties. Some REITs specialize in a specific type of commercial property, such as office buildings or large apartment complexes.

REITs fall into three general types: mortgage REITs, equity REITs, and hybrid REITs. A mortgage REIT invests in commercial real estate-backed mortgages. An equity REIT invests directly in commercial properties, and a hybrid REIT does both.

REITs raise funds from investors through the issuance of shares and use these funds to purchase, develop and manage commercial properties. Investors in REITs receive dividends based on the cash flow generated by the rentals. In case of selling of the properties the funds the managers will invest in other buildings or share them with investors. Moreover, the properties appreciation held by the REIT can raise the value of the REIT shares . One of the main advantages of REITs is their liquidity, REITs shares can be easily bought/sold on stock exchanges.

What is Real Estate Crowdfunding and how does it work?

Real estate crowdfunding is an investment method that allows investors to participate in specific real estate projects without having to buy the entire property. Essentially, investors contribute relatively small amounts of money to finance real estate projects, such as the purchase of a commercial building or the development of an apartment complex. A real estate crowdfunding platform connects investors with project sponsors, who are responsible for managing the project and distributing returns to investors.

There are two mainly models of real estate crowdfunding, including equity crowdfunding and debt crowdfunding. In equity crowdfunding, investors become shareholders in the project and participate in the profits and losses of the property. In debt crowdfunding, investors provide a loan to the real estate project and receive interest on their investment. Either way, investors can profit from selling or leasing the properties once the project is completed.

REITs vs Real Estate Crowdfunding: Pros and Cons

Now that we have a basic understanding of what REITs and real estate crowdfunding are, let's look at the pros and cons of both investments.

Pros of REITs:

1. Diversification. With REITs you can diversify among different buildings both at geographic and industrial level.

2. Liquidity. REITs are publicly traded and therefore are very liquid, allowing investors to easily buy and sell their shares.

3. Affordability. REITs are also accessible to investors with smaller capitals, as shares of REITs can be purchased for minimal amounts.

4. Professional Management. REITs are managed by real estate professionals with experience in the management and operation of commercial properties.

Cons of REITs:

1. Dependence on the stock market. Because the shares of REITs are publicly traded, their value may be affected by stock market volatility. Bear market could affect also them and lead to losses in the value of the shares of REITs.

2. Unsecured Dividends. Dividends distributed by REITs are unsecured and could vary depending on the cash flow generated by the properties held by the REIT. If you are looking for stable dividends also during a recession, this could not be the right investment.

3. Fees and Expenses. REITs may involve management fees and other expenses that could affect investors' returns. Take a look on them.

Pros of real estate crowdfunding:

1. Diversification: Investors can select different real estate projects to diversify their portfolio and mitigate risk. Differently from REITs Investors pick one by one all the buildings they think are worthy to enter in their basket.

2. Affordability. Same as REITs. Also in this case there is the possibility of investing in real estate projects even with minimal amounts. Then making it accessible even to investors with smaller capital.

3. Control. Investors can have more control over the projects they invest in and in some cases participate in management decisions. In this case investors can pick the best opportunity from different type of projects.

4. High Return Potential. Real estate crowdfunding can offer the possibility of generating slightly higher returns than REITs. This is due mainly by the fact that the Investors take the risk of choosing the right project in which invest into.

Cons of real estate crowdfunding:

1. Risk of loss. Investment property always carries a certain degree of risk, including the possibility of losing some or all of the invested capital, as projects may not be successful or unforeseen events may occur.

2. Lack of Liquidity. Real estate crowdfunding investments are usually less liquid than stocks of REITs. I suggest you to search platform with second-market in which to resell the acquired properties. In any case, there could be liquidity problems in a time of real estate panic.

3. Dependence on project management. The performance of the investment depends on the project management skills of the sponsors. It could be difficult to evaluate the different levels of experience and expertise in property management.

4. Regualtion. Real estate crowdfunding may not be regulated uniformly in all jurisdictions, which could pose legal or compliance risks

REITs and Real Estate Crowdfunding: My opinion

In conclusion, both REITs and real estate crowdfunding are real estate investment options with their own pros and cons. REITs offer diversification, liquidity and professional management, but are subject to stock market volatility. Real estate crowdfunding offers affordability, control and high return potential, but also carries risks of loss, lack of liquidity and dependency on project management.

Also, it is important to consider diversifying your investment portfolio. Investing in real estate through REITs or real estate crowdfunding should be part of a portfolio strategy. Diversifying your portfolio can help mitigate overall risk and maximize potential returns.

Having said all this I prefer REITs. As I've always said, I don't really like active investing and the additional alpha of crowdfunding investing doesn't cover the additional liquidity risk.

Furthermore, I don't have the time and desire to study the various individual projects to arrive at the same degree of diversification given by the REITs. That said if you are really good at choosing investments and want to be more of an active investor then part of your portfolio can be in real estate crowdfunding or a mixture of the 2.

I think a real estate investment could take up to 10% of my portfolio in the future. I would focus especially on those areas of the world that are expected to grow a lot (Asia and Africa). On the other hand it is also true that they could still face speculative bubbles (like China), which seem to affect all fast growing economies. In any case, I still have no idea when to enter decisively. For now they remain monitored. REITs ETFs I'm also considering, although large REITs already diversify enough. And you know that too much diversification diminishes returns.

I leave you an interesting article on Seekingalpha about REITs and Real Estate Crowdfunding.👇

Site tips:

REITs Vs. Real Estate Crowdfunding: What's The Better Way To Invest In Real Estate

I've already done a couple of posts about houses which you can find here and here. However, rental yield can vary depending on a number of factors, such as location, property type, and the current state of the rental market.

• One of the key factors that affects rental yield is location. Properties in urban areas tend to have higher rental yields than those in rural areas. This is due to higher demand for housing in urban areas. Properties in areas with strong job markets, good schools, and amenities, such as shopping, restaurants, and transportation, also tend to have higher rental yields.

• Another important factor is property type. Single-family homes tend to have higher rental yields than multi-unit buildings or apartments, due to the ability to charge higher rent for a standalone unit. Additionally, properties in good condition and with desirable amenities such as updated appliances, central air conditioning, or a backyard, tend to have higher rental yields.

• The state of the rental market is also an important factor in determining rental yield. In a hot rental market, properties may be able to command higher rent and have higher rental yields. Conversely, in a slow rental market, rental yields may be lower.

Rental yields are typically calculated by dividing the annual rental income by the value of the property. For example, if a property is valued at €200,000 and generates €12,000 in annual rental income, the rental yield would be 6% (12,000 / 200,000).

It's important to keep in mind that rental yield is just one aspect of investing in rental properties. Other factors, such as property appreciation, can also impact the overall return on investment.

Average European capital rental yields

According to data from the National Association of Realtors, the average rental yield, or the annual return on an investment in rental property, is around 4-5%. Despite these data, the average yield of a rental property can vary greatly depending on the geographical area where it is located. For example, according to data from 2020, the average yields for rental properties in major European capitals are as follows:

• Paris, France: average yield of 2.5%

• Berlin, Germany: average yield of 3.5%

• Madrid, Spain: average yield of 4.5%

• London, United Kingdom: average yield of 4.5%

• Rome, Italy: average yield of 5.0%

• Vienna, Austria: average yield of 5.5%

Understanding the Average Expenses

The annual expenses for managing a rental property can vary based on factors such as location, property size, condition of the property, and landlord needs. However, some common expenses include:

• Property taxes: property taxes are due annually and vary based on location and property value. Insurance: it is important to insure the property against fires, floods, theft and other damages to protect your investment.

• Maintenance and repairs: tenants can cause damages to the property during their stay, so it is important to budget for repairs and maintenance.

• Legal expenses: if necessary, legal expenses may be incurred for issues related to renting, such as resolving disputes with tenants or preparing rental contracts.

• Management fees: some property management companies require a fee for managing the property, this can vary from 6% to 12% of the rent.

• Cleaning and tidy up expenses: if the property is not returned in acceptable conditions after the tenants leave, additional costs may be incurred for cleaning and tidying up the property.

These are just some of the common expenses associated with managing a rental property. It's important to consider all of these expenses and any others when evaluating the potential return on a real estate investment. On average, annual maintenance expenses for a rental property can range from 5% to 10% of the annual rental income. This can include expenses such as property taxes, insurance, cleaning, repairs, and maintenance.

Other Data affecting rental yields

Here is an overview of the average vacancy rates in 3 of the major European capitals. As well as information on how these yields are calculated and the potential impact of non-payment of rent on rental income.

• In London, the vacancy rate for rental properties is around 4-5%.

• In Paris, the vacancy rate for rental properties is around 7-8%.

• In Berlin the vacancy rate for rental properties is around 2-3%.

The potential impact of non-payment of rent on rental income can vary depending on the specific circumstances, but it can be significant. According to a study by the European Mortgage Federation, the average rate of rental arrears in Europe is around 5%. This means that on average, landlords may not receive rental income for around 5% of the rental period. Factors that can contribute to non-payment of rent include economic downturns and high unemployment rates, which can make it difficult for tenants to afford rent payments.

It's also important to note that rental income is subject to taxation in most countries. The tax rate can vary depending on the country and the specific circumstances. For example, in the UK, rental income is subject to income tax at the individual's marginal rate. In Germany, rental income is subject to a flat rate of 25%. It's always important to consult with a tax advisor to understand the specific tax implications of rental income in your country.

Rent an house simulation

To calculate how much you could earn from renting a €300,000 property in London, we need to consider several factors. I use London as an estimate because that's where I found the most data.

• Rental Income: The average return on rental properties in London is 4.5%. Thus, the rental income for a €300,000 property would be €13,500 per year (300,000 x 4.5% = 13,500).

• Annual Expenses: As I mentioned earlier, the annual expenses for maintaining a rental property can range from 5% to 10% of the annual rental income. So, for a rental income of €13,500, your annual expenses could be between €675 and €1,350. I take 5% for simplicity.

• Vacancy rate: I eliminate another 5% from the annual value (€675)

• Taxes: I consider property taxes because income taxation is also cumulative with the rest of the income. Furthermore, if we were to compare it to other forms of passive income we would have to pay taxes on those as well. The rate for calculating the tax due is 0.76% of the property value. It is calculated in proportion to the share of possession of the asset. And the months of the year in which the possession took place. (€2280)

We now take into account all these factor. The annual net income for a €300,000 property in London could be €9870 per year, after deducting expenses and taxes.

3,29% of annual return similarly to a dividend. 🥳

However, this is only a rough estimate. It may vary depending on property market conditions and the specifics of the property in question. Additionally, appreciation of the property should also be considered in real estate transactions. This requires additional estimates. Also, I meant this post to focus on rental income only.

Wealthy's Opinion

I still prefer stock dividends, as they are more liquid and more diversifiable. I also have less bang even though the MSCI World's dividend yield is lower 1.4-2%.

Site tips:

• How Much Profit Should You Make on a Rental Property in 2022

• How Many Rental Properties To Make $100k Annually

A drop in the market good in practice?

• First, a drop in the stock market can present an opportunity to buy low. When the market drops, stocks become cheaper, and this can be a great time to buy. By buying stocks at a lower price, investors can potentially earn a higher return on their investment when the market recovers. According to historical data, the S&P 500 has returned an average of 10% per year since its inception in 1926. And, even after a bear market, the stock market has always recovered and gone on to reach new highs. This is due mainly to long-term trends about the increasing population, increase in the money supply and others.

• Second, a drop in the stock market can also be a sign of a buying opportunity for value investors. Value investors look for stocks that are undervalued and have the potential to increase in value over time. A market crash can create opportunities for value investors to buy stocks at a discounted price. For example, the Buffett Indicator suggests that the market is currently undervalued (June 2022).

• Third, a drop in the stock market can also be a good thing for investors who are looking to rebalance their portfolio. A market crash can provide an opportunity to sell overvalued stocks and use the proceeds to buy undervalued assets. This can help investors achieve a better balance in their portfolio and potentially improve their overall returns. According to a study by Morningstar, portfolios that were rebalanced annually have outperformed those that were not rebalanced by an average of 0.50% per year over the past decade.

Additionally, a market crash can also be a good thing for investors who are looking to diversify their portfolio. A market crash can be an opportunity to add undervalued assets to your portfolio and increase your diversification.

How change accumulation strategy during a drop is good?

Another advantage of a market crash is that it can be a good time to start dollar-cost averaging or put a lump sum money on the markets.

• Dollar-cost averaging. By investing a fixed amount of money at regular intervals, an investor can take advantage of market fluctuations. This allows the investor to buy more shares when prices are low and fewer shares when prices are high.

• Lump sum. Similarly you can use a greater sum to enter the market with more strength. In this way you will earn more from the market rise. You will never be sure that you have entered the market's peak negative moment.

It's important to remember that market crashes are a normal part of investing. While they can be stressful, they can also present opportunities for investors who are willing to take a long-term perspective.

In conclusion, a drop in the stock market can be a good thing for investors. It can present buying opportunities, a chance to buy low, and a chance to rebalance your portfolio. It's essential to keep a long-term perspective and not panic during market downturns. It's important to have a well-structured financial plan and not to make impulsive decisions based on fear or greed. A market crash can be an opportunity to review your investments, realign your portfolio and make sound decisions.

It's also important to remember that investing is a long-term game and that, over time, the stock market has always trended upward. Therefore, a market crash can be a good opportunity for investors to take advantage of the buying opportunities it presents, to improve the overall returns of their portfolio and to make their investments more robust.

No site tips this time. 😕 But I have a beautiful image to be more relaxed

I always recommend investing in market indices (ETFs) to save costs and time. But this way we are not creating a bubble around them.

A few years ago Michael Burry gave an interview in which he stated that ETFs were creating a bubble.
As long as the speech is September 2019, his speech may still be valid. After all, investors' fears remain.
Michael Burry was based on 2 concepts. The index effect and the distribution of daily dollar value traded.

The index effect is based on the fact that a company as soon as it enters an index gets a lot of buys. Increase in demand --> increase in price. However, this effect no longer seems to have strength in recent years, probably also thanks to ETFs.

Also in case the stocks are really overvalued and the replica ETFs are forced to imitate the index. Active fund managers would have even more potential for earnings given their ability to disengage from the index.

Regarding the second point Michael Burry says

The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic

and continues

The S&P 500 is no different -- the index contains the world's largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks.

The bottom line is that if everyone wanted to sell their shares there probably wouldn't be any buyers for everyone.

However Burry does not take into account 2 things:

• An ETF does not need to buy all the stocks within an index in order to track it correctly. Sampling tracking ETFs buy only the stocks that move the index the most (usually outside the half mentioned by Michael Burry) and with mathematical calculations are able to track the underlying index. This is also great for lowering ETF costs, fewer stocks traded, less costs.

• 90 percent of the volumes are in the secondary market the ETF doesn't have to sell its underlyings every time someone sells an ETF. However, let's assume that there is a mass sale of the ETF, because the index no longer satisfies. Should the ETF depreciate more than the underlying then a third party called an authorized participant comes into play. In such a scenario the authorized participant will buy ETF shares from the secondary market then from the seller and then go to the issuer who issued the ETF shares to request the redemption of those shares. This mechanism is called creation and redemption in kind. It is the foundation of how an ETF works, and it is primarily the mechanism that allows an ETF to track the index so closely during major market shocks. I leave you below an article by JustETF that explains it.

I would also add that being passive investments, investors tend to remain more anchored to their instrument even during market crashes. (Disposition Effect?)

Be careful because the above discourse does not apply to all ETFs. If you buy exotic ETFs or leveraged, inverse or SWAP-based ETFs, there may be counterparty risk. You don't have to play with them.

What if everyone invested in an index

When I talk about Index Investing Economy I mean an economy in which everyone invests in passive funds and robots alone determine share prices.

However, I think there are no worries. Some reasons:
1) Active investors will never disappear, because most people will never accept that they are just "average". They think they can beat the market, and they will try. In the same way that people play the lottery, it doesn't make sense economically, but it's there.
2) Many investors now do "index picking" instead of "stock picking", and it helps to set prices.
3) The same company could be in many different indices: large cap, socially responsible, economic sector X, country Y, value, weight parity, dividends, etc. A large number of indices can help set the prices of individual stocks.

4) Institutional investors will always look for strategies to beat the market or to be less volatile. They do it for their budgets, not for the common good.

For the reasons listed above, I wouldn't worry about the Index Investing Economy or an ETF bubble.

Long and complicated topic of which I think I have gutted all the points a bit, but which I don't reserve the right not to write again in the future.
If so, I'll update this post.

Site tips:

• The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime

• What Happened to the Index Effect? A Look at Three Decades of S&P 500 Adds and Drops

• Creation / Redemption - The secret sauce of ETFs

• IS THE GROWTH OF PASSIVE INVESTING MESSING WITH THE MARKETS?

We will basically analyze 3 indicators and their pros and cons.

Rule of 20

Peter Lynch managed a fund called the Magellan Fund, which for about 20 years, generated an average compound return 29% annually.
Lynch is also famous for having theorized a very effective formula for understanding whether the stock is overvalued or not. This is called the rule of 20. It consists of taking the price-earnings ratio of the S&P 500 and adding it to inflation. The sum must equal 20. If the result of this sum is greater than twenty the market is overvalued, otherwise it is underrated.

But why 20?
Historically the price-earnings ratio has been 16, US wide, and inflation has been 4%. So the average sum of these two numbers is expected to be around 20%.

The power of this formula is that, by adding up inflation, which is a way of considering the risk of rising interest rates, we can understand when a market is overvalued or undervalued. This is not in relation to historical price-earnings values, but in relation to interest rates.
With this method, you can always figure out what a reasonable price-to-earnings ratio is in relation to current inflation. Clearly these are qualitative indications, we do not expect the market to settle perfectly at the value of 20. It would not make sense.

When the rule of 20 doesn't work

This rule gives us excellent indications of speculative bubble risk, but it is not perfect as it does not consider monetary policies.
This rule is one of the indicators that we must have in our arsenal, although there are many others that should be considered.
This is a valuation indicator, not a market trend indicator. Valuations are not a tool for making speculative market entries and exits. If something is at a discount it could continue to be at a discount. Also if something is on the bubble tomorrow it could be even more on the bubble.

CAPE Indicator

First let me tell you how we usually measure “overpriceness”: The Shiller PE Ratio, also known as Cyclically Adjusted Price to Earnings ratio, or CAPE 10. Mr Shiller won a Nobel Price with his studies, so of course he deserves our attention.

CAPE is the total market cap divided by the average earnings of the last 10 years, and it's more accurate than PE.

http://www.multpl.com/shiller-pe/

As you can also see from the link above, high CAPE historically correlates with crashes and recessions.

If it were that simple why don't they all sell when you exceed a certain value?
well in a period of low rates one expects a higher cape. Also, during bubbles, you never know when you're high enough to collapse.

So this indicator also has trouble telling us when there is going to be a market crash.

10-year return less 2-year Treasury rate

https://fred.stlouisfed.org/series/T10Y2Y

As you can see from the link above, when the yield difference is negative a recession is followed.

This is because people expect a higher return on 2-year treasury bonds than on 10-year ones.
In practice, people are already expecting a crisis.

unfortunately it does not help us on the timing of the recession.
Indeed often when the recession comes the difference is positive again.

Conclusions

As we have seen, predicting a recession is not impossible, but it could be difficult to understand when it will happen despite the 3 indicators in this post.

However, they can help us understand how to adapt our asset allocation to the historical moment we live in.

We don't have to anticipate the markets, but we can at least understand when they will arrive.

Site tips:

• Why the Rule of 20 Matter in Stock Valuation

• CAPE Ratio (Shiller PE Ratio): Definition, Formula, Uses, Example

• Inverted Yield Curve: Definition, What It Can Tell Investors, and Examples

We can't know.

But above all if we met him what would we do?

Let's assume the market collapses by 50% tomorrow.
Your investments are worth half.
How many would have the courage to double our investments because in this way we would have bought at a good price?
And if there was another 50% drop the next day, would we still continue to average buys down?

Probably not. Me neither.

I think the chart below is comprehensive enough on its own

Second problem to address: when is there a market crash?
10%, 20% or 30%?
the market enters bear mode when there is a 20% drop, but not all investors think the same.

Everyone has their own way of thinking about when a market drop should be entered.

How to fix the situation?
Create a strategy and stick to it.
Two examples if you have a capital accumulation plan could be:

• Stick to it no matter what. No matter how much the market loses, you always invest your amount (monthly, bimonthly, quarterly, ….) and close the app as soon as you have invested.

• Decide on a market drop rate and act accordingly. You could increase the amount that month to make up for the market drop.

Always remember to set yourself a limit. Don't invest what you need to live. And above all prepare yourself psychologically.

We must always invest while waiting for a market drop and always have in mind how to behave accordingly.

Especially in favorable periods, we should understand how to behave, because after growth there is always a stop and a descent and we must not be scared or panicked.

Site tips:

• 7 Things To Do When Stock Markets Crash

• One Thing Never to Do When the Stock Market Goes Down

Today we will deal with one of the most interesting topics for me the macroeconomic environments of the economy. There are four situations (one is divided into two because it gives different results on the economy) that are created by the possible combinations of inflation and growth.

Below you can see their position, their frequency in history and the return of the shares in the meantime.

Let's try to give some definitions:

Warming (Overheat): starting off from a rising growth regime, we have inflation picking up to the point where it slows down growth.

Too Hot (Stagflation): rising inflation chokes off growth

Cooling (Reflation): growth falls further and brings inflation along

Too Cold (deflation): to the point where inflation turns negative and activity contracts severely

Perfection (Recovery): growth is positive and inflation is low

We understand that economic growth alone is not the only condition to earn the most, but low inflation is also needed. Sorry emerging markets, you will do better in the future when your growth is more stable).

Best asset classes for each economic scenario

Here are some examples

But why do they work? Well, for stocks, a recovery situation helps because if inflation is not high, people are not afraid and spend their salaries more quietly. In addition, the interests are lower and this helps companies to finance their projects. GDP growth also increases salaries (in theory). One way to calculate GDP is the sum of a nation's salaries and pensions).

If you look closely in stagflation (theoretically the worst scenario for stocks) you can still see that there are categories that can resist the collapse. These sectors are normally called defensive sectors and are important for resisting collapses. For example, the utilities sector manages to keep its revenues in stagflation. This is because even if the economy is bad no one would be without light, water or gas at least in the short term.

Bonds are to be bought at the beginning of a reflexive phase. In this case because soon the decrease in inflation will lead to a lowering of interest rates and this will help to increase their value. Remember that the rise / fall in bond prices is inversely proportional to the trend in interest rates.

Light lesson today, but in my opinion also very interesting. Everywhere we always talk about GDP growth, omitting inflation and its importance. Economic scenarios need our attention to understand them during our portfolio construction