Life has gotten the best of me but after a 3 months writing hiatus, I am now back!
While I was away, I had also been contemplating on the topic to write on without random blabbering. A big part of this site is trying to keep articles to its necessary gold nuggets. Hence, I truly think all of the guides written here have distilled the key information and knowledge that will help you get started quickly on your financial journey.
With the luxury of some spare cash lying around, a problem is to make the right investment decision while also considering the opportunity costs. A repeated question that I think about is: which asset should I invest more of? Real estate as in an investment property, commodities as in gold, crypto as in bitcoin, or bonds like government bonds?
While this question plagues me, I was then inspired from an earlier conversation with a peer. A key factor of risk for equities is that it is highly correlated to other asset classes and industries. Correlation is a statistical measure that expresses the extent to which two assets are moving in tandem. Positive correlation means that if Stock A increases in price, Stock B is also going to increase in price, and vice versa.
What if this can be used as an benefit? Correlation is just an attribute of equities – like a knife, it can be utilized different in the hands of the holder. While positive correlation adds to risk, investing in equities with positive correlation to another asset class can be leveraged to get proxy returns of that asset class that you are confident in.
Essentially you can simply invest in equities to replicate almost any returns in any market or asset class.
Check out the historical correlation table from Guggenheim
In each market, there will often be a company that leads in terms of market shares or growth and it often pays to invest in such companies to benefit from the market expansion. Examples are Amazon in eCommerce, Coinbase in crypto exchanges and Nvidia/AMD in tech developments. In essence, these are the proxy companies which you can invest in to benefit from a growth industry.
Add in: Invention of ETFs
With ETFs now easily accessible across the market as a low-cost investment vehicle, it has also increased opportunities to invest in previously illiquid and hard-to-access markets.
A recent example is the Bitcoin ETF. Since BlackRock launched this ETF in January, it has shortly reached >$20 billion in AUM in 3 months, since this writing. Bitcoin, or the crypto market, is generally an illiquid market and investors often have to go through several huddles and take big spreads to even start investing in Bitcoin. With the ETF, it has helped to bridge these cons and more importantly allowed investors to buy easily into Bitcoin via public stock exchanges.
Not just in crypto, the proliferation of ETFs meant that there is likely an ETF available if you wish to invest in a region, country, sector, investment style and even issuer. Example: https://etfdb.com/etfs/
How does this relate to our topics?
ETFs are essentially pooled investments in a particular basket of securities and are traded in the markets during regular hours, just like stocks are. While these are essentially not stocks, its equity-like behavior and availability on public exchanges simply makes it very much like it.
Managing a portfolio of ETFs and stocks is also much easier as you can monitor them in a single platform that offers access to these. There are lots of players with such offerings now and the broker I use is Interactive Brokers. It offers a wide list of ETFs with affordable fees: https://www.interactivebrokers.com.sg/en/trading/products-stocks.php. P.S: this is not a paid ad and I am simply sharing what I am using…
If you had access to most markets and asset classes via these 2 investments, the options are indeed unlimited. It might even hurt your portfolio performance if you try to diversify too aggresively. What do you think of equities or ETFs as investment vehicles in your portfolios?