Portfolio strategies explained:
If you want to build a house, already long before the start of construction there are several questions: How big should it be? What materials would you like to use? How would you like to use the individual rooms? How much should the construction costs? You must also consider the topographical features. Probably hire an architects and engineers with the construction. Builders and craftsmen then bring the wishes into reality. In other words: If it ought to be good good, leave nothing to chance. In investment, it goes the same way.
These factors are to be considered when designing an ETF portfolio:
- In the run-up, determine how long you want to keep the portfolio, what purpose it will serve.
- Determine your personal risk-aversion or appetite.
- Be aware of your personal circumstances and risk assessment.
- Innovative investment strategies must first be validated, do not invest in the unknown.
Not every building design fits in any landscape. In portfolio strategies, it is not different. We will provide you with a short overview of the most popular.
Portfolio strategies with ETFs
For investing in ETFs, you can focus on a few selected portfolio strategies, which can also lead to impressive results with simple means. Experiences from the past also demonstrate that the most complicated methods not automatically bring the most success – particularly in relation to expenses in the form of costs for research, administration and trade.
In portfolio construction, there are thee main strategies up for selection: buy-and-hold, core satellite and trend-following models – depending on whether you want to use the portfolio rather passively or actively. The investment strategies differ primarily in how active you deal with investment opportunities: buy-and-hold replaces a market forecast by a long holding period. Once you have purchased an ETF, you just keep it. The Core Satellite strategy is something for active ETF strategists: for a part of the portfolio there are several active forecasts. A trend-following model in turn translates an observed pattern of financial data into an investment algorithm. Those who invested with ETFs are not limited. – but you should be aware of how many active decisions you want to use in your portfolio.
Other investment strategies such as the value-at-risk method require extensive calculations and a carefully guided database of not always easily available high-quality financial data. These strategies are therefore less suitable for do-it-yourself implementation.
Buy-and-hold portfolio strategy
The basic principle of this investment strategy: Once you placed money in an ETF portfolio there are only adjustments to the original allocation. If you make a profit you reinvest in the ideal case. The advantage: As a result, you benefit from a remarkable effect of interest compounding.
The buy-and-hold method has a disadvantage: due to the long holding period, they are limited in their flexibility. Because during painful downward phases you should still not sell. Are you more of a passive type with a lot of perseverance and discipline? Then yhis strategy might be what you are looking for.
We offer you a wide selection of different portfolio strategies as a template for your portfolio. These can be implemented cost-effectively with a few strategically diversified ETFs .
Core Satellite as a portfolio strategy
With a core satellite strategy you split your portfolio into a broad core and related individual investments, so-called “satellites”. The core is covered with a handful of ETF, which are typically broadly diversified. Although the satellites make only a small proportion of the portfolio, they should ideally generate better return than the core part.
With ETFs you can easily implement the portfolio strategy. For the core are only a few ETFs need to invest the very broad. Long-term trends or strategies such as sustainability fit well into the core portfolio. The Satellites require more attention. You should follow a consistent system. You enjoy to go tactical and have fun in active investment strategies? Then Core Satellite should suit you.
Trend following models as a portfolio strategy
A trend-following model automatically controls the composition of the ETF portfolio. Forecasts are not required. The signals are generated by an algorithm. The algorithm is constructed from statistically evaluated data patterns.
Professionals, so-called “quants” (spoiler: like us), use a variety of models, the trends are3 studied under different time periods and capture a wide range of markets.
Simple trend-following portfolio strategies are mostly based on an average day line as the average rate of the last 200 days as a signal. If the price rises above the average line, a buy signal is generated. If the price falls below the median line, a sell signal is generated. So there are phases in which you are invested in ETFs and others when your money is parked in cash.
Here you can see both the advantage and disadvantage of this investment strategy: A timely exit prevents large losses in a stock crash. The re-entry, however, it is often difficult. You are not immune against false signals. With this investment strategy, you basically have to revisit the applied rules constantly.
Combination of portfolio strategies
You can also combine different strategies together:
- Core Satellite can already be a combination of trend-following in the satellites, while the core is a buy-and-hold portfolio.
- Buy-and-hold can be combined with a signal model.
- The satellites of a core-satellite portfolios could be selected by means of a trend following system.