Selma’s Investment Strategy: Part 2 - How your portfolio is managed by Selma
Welcome back to the concluding part of our deep dive into Selma’s investment approach. Both articles provide you with a detailed overview of how Selma creates and manages your individual investment portfolio.
In our first article, we talked about the basics of Selma's investment philosophy and how we put together a portfolio just for you. Now, in this second part, we'll explore how Selma manages your portfolio after you have opened your account.
You will learn about how Selma adjusts your portfolio to changes in the financial market by adjusting it to the valuation of financial markets and also how Selma keeps your investments always in balance with your individual situation.
Without further ado, let’s dive right in.
Part 1: Why managing your portfolio is essential
You might be wondering: "Why do I even need to manage my investments? Why not just let my investments be? Isn’t 'buy and hold' often mentioned as the go-to strategy?"
Very good questions! At the heart of it, investing isn't just about throwing your money into assets and hoping for the best. It's a dynamic journey where multiple factors – from global economic shifts to personal financial changes – constantly interplay. While the 'buy and hold' mantra advocates for long-term commitment to an investment, it doesn’t negate the need for management.
Keep in mind: Periodic reviews and adjustments are essential. Without them, you might miss out on potential opportunities or expose yourself to undue risk. Think of it like tending to a garden: even if you plant the best seeds, they still need regular care and attention to flourish. Similarly, your investments need that care to ensure they align with your evolving goals and the ever-changing financial landscape.
In the vast universe of investment strategies, there are different ways to approach portfolio management:
- Doing Nothing (Buy and hold) :
This means letting your investments sit without any adjustments. While it sounds hassle-free, it can lead to potential risks. Over time, without periodic checks, your portfolio will drift away from its intended asset allocation, making it either too risky or too conservative for your goals. Therefore, the classic “buy and hold” strategy is rarely used among investors.
- Active Management:
Here, investments are continuously bought and sold in an attempt to outperform the market. However, numerous studies have shown that consistently beating the market over the long run is a challenge, even for seasoned professionals. The fees associated with active management can eat into potential returns.
- Passive Management:
The idea here isn't to beat the market but to mirror its performance. This is achieved by maintaining a predetermined asset allocation. The key is periodic rebalancing to ensure that the portfolio remains aligned with its original asset allocation. It doesn't involve chasing after the latest hot stock but ensures that your investments remain diversified and aligned with your long-term goals.
The financial world, along with your personal financial situation, is always evolving. Hence, it's essential to regularly and strategically adapt your portfolio in response to these changes.
Selma's “holistic” management approach
Selma follows an approach where its fundamentals are based on passively managing your investments. This means we do not try to outperform the market, but we also don’t let your investments get out of balance. However, we go beyond just managing your investments passively.
Rather than adjusting your investments to ensure that the portfolio remains aligned with your original asset allocation, we also adjust your investments considering your overall financial situation and risk tolerance. This ensures that your investments always match your individual financial situation. Selma's overarching goal is to ensure your investments are in perfect balance with your life and the financial market.
The strength of Selma's holistic management strategy:
✅ Adaptability with Life Changes:
Life is a journey of change. Events like property acquisition or family expansions can reshape financial goals. With Selma’s approach, your portfolio dynamically aligns with these shifts - and automatically changes the share of growth assets (stocks) and capital-preserving assets (bonds) in your portfolio. This ensures you always take only the amount of risk that aligns with your overall financial situation.
✅ Smart Diversification and Regular Rebalancing:
Selma helps you build the most efficient portfolio that exists. The global market portfolio (as we discussed in the first part) is a representation of how everyone across the world invests. It's considered the most efficient portfolio available, balancing risk and return based on the collective wisdom of all global investors. This global strategy is based on the Modern Portfolio Theory, a Nobel Prize-winning concept that's key to modern investment methods. Selma checks regularly if global market capitalisations are shifting and updates your portfolio in the same way. This way your portfolio keeps in line with the efficient global market portfolio.
✅ Managing Your Risks:
Selma uses the Shiller CAPE to measure long-term over and undervaluations of markets. This helps reduce your risk and seize opportunities when investing for the long term (+10 years). In conclusion, while Selma doesn’t try to beat the market, we believe in the importance of keeping your investments balanced with your situation and with the changing financial markets.
Next, we will dig deeper into how Selma's management strategy exactly works.
Selma's overarching goal is to ensure your investments are in perfect balance with your life and the financial market.
Part 2: How does Selma manage your investments
Now that you understand what Selma's overall management strategy looks like, let's dive into the details.
1. Adjusting your investments to changes in your life
If one thing is for sure, your life is in constant change. Maybe you'll switch jobs, experience fluctuations in your income, buy a new home, start a family, win the lottery 🍀or simply get closer to your retirement.
Each of these milestones can have significant financial implications and how much risk you can take, and thus how your investment strategy should look like. Your current finances, the life situation you are in and how well you deal with risk determines if you should invest more in growth assets like stocks or value preserving assets like bonds.
Your Investor Profile's Role:
At Selma, we believe that an investment portfolio shouldn't just reflect your past; it should evolve with your present and anticipate your future. Your investor profile, which was created during your first chat with Selma, represents a momentary snapshot of your financial goals, life, and risk tolerance. But life doesn't stand still. While core aspects of your financial outlook might remain steady, details change.
While your fundamental situation and goals might remain consistent over time, the nuances can and do change. Hence, it's essential to keep your investor profile updated. Think of this as a regular health check-up for your investments; though a weekly review might be excessive, an annual review is highly recommended.
The Impact of Updating Your Investor Profile:
Every time you review and update your investor profile, Selma dives deep into the data. While an update might not always result in a portfolio change, Selma continuously evaluates the alignment between your current portfolio and the new details you've shared. This isn't just about the money you've invested with Selma.
We always consider the broader picture – accounting for other investments you might hold elsewhere, gauging the associated risks, and ensuring your portfolio complements your entire financial situation. If, for instance, you've taken significant risks in other investments, Selma might propose a more balanced or conservative approach here, ensuring that your overall exposure stays within your comfort zone.
Natural adjustments: Preparing for Retirement
While we've discussed updates you initiate, there are also natural transitions that Selma adjusts for, such as the approach of retirement. As the years roll by, and retirement comes into clearer focus, your financial goals naturally shift from growth to stability and capital preservation.
Selma understands this transition. So, without any prompt from you, Selma thoughtfully shifts your investment strategy from growth to security and capital preservation, protecting your hard-earned savings as you prepare to enjoy your retirement.
The only thing you need to do after you have opened your account is to keep your investor profile updated.
2. Adjustments to changes in the financial market
Since your life is just one aspect that will change over time, we also need to take a close look at how the financial market changes over time. Selma therefore monitors the market for you and rebalances your portfolio over time.
What is rebalancing?
Each of your investments reacts differently to market conditions. Over time, this might skew your portfolio away from its initial allocation. When this happens, Selma steps in, making necessary transactions (both buys and sells) to restore the balance in line with your long-term targets — this action is termed "rebalancing". Without this process, your portfolio might drift over time, potentially exposing you to greater risks than you initially intended.
Selma looks out especially for the following
Now it is getting technical ⚙️. But don’t worry, Selma does the work for you automatically .
1. Changes in how capital is distributed around the globe
As you have learned in the first part, Selma created an individual portfolio which is globally diversified. Selma measures annually how money is distributed globally across different investment categories, i.e., how all the other investors invest money across the globe. In case this changes, Selma adjusts your investments accordingly to make sure your portfolio matches the global market portfolio in the best way.
2. Changes in the risk level of your investments
When some of your investments lose and others gain value, the structure of your investment shifts and so does the risk level. Selma adjusts to such changes in the markets and buys and sells investments to keep the risk level in check.
3. Assessing long-term market valuations with Shiller Cape
Selma employs the Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio — often referred to as the Shiller PE or CAPE ratio — to determine if certain investment markets are undervalued or overvalued based on historical data and revenue patterns. By doing so, we aim to mitigate risk and capitalise on market opportunities, especially for long-term investments spanning over a decade.
Nobody can forecast the future of financial markets. That’s why Selma does not rely on forecasts of any human experts. Instead, Selma makes investments based on accurate numeric data and proven models. This data is updated quarterly, as companies report their new earnings every quarter.
But what is the CAPE ratio?
Developed by Nobel laureate and Yale University economist, Robert Shiller, the CAPE ratio provides a comprehensive snapshot of a stock market's valuation. Unlike the conventional price-to-earnings (P/E) ratio, CAPE considers inflation and the inevitable ups and downs of corporate earnings.
Here's a breakdown
- Calculation: To determine the CAPE ratio, you take the current price of a stock market index, like the S&P 500 or the SMI, and divide it by the average real (once inflation is accounted for) earnings of that index over the last ten years.
- Why Ten Years?: By analysing a decade's worth of earnings data, the CAPE ratio incorporates information from both economic highs and lows. This broad view offers a more consistent perspective on market valuations.
- Interpreting the Ratio: A notably high CAPE ratio implies that the stock market may be on the pricier side, whereas a low CAPE ratio could suggest it's undervalued. To provide context, Shiller sets the current CAPE ratio against its historical average. A present CAPE that greatly exceeds the historical average might hint at overvaluation, while one below the average suggests potential undervaluation.
Investors and market analysts hold the Shiller CAPE ratio in high regard as it provides insights into the long-term potential of the stock market. Selma harnesses this tool, adjusting your investments to either overweight or underweight specific markets as required, ensuring your portfolio remains robust without any effort on your part.
But what if every market seems overpriced?
There are times when major stock market indices seem excessively valued – think of the period just before COVID in 2021. When faced with such scenarios, Selma strategically redirects investments from these high-priced markets into more stable assets like precious metals, specifically physical gold and silver. This approach acts as a buffer, adding a protective layer to your portfolio against potential global stock market downturns. As a policy, Selma portfolios maintain a 5% stake in precious metals, offering protection against market upheavals and inflation. Depending on market conditions, especially insights from the Shiller CAPE Ratio, this allocation can increase up to 25%.
Keep in mind
Selma monitors the financial market, rebalancing portfolios based on changes in global capital distribution, investment risk levels, and insights from the Shiller CAPE ratio, ensuring portfolios align with long-term targets and current market valuations.
Part 3: Summary
Congratulations on reaching the end of our in-depth exploration into Selma's investment strategy! 🎉
By now, you should have a comprehensive understanding of how Selma curates, manages, and fine-tunes your portfolio, ensuring it remains in harmony with both your personal financial landscape and the broader global markets.
- Personalised Portfolio: Selma crafts a portfolio tailored uniquely to you, based on a comprehensive understanding of your financial goals, risk tolerance, and life situation.
- Dynamic Management: Life changes, and so do financial markets. Selma constantly monitors and rebalances your portfolio, ensuring it evolves with you and stays aligned with the ever-changing investment landscape.
- Data-Driven Decision Making: We rely on proven models, accurate numeric data, and tools like the Shiller CAPE ratio to make informed investment decisions, eliminating the unpredictability of human biases.
- Protection Against Volatility: In uncertain times, Selma ensures you have a safeguard in place, redirecting investments into stable assets like precious metals when needed.
Investing can seem overwhelming with so much to learn and many choices to make. But with Selma, you're not on your own. We're here to help, making sure your investment experience is easy and fruitful.
So, what's next?
The only thing left for you is to take the first step. Selma has laid out the map, detailed the journey, and showcased the strategy. Now, it's your move. Whether you're a seasoned investor or just dipping your toes into the world of finance, Selma offers a unique, personalised, and holistic approach that's hard to find elsewhere.
You can sign up here and start your investment journey today.
Niklas is taking care of Selma's digital marketing channels. He is an expert in communication, holds a degree in international economics and is way too passionate about. 🎾LinkedIn