Base, Beta, Bets
An investment approach that require little time and divides the portfolio into three different categories called Base, Beta, and Bets.
Investing is important to protect against inflation over time and to create economic well-being. It is often recommended that the foundation of an investment strategy is a diversified core portfolio across geographies with low fees. An approach that require little time and divides investment into three different categories called Base, Beta, and Bets is explored below.
A model portfolio
This examples portfolio, which allocates 45% to Base (World and US markets), 45% to Beta (Technology and Energy sectors, Nordic markets), and 10% to Bets (Bitcoin ETF), had a nominal annual growth rate of 30% over the last 9 years with yearly rebalancing.
The above-average volatility of almost 22% is expected because of the high concentration in stocks and the allocation towards more volatile sectors and assets. However, it should be pointed out that the worst annual return was just -12%.
The portfolio is available here for further exploration.
It's important to remember that market conditions change over time, and the factors that contributed to the portfolio's results in the past may not persist.
The categories and allocation ideas
In this section the three categories, Base, Beta, and Bets are explored in more detail. The structure is inspired by the three-fund portfolio, but a bit more active and with the goal of increasing returns in comparison.
Base
Base is the foundation of the portfolio and have lower risk compared to Beta and Bets. Index funds are often recommended, as they have historically outperformed most actively managed funds, and is a way to get exposure to stocks with lower risk.
MSCI World (URTH): Exposure to the global stock market, diversifying across many countries and sectors.
S&P 500 (SPX): The largest U.S. companies have been consistent drivers of long-term returns.
Local index: Exposure to stocks in your home country (if outside of the U.S.), to reduce currency risk.
Beta
Allocating a part of the portfolio to growing sectors with the potential of outperforming the broader market (Base).
MSCI World IT Sector (XLK): The tech sector has seen strong growth and the assumption is that the trend is likely to continue.
S&P 500 Energy Index (XLE): Energy demand is expected to keep growing.
Investment companies: A way to get exposure to a focused range of assets, including private companies. Examples include Constellation Software, Fairfax Financial Holdings, and others.
Bets
Consider allocating a small portion of your portfolio to higher-risk, potentially high-reward investments. These investments require more skill and time to manage and are typically held for a shorter period than your core holdings in Base and Beta.
Momentum investing: Momentum stocks have been proven to be a successful strategy for various asset classes and markets around the world.
Niche sectors: Specific industries, or regions you believe will outperform, such as Japan or emerging markets like India, and Turkey, or small cap stocks, life science, cybersecurity, etc.
Exponential growth: Specific assets that have the potential of substantially outperform the broader market. Examples include E.l.f. Beauty, MicroStrategy, Celsius Holdings, Bitcoin ETF, Eli Lilly, Coinbase.
Conclusion
The example portfolio is concentrated in stocks through index funds, which offers some diversification. However, this approach increases portfolio volatility due to limited exposure to low-volatility assets. In high-inflation scenarios, these assets often fail to keep pace with inflation. For risk-averse investors, adding low-volatility assets such as fixed income, bonds, or commodities to the portfolio can mitigate risk but might result in lower returns.
Ultimately, the optimal asset allocation varies based on individual circumstances and goals, ethical preferences, investment timeline, and risk tolerance.