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Shifting your investment strategy at 40

It's worthwhile to note that there isn't usually one single investment strategy to use throughout your life.

At different stages of life, you are in a different phase with regards to wealth management. Before your 40s, it's important to focus on capital accumulation. From 40 onwards, it might be important to focus more on capital protection.

When you are in your 20s and 30s, the amount of capital you have for investing is usually limited as you might not have reached your peak earning years. For those in the 20s, accumulating $100,000 by the age of 30 might seem like a tall order if your monthly salary is $4000. When you are in your 40s, the same amount of $100,000 can usually be easily accumulated either through savings or returns on investment in 1-2 years, especially if your portfolio has already reached a sizable amount of $1M.

Hence, it's very important to understand that investing before 40 is very different from investing after 40. You are usually in the capacity to take on more risks before the age of 40.

This is why my current portfolio is one of high beta. You may refer to the details of my portfolio here. In my current portfolio, you may notice that there are some high volatility items such as Bitcoin, ARKK, BABA etc. All these constituents result in a slightly higher beta value for my portfolio.

When I run through my portfolio choices in Portfolio Visualizer, you will notice a higher beta value of my portfolio as shown below.

This higher beta is also the reason why my portfolio has underperformed recently. During periods of market downturns, high-beta portfolios have the tendency to have a poorer return.

Take a look at the figure below.

The above figure shows clearly how portfolios of various different beta values perform in different market conditions. In recent times, the S&P 500 is oscillating between Bear Market and Down Market. In those conditions, you can see that portfolios of lower beta value have an advantage as they likely face less drawdowns compared to those of higher values. This is also the primary reason why my current portfolio see worse returns than the S&P 500.

However, it's worthy to note that beta is a double edged sword. In the Up Market or Bull Market, portfolios of higher beta tend to outperform. This is also the primary reason why my portfolio returns 17% in the month of January.

This is also exactly why I am sticking to a portfolio of high beta at my current stage of life. If you look at past statistics, the S&P 500 rises 3 out of 4 years. This represents a very good chance for my portfolio to outperform before I hit 40 years old. I will definitely take the chance to attempt to accumulate as much capital as possible through my high-beta portfolio.

However, things will change when I reach 40 years old. This is where capital protection will be important. By that age, your portfolio might have already reached a sizable amount. It is then important to ensure that your portfolio does not suffer drastic drawdowns that might potentially affect your retirement. Suffering 3 years of downmarket just before your retirement is going to give you considerable financial setbacks (think of Sequence of Returns Risk).

Hence, I will likely shift my investment strategy to focus on building a low beta portfolio comsisting of bonds, properties and REITs when I hit 40 years old. Perhaps this is also when it might be worthwhile to revisit the topic of second property again. I'm generally against the idea of getting a second property early as I find that the potential earnings from it is not that great especially when you should be chasing better capital returns during your younger days. In this article by mothership, it is shown that every $1 invested in private property from 1995 to 2021 has only grown to $1.30 while every $1 invested in the global stock market in the same period has grown to $7. I will probably revisit this topic in a separate blog post again.

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