The System I Used To Generate 50% Returns For My Portfolio
Possibly the best 3 stock portfolio?
In soccer, there’s a saying that defence wins you titles. The teams with the strongest defence are the ones who concede the fewest goals. We can apply a similar concept to the stock market.
Focus on building a strong defence FIRST, before building up a strong midfield and frontline. Many people tend to do the opposite, by focusing on high growth plays.
Here we’ll explore a 3-stock portfolio. I call this the VAT portfolio. This portfolio is broken into a 40-30-30 allocation.
40% on defence (low risk)
30% on midfield (medium risk)
30% on attack (high risk)
Over the last decade, this portfolio would have given you almost 50% annualised returns. High upside usually accompanies high downside. Not this one. The drawdowns are significantly lower than similar risk portfolios.
Defence (Allocation: 40%)
Broad Market Index Funds (eg. VTI, SPY)
The defensive portion of our portfolio should be something that’s low risk, and gives you some upside at the same time. Both VTI and SPY has consistently generated between 8% to 10% annualised returns over an extended period.
Even Warren Buffett himself is an advocate. In his 2013 letter to shareholders, he gave an indication on how he wants the money he leaves for his wife to be invested:
Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)
Midfield (Allocation: 30%)
Mature Growth (eg. AAPL, AMZN)
The midfield is reserved for medium risk plays, notably mature growth companies. Some examples include Apple (AAPL), and Amazon (AMZN). My personal choice would be Amazon (AMZN). Amazon is a company that tends to do well during market downturns. It offers both upside potential and downside protection.
Forward (Allocation: 30%)
High Growth (eg. TSLA)
The forward line is arguably the most exciting area, where we can get our hands on high growth plays. This is the sector which did well in 2020 but is in the gutters now. For me, this is none other than Tesla (TSLA). I’ve never been a Tesla fanboy from the start. Over the years, I have started to convert after seeing how well its management has executed on a high level.
How Has The VAT Portfolio Performed?
2021: 43.01%
2020: 410.27%
2019: 25.29%
2018: 12.32%
2017: 44.69%
2016: -1.51%
2015: 23.26%
2014: 23.61%
2013: 131.195
2012: 25.65%
Over a 10-year period, the VAT portfolio only lost money in 1 year. That was in 2016, where it lost a measly 1.51%. Sure, there are some years where the portfolio underperformed the market, but this happens to even the best. Just ask Warren Buffett. On his way to generating 20% annualised returns, he also had extended periods of underperformance.
Portfolio Drawdowns
It’s important to look at the maximum drawdown. Begin by asking if you can stomach the maximum drawdown. If not, you may want to adjust the portfolio allocation or stock selection.
The biggest drawdown of the VAT portfolio is 22.53%. This came recently in Feb 2022. The second largest drawdown of 22.32% was in May 2019, which lasted a total of 9 months.
Here are the top 10 drawdowns of the portfolio:
The longest drawdown lasted for 9 months, from Sept 2018 to May 2019. The longest time taken (i.e. recovery time) for the drawdown to return to initial levels is 7 months.
Conclusion
The VAT portfolio offers both the potential for great returns, and the added downside protection. Its best year came in 2020, where the portfolio returned 410%. The worst year was in 2022 (this year), where there was a drawdown of 22%.
What I’m Using For My Investments:
Crypto
FTX
This is by far the BEST crypto brokerage (in my opinion). Verification and deposit was fast (within less than 30 minutes) and easy. The platform interface is user-friendly and easy on the eye.
Transferring crypto in and out of the platform was also a breeze.
Receive 5% discount on all your crypto trades when you sign up here.
Hodlnaut
I use Hodlnaut to stake my BTC and ETH (for 6.71% APY and 5.65% APY respectively). They offer some of the best rates for staking your crypto.
Get free 30 USDC (US$30) when you sign up and deposit US$1,000 worth of assets here.
Stocks
Interactive brokers (IBKR)
I opened this about 1 year ago. The platform is not too user-friendly, but I like the charts they use to show historical returns.
Earn up to US$1,000 worth of IBKR stock when you sign up here.
Saxo
My first brokerage I opened to invest in the US markets. I love that they give a P&L breakdown, both on a monthly and yearly basis.
Earn up to S$500 per person (depending on your deposit amount). PM me on FB if you’d like to open an account and we can split the rewards.
Moomoo
My most recent brokerage which I opened, just to get some freebies if I’m being honest.
Get 1 FREE SE share and $30 cashback when you sign up here.
TD Ameritrade
The charting software for TD is second to none. The platform even allows you to do backtesting and simulations. My only gripe is that they lack a P&L chart like Saxo or IBKR, making it hard to track your returns.
Note that TD only offers equities listed in the US markets.