2017 was a fairly easy year to make money in the market. Though certain stocks and sectors didn’t perform, if you were long developed and/or emerging market stocks, safe bonds, mid-grade bonds, high-yield, munis, gold… you probably made money. Corporate earnings grew, central banks kept policy loose, and economies expanded in sync. That leaves 2018 markets more expensive, but leaves room for optimism that a continuation of last year’s steady appreciation will remain in effect. Let’s take a look at a few portfolios on the WhoTrades Marketplace and go through what the main rewards and risks are to each: Portfolio #1 This portfolio is basically the poster child for how to do well in the 2017 market: (Source: Marketplace portfolio 1) It holds five top-notch performers – AAPL (31% allocation), FB (25%), NFLX (18%), BABA (17%), NVDA (9%) – and a small position (0.2%) in OCUL. This hits most of the bases in tech – the market leader in consumer electronics, the market leader in social media (and increasingly online advertising), a company that disrupts the way people consume entertainment, the overall Chinese leader in B2B, B2C, and C2C retail, and a chipmaker on the forefront of emerging AI and machine learning technologies. If these companies keep meeting their financial targets and investors remain committed to rewarding “market disrupters,” this type of portfolio could continue to provide double-digit appreciation in 2018. Some downsides include high correlation among the securities held. There is a large overlap in the buyers and sellers of large cap growth stocks. All of these stocks have shared +0.30 or better correlations with each other over the past year. When the market sells off, these all tend to go down in unison. One company is also not yet profitable (NFLX) and should still be considered speculative in nature. Concentrated portfolios – particularly in volatile asset classes such as stocks – tend to produce extremes in returns oscillating from great to horrible. This is often true for broad equity indices as well, and therefore is likely to be particularly valid when considering a small group of securities within the same general subset of the market. Recession risks in 2018 are low, but reliance on just five securities augments the odds that any given one could materially impact its performance. Portfolio #2 This portfolio has been up 75% over the past year, with just a 12% drawdown from its highs. (Source: Marketplace portfolio 2) There’s a lot of activity and different holdings in this portfolio, but it really boils down a pretty simple set of holdings: 1. AAPL (26% of the allocation – a bit more when including options) 2. ADBE (25% – ditto) 3. SOXL (10%) 4. V (10%) 5. GOOG / GOOGL (8%) 6. MA (4%) So you have Apple, a $90 billion software producer in Adobe, a semiconductor ETF, Google, and two electronic payments processors. AAPL’s revenue is still heavily concentrated in the iPhone, which makes the business cyclical. SOXL is a 3x leveraged long semiconductor ETF. Semiconductors are inherently cyclical as well, rising and falling based on global tech demand. V and MA effectively take a royalty on global economic activity, and benefit when consumer spending exceeds expectations. GOOG depends on the vitality of its ads business, though has extensive reach in various technological endeavors. The risks of this portfolio are similar to the first, with concentration risk and high allocation to a particular industry, though with greater exposure to cyclical securities (the leveraged bet on chipmakers underrates this source of risk if going by basic percentage allocations). This type of portfolio is a perhaps a good choice for those with cash-only accounts and a long time horizon (i.e., decades before the funds might be needed), but is highly concentrated to excel in bull markets and is likely to suffer significant drawdowns in bear markets. Portfolio #3 This portfolio made an appearance in a previous article but gets an additional mention due to its unique nature of being a mixture of bitcoin, precious metals, and US Treasuries. (Source: Marketplace portfolio 3) This portfolio is heavily speculative and not one that’s ideal to stow the totality of your life savings. The only yield-based asset comes in the form of TLT (20% allocation), a 20+-year Treasuries ETF. SLV (silver ETF) is allocated at a proportion that could only be viewed as a bullish bet at about 20%, and the remaining 59% of the portfolio is dedicated to bitcoin, which at the moment is the very exemplar of speculative trading. The long-term prognosis of this portfolio will obviously be dominated by how bitcoin does. Nonetheless, the elements contained within this portfolio could provide added value when sized correctly when included among other assets. For example, diversification into bonds can reduce risk and better even out gains over time. From 1972 to the present, a portfolio that was 75% stocks and 25% bonds (i.e., 10-year US Treasuries) reduced annualized volatility relative to a 100% stocks portfolio by 23% and reduced its maximum drawdown from 51% to 38%. This came at the cost of just 0.50% in annualized gains. Silver, gold, or a precious metal can also have a positive diversification effect by hedging against adverse supply-side economic developments and for environments where growth underperforms expectations and inflation outperforms. (Gold is best for this purpose.) From 1972 to today, a portfolio that was 70% stocks, 25% bonds (10-year USTs), and 5% gold reduced volatility relative to a 100% stocks portfolio by 28%. Maximum drawdown was reduced to 35% from 51%. Annualized gains were just 0.50% lower. Bitcoin or any other cryptocurrency, if you’re inclined to use it for any other purpose than pure speculation, could be considered as a (very volatile) diversification asset, given in its history to date it has minimal correlation with any other asset class. For this purpose, it would be used well south of 1% of one’s portfolio. Overall, while I wouldn’t hold this portfolio in isolation, there are elements to it that can be added in some quantity to a more equities heavy portfolio to help better balance out its risk. Conclusion Portfolios that did best in 2017 may be likely to continue into 2018 – namely, those concentrated in companies that are best suited to disrupt entire industries and grow revenues rapidly. However, when asset prices rise, this normally means that these companies are becoming more expensive. As central banks take steps to reduce liquidity in their financial systems, it enhances risks in financial markets, which can pave the way for investors to think about reducing risk in their portfolios. When it comes to Marketplace portfolios, the idea isn’t to always copy what one particular trader has been doing, but follow several unique portfolios and potentially integrate bits and pieces to forming your own particular style of trading that aligns with your own personal return goals and risk tolerances.