Early Investing

How to Build an Investment Portfolio for Current Market Conditions

How to Build an Investment Portfolio for Current Market Conditions
By Adam Sharp
Date December 17, 2021

The other day I was talking to a friend who is just getting started with investing. He asked my opinion on how to build a portfolio from scratch.

In this environment, that is a very tricky question. The S&P 500 currently trades at a quite rich 38x 10 year price/earnings ratio (AKA Shiller or CAPE P/E). The 12-month S&P 500 P/E is also quite high at 29x.

Meanwhile the S&P 500 dividend yield is at a new all-time-low of 1.28%. That’s worse than it was on Black Tuesday – the infamous day of the 1929 stock market crash.

That immediately makes me want to have low exposure to U.S. stocks. Yes, they have outperformed the rest of the world incredibly over the past 10 years – but eventually that will change. I suspect U.S. stocks will underperform significantly over the next 10 years (especially once you adjust for inflation). 

If I had to choose between U.S. bonds and U.S. stocks, I’d definitely choose stocks. But fortunately our options are no longer limited to domestic investments. 

Fading U.S. Stocks

In my stock portfolio, I only have about 20% exposure to the U.S. That’s mostly gold and silver miners and some long-term tech stocks. About 70% of my portfolio is in emerging markets. I’ve chosen primarily Russian stocks, which have done quite well recently. The largest Russian ETF in the U.S. – VanEck Russia (RSX) – currently trades at a 6.66x price/earnings ratio and sports a 4.96% yield. 

Of course, I still have a lot of exposure to the U.S. economy, but it’s in the form of startup investments. I’d much rather invest in disruptive young companies, especially in this market. I am bullish on the U.S. long term, but not so much on the bloated incumbent dinosaurs.

However, even startups are getting expensive these days, as I discussed in “How to Deal With Crazy-High Startup Valuations.” Deciding what to invest in right now is a tricky task. But here’s how I would start building a portfolio today.

Portfolio Allocations

Needless to say, this is not a portfolio for everyone. It’s a rough idea of how I would build a portfolio if I were starting out today. All situations are unique.

  • Emerging markets: 50%
  • Gold/silver: 10%
  • Select U.S. small caps: 10%
  • Startups: 15%
  • Crypto: 5% to 15% (half bitcoin, half ethereum and promising DeFi projects)

A few caveats:

  • During the next crypto bear market, increase exposure. Dollar-cost-average into high-quality projects, collect airdrops, participate in DeFi to get rewards, etc.
  • Invest in startups over the course of a year or more. Try to pick companies with significant traction and happy customers.
  • For gold and silver, I would own half physical bullion and half high-quality miners. Sprott runs a good junior miner fund under the ticker SGDJ.

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