The beginning of the new year very often exacerbates the question for retail investors – where to invest money. Maybe it’s related to bonuses or third salaries that were received, or maybe it’s just that people are used to starting a “new” life after the first of January.
Next, a difficult choice begins, where should you invest your free money? And at this point, very often people get bogged down in details, often not entirely helpful, instead of looking at the issue more broadly. They begin to choose individual shares, bonds, deposits, apartments, gold or some other assets that will help them generate income. It is desirable that this income be as much as possible with as little risk as possible.
But this approach can be wrong and even harmful. Academic economists in the USA Brinson, I, Beebauer and Singer conducted an interesting study on the contribution of various factors to the change in the total return on the basis of pension plans and made an extraordinary conclusion. It turns out that 91% depends on the banal distribution of assets in the final portfolio of the investor, all other factors together accounted for only 9%! The most important conclusion from this is that people should focus their attention not on choosing individual assets, but on how to allocate their funds among different asset classes. Therefore, you should always look at your investments (that is, investments) only through the lens of a portfolio consisting of different asset classes. To put it simply, you should not try to buy Gazprom shares, RZD bonds or a roommate in Koralevo, but build your portfolio so that, if possible, everyone is present, and the most important aspect will be directly the shares that will fall to one or another class. For the sake of objectivity, it should be pointed out that there are very few people in Russia who could consider such a portfolio where real estate would make up, for example, only 20%. Therefore, I will not concentrate on such portfolios and will talk about the one that seems interesting to me in 2024 and which I have chosen as the basis for my investments.
I see the following distribution as such a portfolio for me:
- 45% in shares of Russian companies (Indian stock fund);
- 32% Russian government bonds (OFZ bonds with a horizon of 5 to 10 years);
- 14% gold (in the form of an exchange fund);
- 9% liquid short-term investments in the form of deposits or money market funds.
Now a little more detail.
I don’t expect upheavals on the Russian market this year, but I don’t expect great success when investing in shares either. This is based on my prediction last year, in which the stock could give the funder 20% per annum over a five-year horizon. But in 2023, the shares grew by 52%, which means that expecting 20% per annum in the next 4 years is already optimistic. It’s easy to believe that the growth rate of stocks, based on my forecast, should decrease to 14.5% per annum in the next 4 years, and this does not look attractive, since government securities can now lock in 12% to 14% per annum for the term even older than 4 years. As the professionals would say: “The risk premium of an equity investment of 0.5-2 percentage points is not interesting.” In addition, those who understand bonds probably know a simple rule: there is relatively less risk in bond investments during periods of high interest rates than during periods of low interest rates. Therefore, unlike in 2023, I have reduced the share in stocks to 45% in favor of bonds to 32%.
Also, I have reduced my gold holdings, but will keep my finger on the pulse. Many factors indicate a high risk of a crisis in the US stock market, but they are no longer as high as they were in 2020 and 2021. Therefore, I do not see the point in keeping most of it in gold.
Nor do I expect to see what we will see next year any dramatic changes in the ruble exchange rate when gold behaves as a quasi-dollar asset. According to my calculations, there is a 90% chance that USDRUB will not go beyond its standard volatility of around 10%. 9% in liquid assets allows me to quickly adjust any of the other classes if the situation starts to change rapidly. By the way, in my case, these are not deposits, but money market funds, which became very popular among Russian investors in 2023.