So, which approach is right for you?

Passive vs active portfolio management

When it comes to managing your investment portfolio, there are two primary approaches: passive and active portfolio management. Passive portfolio management involves investing in a diversified mix of low-cost index funds or exchange-traded funds (ETFs) that track the performance of a specific market index, such as the Nasdaq. Active portfolio management, on the other hand, involves selecting individual stocks or funds and making trades in an attempt to outperform the market.

So, which approach is right for you? Let's take a closer look at the pros and cons of passive and active portfolio management:

Passive Portfolio Management

Pros:

Lower Fees: typically involves investing in low-cost index funds or ETFs, which have lower fees than actively managed funds. This means that more of your investment returns stay in your pocket.

Simplicity: With a passive portfolio, you don't need to spend time researching individual stocks or funds or monitoring the market on a daily basis. You simply invest in a diversified mix of index funds or ETFs and let the market do the work.

Consistent Returns: Over the long term, passive investments tend to provide consistent returns that closely track the performance of the market. This can help you avoid the ups and downs of individual stocks or funds and stay invested for the long haul.

Cons:

Limited Flexibility: you are limited to the returns of the index or market that you are tracking. You won't be able to outperform the market or take advantage of individual opportunities.

No Personalization: A passive portfolio doesn't take into account your personal investment goals or risk tolerance. You're investing in the same mix of funds as everyone else who is tracking the same index.

Active Portfolio Management

Pros:

Potential for Higher Returns: you have the potential to outperform the market and generate higher returns than passive investments.

Personalization: An actively managed portfolio can be customized to your specific investment goals and risk tolerance.

Flexibility: Active management allows you to take advantage of individual opportunities and make trades based on market conditions.

Cons:

Higher Fees: Active management typically involves higher fees than passive investments. This can eat into your investment returns over time.

Higher Risk: With active management, there is a higher risk of underperforming the market. In addition, it can be difficult to consistently outperform the market over the long term.

More Time-Consuming: Active management requires more time and effort than passive investing. You need to spend time researching individual stocks or funds and monitoring the market on a daily basis.

In conclusion, the choice between passive and active portfolio management ultimately depends on your personal investment goals, risk tolerance, and the amount of time and effort you're willing to put in. Passive investing can be a simple and effective way to invest in the market, while active management provides more flexibility and the potential for higher returns. It's important to do your research and carefully consider your options before making a decision.

PORTFOLIO 2023

To start our 2023 portfolio analysis, first we need to look at QQQ (Invesco QQQ Trust), an exchange-traded fund (ETF) designed to track the performance of the NASDAQ 100 index with low costs and tax efficiency. As a passive ETF, QQQ aims to replicate the performance of the underlying index, rather than outperform it.

If you want to identify the top 20 companies with the highest weight in the NASDAQ 100 using QQQ, you can first use the weight of each company in QQQ, and then choose the 20 companies with the highest weight. The following are the 20 companies with the highest weight in QQQ:

Earnings Per Share

EPS is a carefully examined metric that is often used as a barometer to measure a company's profitability per unit of shareholder ownership. As such, earnings per share are one of the key drivers of stock prices. It is also used as the denominator in the P/E ratio. EPS can be calculated using two different methods: basic and fully diluted.

Using this metric, a simple year-over-year average was used for 20 stocks, selecting the top ten companies with the highest earnings per share growth to participate in the portfolio.

Portfolio Selection

    Markowitz's principle of diversification tells us that investors can reduce the risk of their portfolio simply by holding combinations of instruments that are not perfectly positively correlated with each other. If all assets have a correlation of zero, then they are perfectly uncorrelated. The variance of the portfolio's return is the sum of the squares of all the assets held proportionally multiplied by the variance of the assets' return and their respective covariances, and therefore, the standard deviation of the portfolio is the square root of this variance.

Expected Returns 2023

    As a way to adjust the annual rebalancing, I chose to maximize the Sharpe ratio. This ratio, presented by Sharpe in 1966, is one of the measures used to evaluate the performance of a portfolio and shows that the assets in the portfolio are organized by their return above the risk-free asset of the portfolio, which can also be referred to as excess return.

    As the fund manager, I also consider that the risk-free asset that best served the purposes of the portfolio would be the ten-year US Treasury bonds. Therefore, the yields of these bonds were considered for the portfolio balancing in order to obtain the return of the risk-free asset. Finally, regarding the portfolio management, I made the decision not to engage in short selling and leveraging, thus placing an additional restriction on its performance.

2023

This year, the most efficient point on the curve is the one where, for a risk level of 51.87%, the return is 55.74%. However, given the assumed restrictions, the optimal portfolio also achieves a return of  22.16% for a risk of 25.62%. The optimal portfolio in this case is composed of the following assets and their respective weights: 

Microsoft - 22%

Tesla- 14%

Costco - 64%

Based on these considerations, I will present the year-by-year evaluation of the consequences of this decision in terms of portfolio performance. When we look at the portfolio, it is composed of 60% in the equity portfolio and 40% in Treasury bonds.

Please note that the information provided is for educational and informational purposes only and should not be construed as financial advice. It is important to consult with a licensed financial advisor or professional before making any investment decisions. The use of any information or materials in this context is solely at your own risk.

Introduction

    The purpose of this blog is to share my personal experiences, thoughts, or opinions. Also, provide informative content on the subject I am passionate about, building a community of like-minded individuals who share same interest and establishing myself as a leader in the PM industry.

This blog post will consider the following aspects:

• Playing the role of a manager of an investment fund.

• Companies that are part of the NASDAQ-100 index, as I understand it encompasses companies with strength in technological and electronic growth.

• The companies will be selected based on their annual EPS growth, with a maximum of 10 assets per period.

• The time horizon for the investment portfolio is a period of 60 months, starting in March 2023 and ending in February 2028.

• The portfolio management will follow the Markowitz model, where annual adjustments and balancing will be made based on the maximization of the Sharpe ratio. The performance of the portfolio will also be evaluated against the benchmark.

Finally, the annual performance of the fund will be taken into account.