Portfolio Tilts: Fine-Tuning Your Investment Strategy with Discipline

Investors can fine-tune their portfolio with small tilts to express views and modify allocations, but should maintain discipline and consider timing.

### Fine-Tuning Your Portfolio with Tilts
* 💼  A "tilt" is a **slight modification of your portfolio** that deviates from your **core, diversified holdings**.
* 🔢  The core portfolio typically consists of **low-cost, low-risk funds**, while the tilt is a **small percentage of your overall investments**.
* 📊  Tilts can express specific views, such as **overvalued markets**, **undervalued regions**, or **preferences for certain sectors**.
* ⏰  Timing is crucial for tilts, with both the **entry and exit points** needing to be well-chosen.
* 📉  An example of a tilt is given involving a **financial sector ETF** during the **US banking crisis**.
* 💰  Tilt size should be limited, with the author recommending a **maximum of 10% of the overall portfolio**.
* 🤔  The author admits to being a **cautious investor** and emphasizes the importance of **discipline and risk management** in tilting.
* 🎯  The article concludes by highlighting the importance of **timing and discipline** in implementing tilts.

many investors now buy into the idea of holding a few low-cost index funds. But what if you think that either you're missing out on an opportunity or Market valuation makes your portfolio a bit too risky? Well, in this case, you can fine-tune your portfolio with something called a tilt. So how can we tilt our portfolio? How far should we tilt? How long should we tilt? And what kind of tilts do investors typically have? And if you do enjoy our content, please do subscribe to our Channel and like this video. So just to be clear, a tilt is not a radical overhaul of your portfolio. What we're talking about here is a fine-tuning of your allocations. So this is not like getting nervous about stocks crashing, selling all of your stocks, and staying in cash. That would be really radical, and it would essentially be taking a huge risk, a huge plunge into a cash-on portfolio. No, as the name suggests, a tilt is just a slight variation of your portfolio. Now I could say to you, you should never deviate from a single

portfolio with just a few funds in it and never try and beat the market. But look, it's human nature that you will try to do that. So all we're talking about here is taking a disciplined approach to modifying our portfolio. No, we can't time markets. No, we probably can't beat markets, but most of us are going to try anyway. And one way to impose that discipline is to distinguish between the core portfolio and satellite portfolios. And the basic idea here is that the core portfolio is that diversified, low-cost, low-risk portfolio. Often it's very simple. In my case, exceptionally simple because it's just got one fund in it. But for most people, that'll contain probably at least a global stock fund and also a global bond fund, or maybe a money market fund as well, maybe some commodities thrown in too. So that's your diversified core. That's the backbone of your portfolio. That's going to get you to retirement and beyond. But then if we want to deviate from that core, we'll have small satellite portfolios which

just modify our allocation overall slightly. Another way of thinking about that is that the core is large, and the satellites are small. Most of our money is in the core, and the satellites are kept to a small percentage of our portfolio. I call it my fund portfolio, my satellite portfolio, and it makes up about 10% of my overall investments, and I'm really disciplined about that. Another way of thinking about core and satellite is in terms of the views that they express. The core expresses the view that you can't time markets, you should be diversified and long-term, you're going to earn the average returns for stocks and bonds, an idea you want to milk those returns with as little loss to the finance industry as possible, so you want low-fee funds. But let's say that you also have some strong views. For example, you might think that stocks are currently overvalued, a view that I'd probably agree with, in which case you might want to tilt away from pure equity, which is what I've got, and maybe have

some money market funds, or alternatively, you could use bond funds in that safe satellite. So here, you'd be tilting away from risk. Or perhaps you think Emerging Markets will outperform global markets, in which case you could have a small allocation to an EM Fund in addition to your core portfolio. Or perhaps you like gold, you think that it's going to provide you protection through the inevitable crashes that we see in markets, in which case you could have that in your satellite portfolio. Or maybe you work in Tech and you think that US tech will outperform, well, that would be your satellite. Or you could have some combination of all of those. All I'd say is keep the tilts small and be really disciplined about the size of the Tilt. As I say, for me, it's 10% of My overall Investments. For you, it could be larger or smaller, really it depends on how convinced you are you can beat markets with these tilts. Or another way of saying that is how convinced you are that you're right. So what kind of tilts

do investors typically use well? If you did think think markets were overvalued and were about to see a big pullback, then you could always tilt away from having so much risk in your portfolio. So you'd buy some Safe Haven Investments. That could be money market funds, Global bond funds, gold, any kind of Safe Haven investment which does well when Equity markets pull back. Or you could tilt towards a certain factor. For example, quality stocks. Or it could be value stocks which haven't been in favor for a while. Or perhaps you think a particular region is undervalued. Perhaps Asia. Perhaps you think that the UK is undervalued. It could be a country. If that's the case and you think as a result that region or country will outperform, you can buy extra allocation to that region. Or it might be a sector. For example, as I make this video, energy stocks in the US have a fairly low valuation. So that could be a tilt if you think it'll outperform as a result. There are lots of single sector funds out there which allow you to express that.

view and then finally, you might think that your currency, your domestic currency, is about to strengthen, in which case you might want to currency hedge your foreign-denominated investments. So all of these are variations of tilts that help you express a view. So we're not supplanting our portfolio, we're just modifying it slightly. Now, as somebody who, I assume, likes our videos, you'll also like our weekly Market Roundup. It's completely free. It's published every Friday, and we don't spam you with lots of other emails. We try to keep it punchy, focused, but also humorous, and talk about what's going on in markets, macroeconomics, and how those two interact with one another. So if you do want to learn more about that and to sign up for it completely free of charge, simply go to our website pensioncraft.com/newsletter or look at the link in the description below. Now, when we're talking about tilts, we're also talking about timing, and here it pays to understand strategic and tactical asset.

allocation now your strategic asset allocation is your long-term portfolio weights. These are designed to help you get to your long-term goal, often that's retirement. That doesn't have to be retirement; it can be other goals, but that's the kind of consistent mix of investments which you always come back to. What we're talking about today is a tactical asset allocation. By its nature, this is a short or medium-term modification to our investments. Why would you do that? Well, it would be to capitalize on short-term opportunities which you see in markets, or it could be a new trend in markets which wasn't factored into your original asset allocation. Now, because this is about timing, there are two points in time which are important: the point at which we tilt and the point at which we remove the tilt and go back to our strategic allocation. And in order to do well, you have to choose both of those points in time well. So let me give you an example of something I did which did okay, but you'll see that when I tilted back, the

timing wasn't great, and this is about the US banking crisis. So in 2023, in March, Silicon Valley Bank failed. Now, this dragged the whole banking sector down in the United States. The two lines you can see here: my core portfolio - that's VHG, that's where most of my money is, 90% of it in fact, and then my fund portfolio is 10% of my overall allocation. So what I thought was I'd do 10% of my fund portfolio, which is just 1% of my overall investments, and I put it into a single sector financials ETF, which was XUFB. Now, the dashed vertical yellow lines that you can see on this graph are when I put on that tilt and took it off. The point at which I put it on was about 12 days after Silicon Valley Bank failed and after US financials really sold off, but they started to stabilize. And my thinking was, well, I'll wait until stocks get back to where they were financial stocks before this crisis hit, and then I'll take the

Tilt away. So, if we look at the return of that tilt relative to my core, you can see that I was right. Eventually, there was a 7% outperformance, but it turned out I took away my tilt too soon. And that's because financials overshot. They went beyond where they'd been before the crisis. As I make this video, the XFB ETF would now be up over 40%, whereas VHG has kind of lost steam. It's peaked at about 28% above where it was when I first did this tilt. So, if I'd have waited until today, I'd have made 133% on my tilt rather than 7% outperformance versus my core. So, you can see how difficult it is to do these tilts. You have to get both of those timing points correct. And even in this case, I did outperform, but really not by much. So, you can see why I don't put too much money into my fun portfolio. I'm not convinced I can beat markets this way. But hey, it's fun to try.

let's go back to that point about the size of the Tilt, because that's really important. Now, professional investors differ from retail investors, people like you and I, primarily in their attitude towards risk. Yes, they've got views just like we do, but the way they express their views is very disciplined, and it's all about risk. How large a bet should you place on any given trade, or in our case, on any given tilt? Now, clearly, it has to be something between 0% - no Tilt at all, and 100% - where you sell everything and buy the new fund. The degree to which you do tilt really should be scaled by various factors. One of them is how convinced you are, your conviction that you're right. However, even the most arrogant person would admit that they could be wrong, in which case, that should dial back the size of your tilt. So, maybe measure over time how accurate your previous tilts have been to try and gauge how large your future tilt should be. As I say, for me, it'll

never be more than 10% of my overall portfolio. For you, that may be quite different depending on your risk appetite or how accurate your tilts have been in the past. Now, you may be saying that tilt that you did towards financials was absolutely tiny. It was only 1% of your overall investments, but it was 10% of my fund portfolio, and I can tell you I was scared. So, I am a very cautious investor, and that's probably why I don't tend to tilt too much. Plus, I don't have much faith in my ability to beat my market, so I hope that's made it a bit clearer when I'm talking about tilts, which I often do. What I'm talking about but also how to approach it so that if you do tilt, and let's face it, we all do, how large the tilt should be, but also the importance of timing it. So, you have to time it correctly on the way in and on the way out. Now, don't forget, if you do enjoy our content, please do

subscribe to our Channel. Like this video, and don't forget you can sign up to our membership. Just go to our website, pensioncraft.com. We have lots of members-only content and specific tools to help you become a better investor. And as always, thank you for listening.

Using Index Funds to Fine-Tune Your Portfolio

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Fine-Tuning Your Investment Portfolio with Tilts

Investors can fine-tune their portfolio through a strategy called a tilt, which involves making slight variations to their allocations, typically as a small percentage of the overall investments.

The core portfolio consists of diversified, low-cost, and low-risk funds, while the satellite portfolios are small and used to express strong views or modify the overall allocation slightly.

Tilting allows investors to maintain a disciplined approach to modifying their portfolio without making radical changes.

Tilting away from risk can be done through safe haven investments like money market funds or global bond funds.

Investors also use tilts to focus on specific factors, regions, or sectors that they believe will outperform.

Tilt variations include expressing views on undervalued assets, strengthening currencies, and using single-sector funds.

These tilts allow investors to modify their portfolios slightly without completely replacing them.

Tactical asset allocation is a short to medium-term adjustment to investments to capitalize on market opportunities or trends.

It involves choosing the right timing to tilt and then return to the long-term strategic allocation.

For example, investing in a financials ETF after the Silicon Valley Bank failure, with the challenge of timing the tilt and return accurately.

The Challenge of Timing and Sizing Tilt Investments

Tilting investments is challenging due to the need for precise timing, as shown in the example of XFB ETF and VHG.

The size of a tilt should be determined by the investor's conviction, but also dialled back based on the potential for being wrong.

Professional investors approach tilts with a disciplined attitude towards risk, scaling the degree of tilt based on various factors, including their level of confidence and past tilt accuracy.

Managing Investment Tilts for Different Risk Appetites

The size of investment tilts should be based on individual risk appetites and past performance.

Even a small tilt can have a significant impact, depending on the size of the overall portfolio.

It is crucial to approach investment tilting with caution, considering the timing of when to make the tilt and when to revert it.