How to hedge website revenue with sector ETFs?

[Philip J. Fry]

So, most people here are making money with Internet marketing, either SEO or SEM or social media ads, and advertising or e-commerce. Most would be B2C since that's whose buying stuff off of Amazon. That makes most people here in the discretionary consumer spending category of the market. I am too as I'm in travel. Super discretionary.

The issue is that, when there's an economic down turn, discretionary consumer spending is the first to go.

Let's say you have a company that makes $500,000 a year in profits. With a 36x multiplier, you have $1,500,000 in equity in this company if you are the sole owner. That's a lot of exposure to the discretionary consumer spending market.

I have been researching and pondering about investing business profits into sectors that hedge against discretionary consumer spending, such as healthcare, energy, non-discretionary consumer spending, and the tech giants. To me, it makes obvious sense but for asset allocation, what should the percentages be? let's say I have 50% in my business, 15% real estate and the other 35% in a mix of tech, non-discretionary consumer spending, energy, and health care?

My goal is that, if my site takes a nose dive, not because of a Google update, but because of a recession and lowered discretionary consumer spending, my portfolio will make up for it with gains in other sectors or at least less loss in other sectors.

Anyone have any idea, comments or constructive criticism?

I asked the Boogle heads and they said to stick with SCHB or another broad market fund and that sector picking is ineffective. They linked me to https://novelinvestor.com/sector-performance/ and said that it's like a bingo game. But, IMO, that's what I want. Something that doesn't correlate with discretionary consumer spending. Also, that's straight from the Boogle playbook but Boogle playbook is for people with j-o-b-s and who plan on retiring at 65 or so. It's not for entrepreneurs who have a lot of market exposure in one sector.

Also, to let anyone reading this know, I did terrible in my finance class and barely passed. I'm as much a beginner here as anyone else.

 

[JOoa0ky]

If you've no idea what you're doing I would just index sp500 and call it a day.

If you're interested in learning about the market, keep a small chunk of change like 10-25k. Formulate a strategy or theory and just buy stuff based on that over the next 1-3 years. See how much you get burned or successful you are. Through these times you will learn to understand what type of investor you are. From there you can start moving larger chunks of capital around but keep the bulk of it with the index.

Investing is really no different from "SEO". You pick a keyword and do intense research into it. It's like picking a stock ticker symbol and doing intense research into it.

You're not going to "get it" about the market in a week or a month for that matter... It's a continual learning experience just like ranking your site.

But yes, if you're relying 100% on your site for your income, you need to diversify promptly.

 

[eliquid]

For most ETF's there is an equal over at Vanguard, for less Expense Ratio.. so the total end result comes out almost the exact same numbers.

I've been doing ETFs for a while.

Some years I will do 60/40 ( 60 in something like VOO and 40 in some type of Bond ), and other years I will do 50/30/20 ( 50 in something like VOO, 30 in a sector like Healthcare, 20 in specific stocks like Apple ).

There are ETFs that pay dividends too, like SCHB

Just depends on what you want to get into.

I also use the 12% solution method to pick my ETFs every 90 days and also how to allocate when needed. The past year has been horrible everywhere by large, even with bonds.. so I held a lot in cash ( not actual cash, but in Vanguard Federal Money Market Inv (VMFXX) ) for while as this was a better investment in this period than 60/40 or 50/30/20 for most people.

But it's going to be time to get back in. Recessions only last on average 18 months.. and depending on who you talk to, we could be past the 50% mark on that timeline now.

Personally, Im waiting on 2 consecutive positive months on the S&P500 before I jump back in. We've already had one.

 

[Philip J. Fry]

I also use the 12% solution method to pick my ETFs every 90 days and also how to allocate when needed.

I'm guessing you're talking about https://www.amazon.de/12-SOLUTION-Average-Beating-Managers-ebook/dp/B0759X92Z6 ? What's the method? Interested.

 

[eliquid]

I'm guessing you're talking about https://www.amazon.de/12-SOLUTION-Average-Beating-Managers-ebook/dp/B0759X92Z6 ? What's the method? Interested.

At the core, the main takeaway is spending a little time every month ( an hour max, if that ? ) to load up some default ETF/fund choices and bonds and pick the best performing ones ( 1 etf, 1 Bond ) over the last 90 days.

You do this monthly though.

The best fund/etf you allocate 60% to. The best bond, you allocate 40% to. That's your holdings for that month. Repeat the next month at the end of the month ( look back of 90 days ).

You're not supposed to analyze the whole market though with this. You don't do this with 4,000 stocks and thousands of funds. You are suppose to have like say, 8 top etfs/funds and 4-5 top bonds you rotate in and out if needed.

For example, Vanguard alone has like 400-500 choices. You wouldn't be doing this strategy on all those. You'd pick some broad ones like VOO or VTI and maybe 5 more, and same with Bond selections at Vanguard and you pick the best and run with it.

Some months, you never change anything. If you selected VOO and it's the top performer every month for 6 months, you don't do anything.

I just expanded it out to do things like 50/30/20 instead of 60/40 and I also expanded it out to handle select stocks too ( mostly top tech stocks like Apple, FB, Amazon, Google, etc ).

When selecting the top performer each month, you want to use something that compared all the funds./etfs you are looking at against each other at the same time with the lookback window. If all of them are underperforming ( under 0% ), you just hold cash at that time in the equity part. Same with Bonds.

Most time periods, you either have equities outperforming or Bonds out performing. However, this last year was rather special where everything was under 0% every month for almost all 90 day lookbacks.

If you are changing things up a bit ( like me ) on a strategy like this, you would need to have a more in-depth background before jumping in and doing 50/30/20 on it... or doing different timeframes and selections ( if you add in Gold or a sector, etc )

 

[Philip J. Fry]

At the core, the main takeaway is spending a little time every month ( an hour max, if that ? ) to load up some default ETF/fund choices and bonds and pick the best performing ones ( 1 etf, 1 Bond ) over the last 90 days.

You do this monthly though.

The best fund/etf you allocate 60% to. The best bond, you allocate 40% to. That's your holdings for that month. Repeat the next month at the end of the month ( look back of 90 days ).

You're not supposed to analyze the whole market though with this. You don't do this with 4,000 stocks and thousands of funds. You are suppose to have like say, 8 top etfs/funds and 4-5 top bonds you rotate in and out if needed.

For example, Vanguard alone has like 400-500 choices. You wouldn't be doing this strategy on all those. You'd pick some broad ones like VOO or VTI and maybe 5 more, and same with Bond selections at Vanguard and you pick the best and run with it.

Some months, you never change anything. If you selected VOO and it's the top performer every month for 6 months, you don't do anything.

I just expanded it out to do things like 50/30/20 instead of 60/40 and I also expanded it out to handle select stocks too ( mostly top tech stocks like Apple, FB, Amazon, Google, etc ).

When selecting the top performer each month, you want to use something that compared all the funds./etfs you are looking at against each other at the same time with the lookback window. If all of them are underperforming ( under 0% ), you just hold cash at that time in the equity part. Same with Bonds.

Most time periods, you either have equities outperforming or Bonds out performing. However, this last year was rather special where everything was under 0% every month for almost all 90 day lookbacks.

If you are changing things up a bit ( like me ) on a strategy like this, you would need to have a more in-depth background before jumping in and doing 50/30/20 on it... or doing different timeframes and selections ( if you add in Gold or a sector, etc )

I suspect that this works because: 1.) after so much quarters your portfolio will be comprised of many sector etfs so it’ll end up looking like the S&P but this would be many decades 2.) it uses dollar cost averaging, which has been proven to work.

this method is also a different objective than my objective. It priorities growth whereas I want to minimize loss. It also would decrease diversification as some sector indexes like tech or industry are mostly comprised of a few companies. Tech is 80% the big 5 or so. Industrial is mostly GE or subsidiaries. This would cause increase risk off loss, if one of those large companies have a bad year.

Now that i write this, I think I’ll hedge my business using diversification with a broad market ETF. Choosing sectors is decreases diversification and I’m more confident that diversification is a good hedge than my ability to choose etf sectors. So let’s say 60% SCHB 20% sector etfs like vanguard healthcare etf and 20 in bonds. This is super conservative for someone my age, early 30s, but I’m looking to reduce risk. Not growth.

thanks for the detailed answer! Appreciate it.

 

[socialpatterns]

What about ETFs that have a low beta? (i.e a low beta stock like Walmart, holds or even does well during a recession). Low Beta ETFs

(I have an economics degree, but still don't take my advice, I am not qualified to give advice. Also don't take anyone else's advice on here. Nor a financial advisor lol... just do a lot of research and follow your gut. Maybe look into alternative investments too. Stock market as a whole could still drop quite a bit)

 

[eliquid]

Oh, wanted to add... the hotness right now is i Bonds.

You'd need to adjust your holdings in them as rates change, but 9.62% right now is pretty good

https://www.treasurydirect.gov/savings-bonds/i-bonds/

 

[stackcash]

So, most people here are making money with Internet marketing, either SEO or SEM or social media ads, and advertising or e-commerce. Most would be B2C since that's whose buying stuff off of Amazon. That makes most people here in the discretionary consumer spending category of the market. I am too as I'm in travel. Super discretionary.

The issue is that, when there's an economic down turn, discretionary consumer spending is the first to go.

Let's say you have a company that makes $500,000 a year in profits. With a 36x multiplier, you have $1,500,000 in equity in this company if you are the sole owner. That's a lot of exposure to the discretionary consumer spending market.

I have been researching and pondering about investing business profits into sectors that hedge against discretionary consumer spending, such as healthcare, energy, non-discretionary consumer spending, and the tech giants. To me, it makes obvious sense but for asset allocation, what should the percentages be? let's say I have 50% in my business, 15% real estate and the other 35% in a mix of tech, non-discretionary consumer spending, energy, and health care?

My goal is that, if my site takes a nose dive, not because of a Google update, but because of a recession and lowered discretionary consumer spending, my portfolio will make up for it with gains in other sectors or at least less loss in other sectors.

Anyone have any idea, comments or constructive criticism?

I asked the Boogle heads and they said to stick with SCHB or another broad market fund and that sector picking is ineffective. They linked me to https://novelinvestor.com/sector-performance/ and said that it's like a bingo game. But, IMO, that's what I want. Something that doesn't correlate with discretionary consumer spending. Also, that's straight from the Boogle playbook but Boogle playbook is for people with j-o-b-s and who plan on retiring at 65 or so. It's not for entrepreneurs who have a lot of market exposure in one sector.

Also, to let anyone reading this know, I did terrible in my finance class and barely passed. I'm as much a beginner here as anyone else.

As a former RIA - you're making a few assumptions here that may or may not be correct. Always test your assumptions before making decisions.

First rule of investing is to not lose your principle. If your bingo game puts your principle at risk - it may be too speculative.

My personal opinion is that consumer spending isn't going to get hit the way you're thinking it's going to get hit. It shouldn't get wiped out. It'll likely just dip throughout a 18-24 month recession (that started months ago)...if at all.

Beyond that, I suggest reading Bogle on Mutual Funds, as well as The Little Book of Common Sense Investing to get info from the horse's mouth. The boglehead forums tend to tweak and twist the underlying concepts.

For most ETF's there is an equal over at Vanguard, for less Expense Ratio.. so the total end result comes out almost the exact same numbers.

I've been doing ETFs for a while.

Some years I will do 60/40 ( 60 in something like VOO and 40 in some type of Bond ), and other years I will do 50/30/20 ( 50 in something like VOO, 30 in a sector like Healthcare, 20 in specific stocks like Apple ).

There are ETFs that pay dividends too, like SCHB

Just depends on what you want to get into.

I also use the 12% solution method to pick my ETFs every 90 days and also how to allocate when needed. The past year has been horrible everywhere by large, even with bonds.. so I held a lot in cash ( not actual cash, but in Vanguard Federal Money Market Inv (VMFXX) ) for while as this was a better investment in this period than 60/40 or 50/30/20 for most people.

But it's going to be time to get back in. Recessions only last on average 18 months.. and depending on who you talk to, we could be past the 50% mark on that timeline now.

Personally, Im waiting on 2 consecutive positive months on the S&P500 before I jump back in. We've already had one.

Good stuff @eliquid

I was toying with the idea of doing a 12% Solution / Rule #1 portfolio earlier this year, but assumed transaction costs would eat up any gains I'd get over a more passive strategy.

Are you doing that as your primary investment strategy, or as a bolt on strategy? Would love to hear how you see a 12% solution portfolio performing over a 10-year time frame.

 

[eliquid]

I was toying with the idea of doing a 12% Solution / Rule #1 portfolio earlier this year, but assumed transaction costs would eat up any gains I'd get over a more passive strategy.

I think it would depend on:

1. Which brokerage/platform you are doing transactions
2. What investments ( mutual funds, stocks, etfs, bonds, etc )
3. How frequent ( you could follow 12% solution exactly every month, or just do it every quarter )

If you were at Fidelity or Vanguard, and stuck with a certain selection of ETFs, I couldn't see transaction costs being a real issue ( again depends on what you are specifically doing and how often and where at ). But I know this is different per person.

Are you doing that as your primary investment strategy, or as a bolt on strategy? Would love to hear how you see a 12% solution portfolio performing over a 10-year time frame.

Right now it's primary, but mine is sorta hybrid and not a true "by the book" 12% Solution method.

Over a 10-year period, when the book was published, it was doing well as a strategy. One of the cons is, it only looked at a 10-year period.

Overall, it's tough to knock a 60/40 strategy for most average 401k/retail investors if you look at keeping things safe ( relatively speaking ), and aiming for low-cost ETFs in an index like SP500 is almost foolproof for the same investors.

Even Warren Buffet instructed his Trust: "My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors"

And basically, the 12% Solution is the same, but at 60/40 and rotating out for the best-performing index/bond within a lookback window.

Now if you wanna talk aggressive and most gains possible, this prob isn't the strategy.

 

[Philip J. Fry]

My personal opinion is that consumer spending isn't going to get hit the way you're thinking it's going to get hit. It shouldn't get wiped out. It'll likely just dip throughout a 18-24 month recession (that started months ago)...if at all.

Beyond that, I suggest reading Bogle on Mutual Funds, as well as The Little Book of Common Sense Investing to get info from the horse's mouth. The boglehead forums tend to tweak and twist the underlying concepts.

I agree that protecting your principal is #1 and consumer spending did go to 0 for me. I'm in travel and no on got on to a plane for that week when COVID was first a pandemic. Sales literally halted to zero for a whole week.

What's more, I also do business with a Ukrainian-American and, in 2022, after suffering through COVID, his back office in the Dunbas region was invaded by Russia. It didn't cause sales to dip but, you know, for humanitarian reasons you can't fire your employees when they're refugees and they're not going to be as productive as they were before. Not a loss in assets but a loss in production with similar payroll liabilities.

So, ugh, yeah, I'd like to keep my principal safe with a little return. That's fine and I might have to use that in the future when something crazy happens like Russia invades my town and I need to finance my business for a few months from my cash reserves.

This might be more of a "me" thing than anything else but, I'm sure if you lived through this like me, you'd consider something similar.

I have a goal to have 2 years of cash on hand for operating expenses just like Apple. Companies who've went through hard times know they need to save big time to finance the next recession. My last company, who was ran by idiots, didn't do this and only had 3 months of cash on hand for operating expenses. Stupid idiots almost drove the company to the ground but the company only had short term debt at the time and no long term debt. I'm going to be even more cautious.

Thanks for the book recommendations! I've read his other book and like his advice too.

 

[JOoa0ky]

I agree that protecting your principal is #1 and consumer spending did go to 0 for me. I'm in travel and no on got on to a plane for that week when COVID was first a pandemic. Sales literally halted to zero for a whole week.

What's more, I also do business with a Ukrainian-American and, in 2022, after suffering through COVID, his back office in the Dunbas region was invaded by Russia. It didn't cause sales to dip but, you know, for humanitarian reasons you can't fire your employees when they're refugees and they're not going to be as productive as they were before. Not a loss in assets but a loss in production with similar payroll liabilities.

So, ugh, yeah, I'd like to keep my principal safe with a little return. That's fine and I might have to use that in the future when something crazy happens like Russia invades my town and I need to finance my business for a few months from my cash reserves.

This might be more of a "me" thing than anything else but, I'm sure if you lived through this like me, you'd consider something similar.

I have a goal to have 2 years of cash on hand for operating expenses just like Apple. Companies who've went through hard times know they need to save big time to finance the next recession. My last company, who was ran by idiots, didn't do this and only had 3 months of cash on hand for operating expenses. Stupid idiots almost drove the company to the ground but the company only had short term debt at the time and no long term debt. I'm going to be even more cautious.

Thanks for the book recommendations! I've read his other book and like his advice too.

I literally opened the doors of my local business the summer before COVID. I remember asking my CPA how much cash I should keep in the business checking and he said "one month".

COVID hit mid-March and we were in lock down for three months. Luckily at the time, I wasn't sure what to do with the working capital so I never spent any of it... that hesitation allowed me to survive through it interestingly enough.

But an important lesson for me that I hold dear is that businesses don't survive based on how much they make. The ones that survive are those that are able to meet debt obligations when income goes to shit.

A lot of times, from an investment standpoint it may not make a lot of sense holding onto a pile of cash while it can be earning elsewhere. However, that cash cushion lets you sleep SO much better at night.

I noticed that I start getting anxious whenever I have to drain the reserves even if business is chugging along well. But when the emergency reserves are in place, I don't seem to give two shits.

 

[stackcash]

I think it would depend on:

1. Which brokerage/platform you are doing transactions
2. What investments ( mutual funds, stocks, etfs, bonds, etc )
3. How frequent ( you could follow 12% solution exactly every month, or just do it every quarter )

If you were at Fidelity or Vanguard, and stuck with a certain selection of ETFs, I couldn't see transaction costs being a real issue ( again depends on what you are specifically doing and how often and where at ). But I know this is different per person.



Right now it's primary, but mine is sorta hybrid and not a true "by the book" 12% Solution method.

Over a 10-year period, when the book was published, it was doing well as a strategy. One of the cons is, it only looked at a 10-year period.

Overall, it's tough to knock a 60/40 strategy for most average 401k/retail investors if you look at keeping things safe ( relatively speaking ), and aiming for low-cost ETFs in an index like SP500 is almost foolproof for the same investors.

Even Warren Buffet instructed his Trust: "My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors"

And basically, the 12% Solution is the same, but at 60/40 and rotating out for the best-performing index/bond within a lookback window.

Now if you wanna talk aggressive and most gains possible, this prob isn't the strategy.

Makes sense!

Yeah, I'm going to launch an index investing portfolio in the next few months. First looked at 12% / Rule #1 as mentioned... but landed on following that exact Buffet quote you mentioned.

My problem with doing a 3 or 4 fund portfolio is that I'm not entirely sure if I want market cap weighted funds/etfs, or one's that are equally weighted.

If market-cap weighted funds end up being what makes sense for me, a small number of holdings make sense. If I want to get into holdings that are equally weighted, I'll need a few more holdings to get exposure to the entire index.

I agree that protecting your principal is #1 and consumer spending did go to 0 for me. I'm in travel and no on got on to a plane for that week when COVID was first a pandemic. Sales literally halted to zero for a whole week.

What's more, I also do business with a Ukrainian-American and, in 2022, after suffering through COVID, his back office in the Dunbas region was invaded by Russia. It didn't cause sales to dip but, you know, for humanitarian reasons you can't fire your employees when they're refugees and they're not going to be as productive as they were before. Not a loss in assets but a loss in production with similar payroll liabilities.

So, ugh, yeah, I'd like to keep my principal safe with a little return. That's fine and I might have to use that in the future when something crazy happens like Russia invades my town and I need to finance my business for a few months from my cash reserves.

This might be more of a "me" thing than anything else but, I'm sure if you lived through this like me, you'd consider something similar.

I have a goal to have 2 years of cash on hand for operating expenses just like Apple. Companies who've went through hard times know they need to save big time to finance the next recession. My last company, who was ran by idiots, didn't do this and only had 3 months of cash on hand for operating expenses. Stupid idiots almost drove the company to the ground but the company only had short term debt at the time and no long term debt. I'm going to be even more cautious.

Thanks for the book recommendations! I've read his other book and like his advice too.

I guess there's nothing wrong with being conservative and keeping your position safe.

My view is that these events are just small blips on the radar over the long-run that shouldn't result in a change to your underlying long-term strategy.

I literally opened the doors of my local business the summer before COVID. I remember asking my CPA how much cash I should keep in the business checking and he said "one month".

COVID hit mid-March and we were in lock down for three months. Luckily at the time, I wasn't sure what to do with the working capital so I never spent any of it... that hesitation allowed me to survive through it interestingly enough.

But an important lesson for me that I hold dear is that businesses don't survive based on how much they make. The ones that survive are those that are able to meet debt obligations when income goes to shit.

A lot of times, from an investment standpoint it may not make a lot of sense holding onto a pile of cash while it can be earning elsewhere. However, that cash cushion lets you sleep SO much better at night.

I noticed that I start getting anxious whenever I have to drain the reserves even if business is chugging along well. But when the emergency reserves are in place, I don't seem to give two shits.

Condolences on the local store during Covid. I feel your pain.

I opened a restaurant during the November before Covid. We ended up reinvesting our PPP loan into the biz to stay afloat while cutting as much staff as possible. I sold off my shares as soon as we had a rally. Probably my last venture into brick and mortar, tbh.

 

[JOoa0ky]

Makes sense!

Yeah, I'm going to launch an index investing portfolio in the next few months. First looked at 12% / Rule #1 as mentioned... but landed on following that exact Buffet quote you mentioned.

My problem with doing a 3 or 4 fund portfolio is that I'm not entirely sure if I want market cap weighted funds/etfs, or one's that are equally weighted.

If market-cap weighted funds end up being what makes sense for me, a small number of holdings make sense. If I want to get into holdings that are equally weighted, I'll need a few more holdings to get exposure to the entire index.



I guess there's nothing wrong with being conservative and keeping your position safe.

My view is that these events are just small blips on the radar over the long-run that shouldn't result in a change to your underlying long-term strategy.


Condolences on the local store during Covid. I feel your pain.

I opened a restaurant during the November before Covid. We ended up reinvesting our PPP loan into the biz to stay afloat while cutting as much staff as possible. I sold off my shares as soon as we had a rally. Probably my last venture into brick and mortar, tbh.

I only had two employees at the time so got a really small PPP loan.

It was supposed to have been forgiven but then changed the rules when it came time... Apparently I didn't "qualify" for forgiveness.

I asked them how did I get it in the first place, they were like... well you know at the time... lol...

See if I ever rely on the fed gov ever again.

 

[stackcash]

I only had two employees at the time so got a really small PPP loan.

It was supposed to have been forgiven but then changed the rules when it came time... Apparently I didn't "qualify" for forgiveness.

I asked them how did I get it in the first place, they were like... well you know at the time... lol...

See if I ever rely on the fed gov ever again.

I feel your pain. Right there with ya.