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ikkyu2 (99.45)

How Asset Allocation Protects You From Yourself

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June 01, 2012 – Comments (8)

I wrote yesterday about being a long-term investor - having a 10+ year time horizon.  Yet if you look back through your own stock portfolio, how many positions do you have that you owned 5 years ago?  (In my case, the answer is none; I have a few names that I had back then but the shares are not the same lots.  10 years isn't valid in my case because I didn't own any stocks then.)

Here's the trick that I've learned to stop myself trading away a position because of a dip like today's.  I have decided that a certain part of my investables are going to be positioned in stocks, equity in companies.  When I trade dollars for equities I stop looking at the dollar measurement of those shares' bids and asks as the measure of their value; the value is the intrinsic worth of the shares themselves.  This is an important trick because that worth, if properly determined, changes little over time compared to the stock price.  That way, if I decide I am 80% in equities, and equities lose 10% of their value, I do not have to buy more equities to keep my allocation constant; the worth of my equities is unchanged.

The other, more important part of the trick is this:  I have decided that that part of my portfolio, regardless of today's cash value, is going to be allocated to stocks.  A value investor whose name I have forgotten (someone reading this probably knows) once was asked how he holds on to his positions when the price declines.  He replied (paraphrased), "I have decided to be invested in equities, and therefore to participate in the all the price movements of equities.  Why, therefore, wouldn't I want to hold such a position when the price movement is negative?"

The last part of the trick is this: you gotta stay steadfast to that conviction.  If you don't, you are blood in the water and you will be eaten by a shark.  Use whatever means you need to - quit looking at your portfolio; think about the dividends rolling in; just don't sell at a loss.  That's easy in CAPS; maybe harder when it's real money, but infinitely more important. 

8 Comments – Post Your Own

#1) On June 01, 2012 at 7:29 PM, awallejr (79.96) wrote:

Well I buy on down days and sell on up days.  Today I bought.  And as a result of my purchase my annual income has just increased (assuming no cuts in distributions/dividends).  Market is hitting where I predicted (8-10 pct correction).  Time will tell if I prove right, but I will continue to reinvest my income into equities.

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#2) On June 01, 2012 at 8:19 PM, Valyooo (99.80) wrote:

I feel that if you buy very good companies, without fundamental changes in the company, you should never really sell at a loss (unless its a trade).  Thats what I do in CAPS.  I pick good stuff, and I close it out when I am +6.  That way I never lose.  And then I short junk until something good comes along.

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#3) On June 01, 2012 at 9:48 PM, HarryCarysGhost (99.78) wrote:

Well, I started investing in April of 2008 so I don't meet the five year criteria.

Answer to how many I've held since then is- Three (also added to those positions when needed)

ps- In the case of GE I subtracted halve. (Problems with management and the shares are well paid for)

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#4) On June 02, 2012 at 1:04 AM, rd80 (99.12) wrote:

Chevron and Wells Fargo have lived in my portfolio continuously for the last five years.  Traded around the Wells position, but never zeroed it out.  Haven't been investing in individual stocks long enough to have a ten year record.

 

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#5) On June 04, 2012 at 9:18 AM, daveandrae (< 20) wrote:

Friend-

Exactly what are you trying to get "asset alocation" to do for you? 

If you think you can mix a portion of your assets to stocks, a portion to bonds, and a portion to cash and produce a better return, or even a return that is equal to 100% equity, you are deluding yourself.

This is not "asset allocation." This is voodoo allocation. 

Asset allocation may give you something to do. Asset allocation does not produce a better return than 100% equity.    

As for portfolio turnover, ( I still hold all of the stocks I had 5 years ago) my investment philosophy has always been very simple.  Buying a good stock is lot like marrying a good woman. If divorce were not an option, you would think a hell of lot longer and harder about not only what to buy, but the price you're willing to pay for it.  

Good luck :-)

 

 

 

 

 

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#6) On June 04, 2012 at 1:59 PM, ikkyu2 (99.45) wrote:

Daveandrae:

I'm trying to use the idea of asset allocation to prevent portfolio turnover.  You're chasing a red herring; at the moment I have about 10% allocated to high yield bonds, 10% allocated to convertibles.  Both of those parts of my portfolio haven't been touched since 2005 and they were originally 5% stakes; they have outperformed my equity portion (which was 90%) by a solid 100% outperformance, doubling compared to the change in my equity stake.

Point being, the part of my portfolio that doesn't hold high yield bonds and convertibles holds equities.  Not cash.  Prevents me from doing something dumb like trying to 'time the market'.

This is something I identified I needed to do - the relevant analysis is back somewhere around Jan 2011.  I realize that what you're saying about holding a stock is the right thing to do; I also used numbers and retrospective analysis to discover that my average 'position hold time' was about 4 months.  As anyone knows who's been in this game behavior often differs from best practices; this is a way of thinking that I use to bring my real behavior more in line with best practices.  And if you don't think that's important, then you really haven't been doing this very long - or you've been kidding yourself.

Thanks for commenting. 

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#7) On June 04, 2012 at 3:45 PM, ikkyu2 (99.45) wrote:

Valyoo:  I feel that if you buy very good companies, without fundamental changes in the company, you should never really sell at a loss (unless its a trade). 

Let's take a look at this statement, which I find too full of hedges to be useful.  "Very good companies," well, that's an opinion. "fundamental changes in the company," that's an opinion too.   "Unless it's a trade" - well, as opposed to what?  Can you buy or sell a stock without trading it for something else (usually cash)?  No, you can't.  What makes "it" "a trade?"  A matter of opinion, that's what.

My opinions, such as they are, change from day to day - and they better, especially when I am looking to have opinions about such things as "fundamental changes."  However, my investment strategy - "keep this certain amount allocated in equities" - should not change from day to day, no matter what my opinions do.  The problem is that a bunch of fluctuating opinions on topics are influencing my behavior - and, according to an honest review, these influences are negatively impacting my portfolio performance.

This post is about a strategy I use to protect myself from those negative influences.  Hope that clarifies. 

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#8) On June 04, 2012 at 3:48 PM, ikkyu2 (99.45) wrote:

Also, just for reference; in 2006 I put about 15% of my portfolio in fixed-income securities, 10 year maturity, not call protected, yielding 6%.  They were called in 6 months (the first opportunity.)  I had the option to take 5.5% with a 10 year maturity and call protection.  Sort of wish I'd done it; that's a decent yield, these days.

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