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My new assett allocation

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February 05, 2011 – Comments (10)

Yes, I have made a crapload of short blogs lately.  I am trying to learn, sue me.

Anyway, so throughout a lot of thinking and reading, I have come to the conclusion that rather than try to learn everything about everything, I will stick to my strengths.  This is not to say I won't try to learn a lot more; in fact, after I learn more about fundies, I plan on spending  a few years learning TA, banking, utilities, insurance, railroads, retail, and some other attractive sectors, commodities and coutnries.  I have realized however, at least for the short term, that my strength is swing trading.  To me, it is fairly obvious when a company or sector is oversold. Mos t of the time, it involves looking at prior prices, then looking at how the news has affected them, and then figuring out if it was overblown, but leaving a margin of safety.  Maybe an example would be better: Every source I saw for BAC's mortgage right downs was far less than the value the stock took on the news.  On top of this, the wikileaks thing, which I calmly assessed would never come to fruition, drove the stock down to $10.96 when the net tangible book value was $12.91.  The insiders were buying at $15, and the yield curve was widening like crazy, while the 52 week high was $20.  I figured the company had to be worth atleast $20, but I bought at $10.96 and sold at a little over $14 in a matter of a few weeks.  Selling is one of my weak points, so I figured locking in a nice profit was better than trying to analyze and hold onto a hated bank (eveyrbody I know who uses them is unhappy).  Yes, I understand the concept that 'locking in profits' can often be foolish if the company is still undervalued.  But I know myself, and I know i made a nice size.  I made a similiar call with STD.

 On to the point, I know long term investing is much better for tax purposes.  I don't yet have the capital to properly diversify in the way I am about to lay out, but I should in the next 2 years, so I am reworking my model. I will list the % I plan on putting in each, and why...please tell me if my logic is sound, or if I am destined to underperform

20% Cash and short term trades: I like leaving money open for buying corrections, but there are about 5-10 different types of trades that I notice fairly obviously.  I have made money on C calls a few times in a row because it acts so predictably around earnings.  I love trading, and I am good at certain trades, so I will stick to them.  If I need to raise cash, these trades are only in my portfolio for a few days or weeks, so they are almost as liquid as cash.

20% economic situation: This mostly encompasses my swing trading.  This economic situation category includes ETF's, and equivalents. For me, an example of an equivalent is using SLW as an etf for silver.  It is best of breed for silver, and if I am bullish on silver, I buy SLW over bullion, agq, etc.  I use SLB for oil. So if I am bullish on a few different commodities, I either buy a corresponding etf or best of breed stock.  This does not have to be a short term portion of my portfolio.  If interest rates rise dramatically and I am able to snag long term bonds at very high yields (compared to histroical levels), I will put all 20% into those bonds. If I were in a higher tax bracket I would be loading up on munis as they give some a tax equivalent rate of 12%, which is nice.  The advantage of this section of my port is that lets say I buy SLB, SLW, and SSCO.  When copper spikes, I can sell SSCO and if SLB and SLW are lagging, I can hold them until they spike.  Buy dips, sell spikes, but assuming I have 4-5 different types of stocks I am bullish on, I will almost always have one that is outperforming the market, which is when I can sell that one and load up on some of the laggards.

20% long term stocks: Companies with a strong niche, that survive reccessions, good management, and consistently outperform the S&P.  This would generaly be spread amongst 3-5 stocks, as I don't have the desire to analyze the reports of 20 different companies.  This will most likely include PM as an investment I will hold until I die, and the other 2-4 would probably include MTB, LIFE, KO, and some other great companies (maybe BRK-B)

15% index funds: over time, I know small cap equities outperform all other investment classes.  Thefore, about 8% would be in IJR, the best small cap index fund IMO.  the other 7% would be 3% SPY (since this IS the market), and 4% QQQQ since my other individual stock picks are unlikely to be tech stocks (since I don't know much about technology and can't analyze it, but I do believe technology companies will shape our future and I need exposure). I understand what equity classes outperform in the long run.  I also understand that I am not currently the best fundamental analyzer out there.  However, to quote Joel Greenblatt, "If you don't lose money, most of the other alternatives are good".  If I know what will make money but I can't pinpoint it, the baskets will be nice. Considering 60-80% of mutual funds cant beat the market, I figure I can beat them all simply by buying the dips and selling the spikes.  Why not do this, unless I think the market is headed to 0?

10% emerging markets:  I think emerging markets will outperform mature first world markets.  However, I dont want to fly to different countries and get to know everything about them, so I make it simple and buy funds.  5% VWO for general diversification, and 5% BRF because 1) I like the Brazil story 2) small caps are best. That simple

5% in special situation stocks: these are generally pretty easy to follow when they come about. It requires about 5-10 hours of analysis, and after that you generally dont have to hardcore track the company, just let the situation play out.

5% in growth stocks: Once in a while, there will be a company that I think is fantastic and will be the next big thing.  I am not going to miss out on the next AAPL, which I should not have, while I stared at everybody's iPods. For me right now this would probably be IMAX.

 5% "free money": Shorting broken etf's, but a basket of them, so I don't get screwed.  This would mean shorting UNG, VXX, GSG, and FAZ.  Overtime it will be profitable, but if its too large a % of my port I can go bankrupt.

 

I think this strategy should play to my strengths, please help me out if you notice flaws.

10 Comments – Post Your Own

#1) On February 05, 2011 at 8:37 PM, Valyooo (99.57) wrote:

I would like to add I employ seasonality to these holdings.  I buy QQQQ in september since the summer tends to be hard on tech, and I buy small caps in mid december ahead of the january boost they usually get, etc. etc

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#2) On February 05, 2011 at 8:53 PM, dragonLZ (99.37) wrote:

That's way too much trading. Being young, you should allocate much higher % of your portfolio to long term growth stocks. Just my opinion.

Good luck.

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#3) On February 05, 2011 at 9:24 PM, ag77840 (23.50) wrote:

No commodities or precious metals?  I am about 30% silver right now.  I am not a silver bug, but Caps players like SilverMiner, and extensive research into the current macro-economic situation (growing industrial demand in China/India, indicators of a true growing shortage) have convinced me to allocate money there.  I am a 20 year old finance major with similar capital to you, so I enjoy reading your commentaries as I can relate to your current situation.  I also have a great appetitite for risk, and so far the risk/reward ratio has been in my favor as I've made 80% in RL since September trading. These are my recent RL purchases if you are interested, I'd like to see yours as well.

HAWK - in at $7.13 due to insanely cheap valuations. One piece of news could send this stock flying.

GSX (small position) - Potential of land assets, speculative play

CDY (small position) - Overseas demand, chart and P/E. I am bullish on earth minerals due to foreign expansion. 

I got totally burned on IRE (down 33%) but am holding on long term and considering adding more shares.

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#4) On February 05, 2011 at 10:47 PM, goldminingXpert (29.55) wrote:

IRE is completely a gamble. No one has any idea what will happen, including IRE management. Feel free to buy IRE, but know your odds are no better than at your local craps table (no worse either.)

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#5) On February 05, 2011 at 10:55 PM, Bays (30.18) wrote:

Valyvooo,

You're on the right track, by this I mean that you have written down a strategy.  I think it is important to have an investment strategy, and to stick to it.  I do however agree with dragonlz, it seems like you might be trading a little too much.  

Having a strategy is one thing, being able to monitor it and to stay disciplined is another.  I have my entire portfolio on excel, and using the SMF add-in I could check my asset allocations at any given moment. 

I like using excel because I can use the data how I please, whereas a broker or an internet site doesn't allow you that sort of flexibility.  For example, if I want to know at any given time how much my money is equities, fixed income, Canada, BRIC, small cap, index funds, micro-cap, large-cap, etc... well I have formulas that grab information from my portfolio and are linked to pie charts.   I take snap shots of this excel file every single quarter.

My portfolio is mainly broken into two sections, index funds and equities.  I rebalance every 1-3 years depending on how out of whack the allocation becomes.  I measure my own performance (equities) against my auto-pilot (index funds) performance.  I have never sold any shares of an index fund that I own, I actually have one that is up over 100% since 2009, CBQ.TO (BRIC), not including dividends. Not bad for the 5 minutes of homework I did before I bought it, and the 0 minutes of effort I've put in since then. 

I'd recommend The Four Pillars of Investing, for building an investment strategy, asset allocation, etc.  

It is a great read for a young investor, and I recommend it as the first book any new investor should read. Read the comments on Amazon.com

 

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#6) On February 06, 2011 at 12:03 PM, Valyooo (99.57) wrote:

Dragon, you are probably right, I am just not particularly great at sniffing out growth stocks. Any advice, or should I just put more into IJR?

Sah, silver constitutes that 20% "economic situation" part of my portfolio.  My recent RL purchases have been GPRLF, IJR, NGS, SLW, AEM, DSCO, and I am going to buy PM soon.  PM and IJR are long term picks, NGS is a seasonal thing, GPRLF, SLW, and AEM are just being held for a little while until I think the bubble is large enough, and DSCO I will hold until theres an anticipation run up

I agree about IRE....its only good for a quick trade

Bays, thanks for the suggestion. Currently I have about 12 books sitting on my desk that I need to read.  After that, I will buy the book you mentioned.

I won't have a problem sticking to my game plan.  Right now I don't, just because my capital is too small to do that.

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#7) On February 06, 2011 at 5:57 PM, valunvesthere (< 20) wrote:

Valyooo 

According to Morningstar as of 9/30/10 Vanguard Emerging Markets Stock ETF with a total of +$45 billion assets has % of assets invested in

% 57.5 Asia ex-Japan

% 23.4 Latin America

%18.3 Other

%18.0 China

%16.2 Brazil 

%13.1 South Korea

%10.4 Taiwan

% 8.2 India

% 0.8 Not Classified

The top 25 holdings has 7 China stocks:

%1.74 China Mobile Ltd. ADR

%1.13 Industrial And Commercial Bank Of China Limited

%1.11 China Construction Bank Corporation

% 0.98 CNOOC, Ltd.

% 0.84 Bank Of China Limited

% 0.83 China Life Insurance Company, Ltd.

% 0.69 PetroChina Company, Ltd. ADR

Is this too much China for your VWO pick?

Valunvesthere

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#8) On February 06, 2011 at 11:27 PM, Valyooo (99.57) wrote:

hmm maybe I will go with EEM. Thanks!

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#9) On February 07, 2011 at 3:17 AM, valunvesthere (< 20) wrote:

Valyooo 

According to Morningstar as of 12/31/10  iShares MSCI Emerging Markets Index EEM with a total of +$39 billion assets has % of assets invested in

Regional Exposure 

% 57.0 Asia ex-Japan

% 23.3 Latin America

% 19.1 Other

%   0.6 Not Classified

Country Exposure 

% 17.1 China

% 15.8 Brazil 

% 13.8 South Korea

% 11.3 Taiwan

%   8.0  South Africa

The top 25 holdings has 6 China stocks:

% 1.53 China Mobile Ltd. ADR

% 1.16 Industrial And Commercial Bank Of China Limited

% 1.10 China Construction Bank Corporation

% 1.07 CNOOC, Ltd.

% 0.79 Bank Of China Limited

% 0.79 China Life Insurance Company, Ltd.

Is this too much China for your EEM pick?

Valunvesthere

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#10) On February 07, 2011 at 8:22 AM, Valyooo (99.57) wrote:

I don't think so...I am not particularly anti-china

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