austinhippie (83.00)

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What do you think? If holdings include preferred, micro, long-term and short-term, can this portfolio be balanced?

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September 08, 2012 – Comments (10) | RELATED TICKERS: GMCR , VOXX , CMG

What do you think about these portfolio allocation goals for someone with a very long time horizon and a total annual return of 2+% above SPY? Assume that less tax efficient issues are held in tax-deferred or non-taxable accounts.

A) 20% preferred stock position – 5 – 10 issues - learning

B) 20% - 40% micro and small cap stocks – 10 to 20 issues

C) 20% - 40% stocks for long-term holding – these can be significantly overweight

D) 20% cash and/or deep value stocks for flipping* – these can be overweight too

Some examples from each category

A) recently bought WLFCP and HIGpA in non-taxable account and BMLpQ and JPMpI in taxable accounts

B) bought some REX, VOXX and MIND recently

C) bought CMG after its most recent earnings report – long-term hold in taxable account, bought some SBUX in dividend accumulating taxable account and also in my non-taxable account, TOT

D) bought CMG after its most recent earnings report, sold it the other day in my non-taxable account

* I never let myself feel guilty about selling a winner when it is in this category. The purpose, when it is in this section of my portfolio, is to make me quick money and get out of my portfolio. If it suddenly goes up 10% - 25%, I might just sell, even if it looks like it is still worth more than what I sold it for. At that point there are probably more attractive bargains available.

I am currently debating GMCR in this category. It has gone up significantly from my buy point and I am trying to decide if it will be just greed that makes me choose to hold after this weekend or if I am really moving that position into the longer-term portion of my portfolio. It still looks like a tremendous bargain to me. But I bought it as an extreme value situation, so I give my self permission to go either way with it. What do you think?

10 Comments – Post Your Own

#1) On September 08, 2012 at 6:07 PM, MegaShort (99.95) wrote:

That sounds like a lot of work for targeting 2% return above SPY.

I don't see the point of 20% preferred stock. Preferred stock is somewhat correlated to stock, so it's not quite as useful for portfolio insurance as bonds/cash (or short positions).

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#2) On September 08, 2012 at 8:54 PM, austinhippie (83.00) wrote:

Thanks for sharing your thoughts. Most preferred stocks have a pretty stable price through the course of any given year but they pay out more substantial dividends than bonds. Only some issues of preferreds are convertable into common stock. Those issues can have greater fluctuations that do mimic that of common stock. I don't own any convertables. I still don't think I can stomach the bonds. That's the kind of sub-market performance that keeps me awake at night. Thanks again!

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#3) On September 09, 2012 at 12:25 AM, awallejr (79.96) wrote:

Scratching my head trying to think what you are doing with the last 20%.

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#4) On September 09, 2012 at 12:26 AM, awallejr (79.96) wrote:

Nm I read too quick and posted too soon.

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#5) On September 10, 2012 at 2:15 PM, austinhippie (83.00) wrote:

I sold my GMCR today - Yeah! I am leaving SBUX and CMG in my long-term holdings, but I'll be done with GMCR until the market becomes extreemly irrational about it again. :)

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#6) On September 10, 2012 at 4:37 PM, chk999 (99.98) wrote:

The 20-40 percent in small companies is going to be very volatile. What will you do when it drops 50% suddenly?

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#7) On September 15, 2012 at 9:42 AM, TSIF (99.96) wrote:

Same comment as chk999, if you're on the high end of that 20-40% of micro/small cap, then you are a little out of alignment with diversification. It appears to me, however, that your goal isn't diversification, it appears to be that you are really stiving for "low risk with potential and your hands on the steerage" in your portfolio. I do agree that in an upward market that small caps rise the fastest, (i.e. coming out of the March 2009 bottom), but they are topping out currently, slowing down, and have more risk. Are small/micro caps also in yoru "D", stock flipping/cash?

Overall, I don't think a financial advisor would consider you diversified without bonds. Classifications of diversified are generally broken down across cash, bonds, small cap, mid-cap, and large cap, as well as foreign and domestic and they are varied based on time to retirement/need for investmetns.

You may end up doing well as you have some diversification across the streams, and you may be "diversified" within your goal/persoanl perspective. If you're a long way from retirement and don't mind the risk in the micro/smalls that chk999 mentioned then you're probably at a point to steer the ship. What's also good is that you have the broad range you've catagorized within your own goals.

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#8) On September 17, 2012 at 2:45 PM, austinhippie (83.00) wrote:

Thanks TSIF and chk999. I appreciate your comments. I have guts of steel, as I learned in the great recession. I also have tremendous amounts of patientce. And yes, some of my D section stocks are small / micros. But there is often a big difference between the types of companies I have in these two sections. The volatility in my core smalls and micros is less than the volitility of my quick cash flippers.

I agree that most financial professionals probably couldn't see diversification in my portfolio, but I do. One of my micro company's is a great international diversification tool for me. Even though they are an American company, their business is on almost every continent. The preferred issues I hold add dramatically less volitility as they tend to swing less than 10% from their mid point each year, and most less than 7% from their mid point.

I honestly have a harder time sleeping at night knowing that my portfolio's growth could be hindered by holding onto bonds thanI do about large portions of it dropping precipitously due to volitility in the micro / small sector. The volitility is where the short term money is made and where really good long-term investing bargains are found.

For instance, BIDU is down about 30% from its 52 week high. Much of this drop has occurred because of a competitor putting out good news for itself. This is a completely irrational valuation. Have you seen the margins and earnings growth rates, ROE, RoA and RoIC for BIDU. This price is an irrationally low opportunity, either for true long-term holding or for flipping. Flipping requires seeing an impetus for the upsurge too. And while that may not be obvious for the next few days, Baidu does have an earnings announcement coming up next month that may provide the stimulus for the upward momentum necessary to flip it.

What I am saying here is that, even if volitility takes a large chunk of my portfolio down, there are opportunities in every market at all times. Especially if you are willing to outweight companies to substantial portions of your total holdings from time to time, you can make that move your portfolio, even in down markets.

I am thinking more and more that the traditional allocation recommendations for diversification are not really best for everyone. In particular, if you have time to dedicate to your portfolio, you might be better off thinking through allocation / diversification for yourself too.

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#9) On September 17, 2012 at 3:50 PM, TSIF (99.96) wrote:

There are always opportunities in a down market. I hold some cash that misses out on any upswings, but when needed for deployment for an "opportunity", it's nice to have it available for deployment and usually makes up for the time it was idle. I "sleep" better knowing that the market can move in either direction and I'll still, (most likely barring a serious crash at the worse possible time), meet my "minimal goals" over time. A crash at the "right time", could be a better win than a long term bull market.

I believe the thumb rules for diversification are good ones overall when properly applied, but no, no thumb rules are meant to fit everyone. In your case, you're a rare cookie!! Most people don't spend any effort on their investments and thumb rules are better than naught.

Some people sleep well at night leaving it to others, some people read up once a decade or so and leave things in auto-pilot for long periods of time, some people don't sleep well at night no matter who does it or what they do!

There are no "right rules". Being personally invested goes a long way, at least if/when you are wrong, you can learn from it and you can't blame someone else for a brief snapshot in time.

Good luck!

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#10) On October 04, 2012 at 11:17 AM, austinhippie (83.00) wrote: