Tuesday, March 5, 2013

Spreading out the risk

Anyone following this blog knows I have made some bad calls lately. They are not bad enough to keep me awake at night but they are bad enough to slow the growth of my portfolio.

But, I don't have all my bets in one stock or in one sector; They aren't even all on the same continent. I have more than thirty investments and since some of those are ETFs, the total number of stocks in which I have an interest number in the hundreds, if not the thousands.

With the market climbing daily I figure about 94 percent of my investments are performing well. This is why one mixes up one's investments. If one knew, really knew, what was in the cards, one would put everything into one investment and make out like a bandit. Sadly, the world doesn't work this way.

I have two big questions: At what point in the future will my under performing stocks, begin performing like the other investments, and at what point in the future will my great performing stocks loose steam and begin falling like my present losers?

I'm betting my dogs will soon take off and then all my investments will tumble together. I'm already looking at what to jettison in order to have cash on hand to buy during the correction.

1 comment:

  1. Interesting post and exciting topic... may I suggest this is where an advisor can become truly valuable (amongst many other subjects/ideas).

    I would say first off you need to have a comfort level of risk in your portfolio... again I am a fan of in the market (for a portion of your holdings) and out of the market for another portion. Equity vs/ Fixed income/cash. So a simple rebalance would allow you to divest of some winners (take profits) and get your risk tolerance back in line. The decision on winners/ losers has to do with the view of those stocks. Why did you buy them? What has changed now?

    Here, I am going under the assumptions strong analysis was done on management team, industry, etc. If the companies are still strong and you believe in their story, keep them (set a target price in and out) and stick to your discipline, again just make sure that a couple of positions will not sink your whole account (just like that F55F investment).

    In the past I have characterized you as a cash flow investor... that the cash flows from your investments are the important part as you live off those. If that's still the case than the fall of the stock price should not be a big concern (assuming the company has not cut dividends and their financials are still solid and looks like they will not need to cut dividend). In fact your yield has likely increased. On your winners set a target allocation. Example (I think you hold it, you've mentioned the stock before) Scotiabank.... set a target for the % this stock can make of your overall account. If you say that it's 5% and that your account is $500,000 than rebalance (I would say no less than 2/yr) and reset that amount back to 5%. So if today it has a weighting of 10% of your overall account, trim your position. I would also set limits to how much I would let it grow to as % of your overall account. If you say that Scotiabank should not grow to more than 5% of your account with a 2% variance than if the stock gets to 3% add to your position and if it gets to 7% take profits.

    The idea is to have a process and to take the emotion out of decisions. Remember the most important lesson I can impart... don't fall in love with a stock... I see this so many times.... Example, we had beginning of 2000s... Nortel makes up 80% of your overall holdings. We would tell clients, that is a very risky portfolio and we would get time after time... Do you know how much money I have made from Nortel?... you know that investor's in trouble. if you really love a stock set a limit (personally I find 5% the limit, but I am conservative by nature) and never exceed that limit... make your investment decisions a process that is repeatable and you'll protect yourself (from your worst enemy lots of times... yourself)