This chart captures three stocks and the S&P 500 (as measured by SPY). I removed the other tickers as that is not the point; SPY is in yellow.The blue line is a growthy stock a bought at the start of the chart (early October), the red line is the one REIT I own across the board and the green line is one of two foreign mining stocks in my ownership universe. The blue line shows up 20%, the red line down 15% and the green line with a wild ride to being down less than 1% in a down 4 plus percent environment for the S&P 500.
One reason for the timing of buying the blue line stock was as a counter strategy to my bearish sentiment--that is if the market rallied I figured this would help me to better keep up.
Going into a period where the market was going to drop 4% in two months I might think the REIT would hold up better than the growthy, albeit with a long term theme I believe in, stock.
The REIT obviously came apart like most REITs due to the financial event we are still working through. Take these three as a microcosm for how a properly diversified portfolio can work. The three are from disparate sectors and make an important point. Leadership will come from somewhere. You may be right or wrong about where leadership comes from but you will have the exposure if you are diversified, meaning you don't have to be right to have a good result.
These are all individual stocks. The stock that is up a lot is ahead of the corresponding narrow themed ETF, the REIT is down more than iShares DJ REIT (IYR) and the mining stock is about even with the iShares Global Materials ETF (MXI), I own MXI for a few accounts. So more risk and more reward with stocks, no shock, than with ETFs but interestingly enough the net result seems to be about the same.
Taking the path of least resistance is important in life and portfolio construction.
One last item, I think this week's video will be interesting. I am going to take a stab at recapping some of the meatier portfolio construction concepts discussed at the Super Bowl of Indexing I attended earlier this week.
7 comments:
It's early and the coffee is still working it's magic, but I'm curious...
In any well-diversified portfolio, it's likely that one or more equities will be off, and others will be propping up the portfolio. Do you make any attempt to time your entries and exits to capture these inevitable swings, or take profits from the outperformers? Or do you welcome the swings as a sign that your diversification is working & just ride it out? I guess my question is, do you have a big-picture exit strategy for taking profits, or does each position stay or go on its own merits?
Thanks for the vivid example...
-- Rick
part of the top down method, as i see it, is that each stock is a proxy for several things--large cap, low beta, high yield, a particular country as an example.
so one reason to sell is when a stock is no longer a good proxy for the things i thought it would be a proxy for.
my REIT is probably still a good proxy for the space but it might make sense to take the tax loss in the next couple of weeks.
i have outlined selling down partial positions when stocks get too big, i also outlined selling starbucks a few months ago thinking that I got something wrong ( the no longer a proxy idea might apply to SBUX).
The more important decision than riding it out is whether to be over, equal or underweight ahead of time. over time some of these decisions will be right and some wrong. as stated previously i hope to be right more often.
if a stock is down 20% and so is the sector, that stock is not an obvious sell if i got the sector weight right ahead of time.
I could be reading more into this, but from the conference, and I will say that I think that the collective writers at IU are tops, what would you do slightly differently as you and others are learning to take advantage of all the new products? Any chance, you see growing role of etfs in your portfolio construction?
jasper
jasper, there are two things pulling in opposite directions WRT to answering your question.
to say yes to more investment products (so going a little bigger than just one type of "wrapper") is the desire for more asset classes like intl small cap, emerging small cap, infrastructure, more in commodities.
what says no is the desire for narrower exposure in more disparate locations around the globe. for example intl RE. One could buy one of the newer ETFs or do a little more work to pick a stock that could isolate something narrower than the world or a big region and maybe pick up more yield.
i can't say for sure what I will do as i can envision multiple evolutions with the accounts i manage.
Another factor to consider in Roger's example is dividends. Of course for the readers that have been here for awhile we know that Roger likes dividends.
I don't know about the yellow line stock, but in the case of the REIT stock the dividend also helps to smooth out the graph making the real loss less than 15%. That's assuming of course that dividends were not factored in this graph. Most financial graphs don't.
Dividends can make selling at the bottom even less appealing. But as Roger said a loss makes tax day a little merrier. Especially if you think the sector is going to tank some more and you can buy it back cheaper later, like financials, REITs and homebuilders next spring.
OT: Henry Blodget is thinking bear:
http://tinyurl.com/2xtr2p
Roger-
Although Fisher and his folks are saying "onward and upward" through 2008, this yellow line for the S&P 500 sure has the the appearance of starting a long and slow "down", as you have been warning us to watch for...
if i recall correctly they don't do a lot of technical analysis.
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