After the fall (and partial recovery): Portfolio evolution

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Shakespeare
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by Shakespeare »

Every once in a while I buy a little of some cyclical- a few $k. I just never make any money on it....

BTW, last time I checked I outperformed the FPX Balanced by >3% a year going back to 1998, when I retired.

But I don't recommend this approach to anyone else, despite my own success. Sharpe's Arithmetic suggests I make extra money by taking it from others.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by BRIAN5000 »

The reason I ask is because this is sort of the approach I'm trying to build towards, either that or just index the whole thing.

I will try to post a spread sheet, a work in progress, all comments welcome, some may have a laugh or two.

Crap, poker time have to do this in the AM.
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scomac
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by scomac »

PORTFOLIO EVOLUTION

I do recall making a resolution to alter the asset make-up of our portfolios to reflect the lack of comfort I felt during the crisis, but, for good or bad, this has failed to materialize in any meaningful way. I suppose you could say that it is with sober afterthought that I realized that despite errors of execution, the investing strategy I have employed over the years served me well throughout the crisis and subsequent recovery. It seems to me that we run a very great risk to measure the suitability of an investing approach over any period less than the full market cycle. My thinking is that the best way to truly determine one's risk tolerance is that during periods of crisis or euphoria one should feel more than just a wee bit uncomfortable. The trick is to feel the angst without having it override the decision making process. With that in mind, I continue to forge ahead with an equity biased asset mix of roughly 60:40 (preferreds included in the equity side)

BETA

While I don't use Beta per se, the concept of building an equity portfolio that is less volatile than the market has always been near and dear to my heart. It is something that I have referred to in the past as "effective diversification". RiskGrades is a portfolio analysis tool that I have used for a number of years to assist me in this regard. It allows you to input your portfolio data and then see how hypothetical will impact the volatility of the over all portfolio. I have always managed to have our equity portfolio constructed in such a way as to be lower in volatility than a big market index like the S&P 500. A combination of selecting low volatility stocks and those issues which have a tendency to move independently providing effective diversification.

Taking the data provided from Globeinvestor, I have calculated an arithmetic average Beta for the equity portfolio of .59. Approximately 20% of the portfolio is in preferred shares; 22% in US domiciled common stocks and the balance in Canadian common shares and income trusts. Large cap - 58%, Mid cap - 30%, Small cap - 12%. Sector breakdown: Financials - 36%, Consumer disc. - 19%, Consumer stpl. - 15%, Energy - 12%, Industrial - 6%, Utilities - 4%, Telecom - 3%, Health care - 3% and IT - 3%. So, it doesn't necessarily have to be as dull as loading up on utilities and telecoms. Despite taking a different tact, Shakes and I have ended up at similar end point - being a low volatility portfolio. I can also verify from my own experience that returns have been quite gratifying, easily out pacing the market with an CAGR since inception (Jan. 2002) of 9.86%.
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by DenisD »

I try to keep my core bond and equity positions constant in real terms. So, I've been a net seller every month since the end of February/09, raising cash and making my portfolio less risky. Cash has gone from about 28% to 33% of the portfolio. And I'm withdrawing cash to live on.

Put another way, bonds and equities have gone up about 21% and cash has gone up about 52%. Obviously, 21% is much more than the inflation since the end of February/09. Bonds and equities were quite a bit under target back then and they're over target now. Some things are hard to sell. :wink:

In retrospect, I rebalanced too aggressively early in the fall and not aggressively enough in the end.
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by JaydoubleU »

As "the fall (and partial recovery)" fades further into the distant past, I find topics like this one and also this one well worth the time to re-read them. As we head into 2011, I've been making minor adjustments to our asset allocations (the leading digit in our age is changing, so reducing equities 5%, increasing fixed income 5%), but otherwise we are just sticking to our investment plan and strategies.

I wonder if others reflect back using topics such as these and have an updated view of their portfolio evolution and investing philosophy?
Thanks for reviving this thread, P.I. It was informative to read. I'm sorry that I didn't participate in it last year.

Like scomac said near the start, 2009 was the second time in my investing life that I went through a catastrophic crash in the markets, and my net worth, which is mostly tied up in them, suffered. It wasn't pleasant. I thought I had learned plenty the first time; I suppose I did, because this time I kept my nerve, buying aggressively around the lows, and we rebounded and then some. But this second time 'round I realized that I need to harness those emotions better, and above all, to be more patient, both with buying and selling. In 2007 I sold out of mutual funds reaping great gains, but rushed head-on like a linebacker into stocks. Actually, I made some pretty good picks! Buying and selling SAP, CNR, TCK.B, and TIH for profits was good; buying BMO, IGM, MBT, RUS at market highs was bad....really bad. In hindsight, I might have held on to those SAPs, CNRs and TIHs, and I should have studied a lot more before blindly investing in blue chips that I assumed were safe.

I have since scaled back significantly on financials, and have reallocated to a wide range of staples, healthcare, telecoms, utilities. I watch the markets closely and try to see the big picture and not get fooled into following what the media seems to be advocating. A little while ago it was deflation; now it's inflation. I watch as certain sectors roar ahead, and I resist the temptation to jump on, sticking to fundamentals regardless of analyst ratings or guru predictions.

Also as scott said, I stick to lower relative beta and don't worry about some vague (and false) "beating the index" test. I want nothing to do with ETFs, mutual funds or any vehicle in which intermediaries skim off any gains I might make.

Unlike some others, however, international diversification is very important to me, and this is simply because I'm not a Canadian resident and don't benefit by any of your tax breaks. So I try to maximize income and the potential for future income in the most tax efficient manner possible, while looking closely at the merits of each and every investment. And still, I am overweight Canada! No wonder I spend hours at it everyday. The hope is to retire there someday.

I am 100% in equities, dividend growth stocks, and I intend to maintain most of these positions (with occasional rebalancing) until I eventually cash out, hand the money over to my descendants, and fade away.
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by Peculiar_Investor »

JaydoubleU wrote:Thanks for reviving this thread, P.I. It was informative to read. I'm sorry that I didn't participate in it last year.
You're welcome. There are many nuggets amongst the older financial topics. I've found it very useful to scan back through the years at the Topic subjects and review some of them and contemplate them in the current environment. IMHO, too often discussion centres on the topics with unread posts and the older posts become ignored. Some of the wise FWF gurus have contributed much in the past and are no longer posting as often or at all.
Unlike some others, however, international diversification is very important to me, and this is simply because I'm not a Canadian resident and don't benefit by any of your tax breaks. So I try to maximize income and the potential for future income in the most tax efficient manner possible, while looking closely at the merits of each and every investment. And still, I am overweight Canada! No wonder I spend hours at it everyday. The hope is to retire there someday.
I find your posts enlightening as the generally offer a Canadian perspective but from far away and with a different context (taxes et al.). It is a helpful reminder that Canadian is a small player on the global markets and we need to ensure we don't get too narrow in our investing focus.
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by StuBee »

Interesting thread. I may as well testify to my personal turmoil between August 2008 (when my portfolio began to be affected) and now... Firstly, I can say that I did not panic. I like to believe that I was acting in a wise and mature fashion. However, it may be partly because I was simply keeping to plan (i.e. in a rather close-minded manner). ISTM that this is one of the main benefits of having a plan. A plan is necessary for Reason to reign over Passion...

Around a year ago, I documented the different investment decisions that I had made since 08/2008. It was good that I did so because the factors influencing my past decisions were fresher in my mind. All selling/buying decisions were either opportunistic or forced. On the "forced" side: 1) Sold BCE at 40 (after the Supreme Court of Canada decision) and purchased MBT at 40. 2) Sold PCA when it was taken over by SU and purchased SAP. After SAP had run up to the point that it's yield broke 2%, I sold SAP and purchased FCR. On the "opportunistic" side: 1) During the slump, IGM was sold and PWF was purchased (traded up the Power chain...). This switch occurred when their yields were nearly identical (generally, IGM has a higher yield than PWF). 2) Sold MBT at 38 and bought back BCE at 22 :shock: (after BCE's failure to pass an obscure "post-privatization solvency test"). So no panic... everything was either by force or by chance (i.e. seizing the moment).

On the negative side (Passion outdid Reason) I was unable to rebalance towards equity. At one point, my AA was "out of whack" with FI clearly too high. I could not get up the courage to sell off FI and purchase more Eq. Only when the situation was starting to correct did I have the courage to move some FI into Eq.

Needless to say, we are alright at this time. (As are most people who were heavily weighted in Eq. since 2009).

StuBee
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by JaydoubleU »

I find your posts enlightening as they generally offer a Canadian perspective but from far away and with a different context (taxes et al.). It is a helpful reminder that Canadian is a small player on the global markets and we need to ensure we don't get too narrow in our investing focus.
Well, thank you. It is probably because I'm Canadian that I was almost exclusively in Canadian stocks in 2007 and still 50% there today: you go with what you know. It was sheer luck and coincidence, however, to be invested in a country whose banks would come to be recognized as the world's soundest, whose debts are not out of control, and whose natural resources are the envy of the world.
a country whose banks would come to be recognized as the world's soundest
That is, until BMO's big push into Milwaukee :roll:
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by scomac »

JaydoubleU wrote:
a country whose banks would come to be recognized as the world's soundest
That is, until BMO's big push into Milwaukee :roll:
[OT]I rather doubt that this deal will be the undoing of BMO; far from it, in fact. My issue with the deal is that there is little, if anything, in it for shareholders -- seems more like empire building to me. :x [/OT]
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Re: After the fall (and partial recovery): Portfolio evoluti

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OT]I rather doubt that this deal will be the undoing of BMO; far from it, in fact. My issue with the deal is that there is little, if anything, in it for shareholders -- seems more like empire building to me. [/OT]
I didn't mean to suggest that BMO is no longer a sound institution. I believe my dividend is safe, anyway. However, hopes for a 2011 increase have been dashed, and from what I have read, albeit cursorily, the deal involves significant risk in a troubled bank with accretive value of only 2%.......by 2013. In other words, my issue is the same as yours :wink:
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by Sensei »

Hi,

I agree with upthread posters, this is a good topic, and thanks for resurrecting it.

I didn't know much about investing and before dot.com and I didn't really learn much from it either. At that time I was dollar-cost averaging into way too many mutual funds. IIRC, I just fell into a funk during the period and did nothing except continue the plan (which was on automatic pilot anyway) and I might have used re-balancing. Things worked out at least until around 2008. Maybe following the plan was the best plan.

The recent crash was the impetus to start investing in high quality dividend equities. Near the bottom, I was looking at some serious losses among an unwieldy group of mutual funds both in Canada and abroad. I realized I had work to do, but no way to do it. The idea that gripped me during the depths of the crash was that being tied to equity prices for income just seemed like a real donkey's game. I was close enough to retirement that I could imagine being caught with a bunch of funds over which I had no control. Thus, the focus on dividends as opposed to share value. Several steps followed including opening a brokerage account and a massive shifting of money from funds to stocks. Also, doing a lot more reading and haunting Canadian Business and then FWR became somewhat obsessive.

In the present circumstances, mutual fund investing is still residual in my overall portfolio. About 40% of my net worth is parked in fund companies domiciled offshore. Since these portfolios had what I now realize were huge front end loads that could only be amortized by holding for double digit numbers of years, I'm in no hurry to redeem them. Major fees have been mainly paid, and they are just beginning to show their worth. They have shown an average annual return of 6% - 7% nominal even after exorbitant bid offer spreads and other fees are taken into account. Now all are somewhat in line with typical Canadian fund MERs, probably 1% - 2%. I use them to invest in Europe, and the BRIC group, as well as fixed income funds, IOW, things that I have no desire to invest in directly.

The dividend strategy is very long term and now only in year three. Phase one was major shift from funds to stocks. Lots of buying in 2009.

This year, I realize I've reached a phase 2. I have 95% of stocks that I want distributed somewhat unevenly over 8-10 sectors. Selling things is mostly not part of the plan. For better or worse, I've been pretty consistent about selling dividend cutters and no regrets. Canadian stocks represent approx. 1/3 of the total portfolio. I'm not planning on buying much new, except I'm tentatively re-entering non-Canadian banks. I'm not convinced that total return is a key concept for me, and I haven't decided on any weighting system for the stock portfolio.

The main goals going forward are:

1. Monitor the stocks I have and learn about specific metrics to watch for each kind of stock
2. Set up better systems for monitoring
a. Learn some basic stuff like how to use Excel :oops:
b. Create spreadsheets that show changes in basic metrics for each stock I own


The main challenges I'm facing are:
-fixed income is rather light in the overall portfolio (The plan is to readjust in about three years when I turn 60 and take a more direct approach to adding bonds and preferreds.)
-working on the psychological game and waiting for the really good buys, I think I was more patient in 2010 than in 2009, but there is room for improvement
-one thing that is very clear is that as far as adding to my positions, it is a whole lot harder now and the real table pounding buys are few and far between, although some stocks that I own are attractively priced from time to time

Note: Sorry I stopped midway through. This is an edited version.
Cheers

"A dividend being paid today is always a positive return." Josh Peters, Morningstar
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by Peculiar_Investor »

From NormR's article in today's G&M, For stocks, the merry-go-round beats the roller coaster - The Globe and Mail I have a follow-up question.
NormR wrote:Let’s look at his data on stocks. He tracks five stock portfolios based on beta from 1962 to 2010 and compares the returns to those of the S&P 500. The first stock portfolio is formed by picking 100 stocks with the highest betas and the second contains 100 stocks with the lowest betas. The remaining portfolios focus on the 100 stocks with betas closest to 0.5, 1.0, and 1.5 respectively. The portfolios were rebalanced every six months and the long-term results are shown in the accompanying graph.
I'm curious if the results of the graph would change if a different period was used for rebalancing. Would the graphs look the same if one rebalanced every year? Every two years?

I for one would have more belief in the theory if it could be proven to work largely independently of the period chosen for rebalancing. I cannot recall the investment book that I read that encouraged this line of thinking to make sure that an "independent variable" is truly independent, but the thought process has stuck with me.
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Re: After the fall (and partial recovery): Portfolio evoluti

Post by kcowan »

I recall reading an article that proved that rebalancing period meant little over a long period, i.e. 10 years. I think they compared quarterly, half yearly and yearly.
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