Showing posts with label building big portfolio. Show all posts
Showing posts with label building big portfolio. Show all posts

Saturday 15 June 2013

5 Popular Portfolio Types

Stock investors constantly hear the wisdom of diversification. The concept is to simply not put all of your eggs in one basket, which in turn helps mitigate risk, and generally leads to better performance or return on investment. Diversifying your hard-earned dollars does make sense, but there are different ways of diversifying, and there are different portfolio types. We look at the following portfolio types and suggest how to get started building them: aggressive, defensive, income, speculative and hybrid. It is important to understand that building a portfolio will require research and some effort. Having said that, let's have a peek across our five portfolios to gain a better understanding of each and get you started.

The Aggressive PortfolioAn aggressive portfolio or basket of stocks includes those stocks with high risk/high reward proposition. Stocks in the category typically have a high beta, or sensitivity to the overall market. Higher beta stocks experience larger fluctuations relative to the overall market on a consistent basis. If your individual stock has a beta of 2.0, it will typically move twice as much in either direction to the overall market - hence, the high-risk, high-reward description.

Most aggressive stocks (and therefore companies) are in the early stages of growth, and have a unique value proposition. Building an aggressive portfolio requires an investor who is willing to seek out such companies, because most of these names, with a few exceptions, are not going to be common household companies. Look online for companies with earnings growth that is rapidly accelerating, and have not been discovered by Wall Street. The most common sectors to scrutinize would be technology, but many other firms in various sectors that are pursuing an aggressive growth strategy can be considered. As you might have gathered, risk management becomes very important when building and maintaining an aggressive portfolio. Keeping losses to a minimum and taking profit are keys to success in this type of portfolio.

The Defensive PortfolioDefensive stocks do not usually carry a high beta, and usually are fairly isolated from broad market movements. Cyclical stocks, on the other hand, are those that are most sensitive to the underlying economic "business cycle." For example, during recessionary times, companies that make the "basics" tend to do better than those that are focused on fads or luxuries. Despite how bad the economy is, companies that make products essential to everyday life will survive. Think of the essentials in your everyday life, and then find the companies that make these consumer staple products.

The opportunity of buying cyclical stocks is that they offer an extra level of protection against detrimental events. Just listen to the business stations and you will hear portfolios managers talking about "drugs," "defense" and "tobacco." These really are just baskets of stocks that these managers are recommending based upon where the business cycle is and where they think it is going. However, the products and services of these companies are in constant demand.defensive portfolio is prudent for most investors. A lot of these companies offer a dividend as well which helps minimize downside capital losses.

The Income Portfolio An income portfolio focuses on making money through dividends or other types of distributions to stakeholders. These companies are somewhat like the safe defensive stocks but should offer higher yields. An income portfolio should generate positive cash flow. Real estate investment trusts (REITs) and master limited partnerships (MLP) are excellent sources of income producing investments. These companies return a great majority of their profits back to shareholders in exchange for favorable tax status. REITs are an easy way to invest in real estate without the hassles of owning real property. Keep in mind, however, that these stocks are also subject to the economic climate. REITs are groups of stocks that take a beating during an economic downturn, as building and buying activity dries up.

An income portfolio is a nice complement to most people's paycheck or other retirement income. Investors should be on the lookout for stocks that have fallen out of favor and have still maintained a high dividend policy. These are the companies that can not only supplement income but also provide capital gains. Utilities and other slow growth industries are an ideal place to start your search.

SEE: Dividends Still Look Good After All These Years

The Speculative Portfolio A speculative portfolio is the closest to a pure gamble. A speculative portfolio presents more risk than any others discussed here. Finance gurus suggest that a maximum of 10% of one's investable assets be used to fund a speculative portfolio. Speculative "plays" could be initial public offerings (IPOs) or stocks that are rumored to be takeover targets. Technology or health care firms that are in the process of researching a breakthrough product, or a junior oil company which is about to release its initial production results, would also fall into this category.

Another classic speculative play is to make an investment decision based upon a rumor that the company is subject to a takeover. One could argue that the widespread popularity of leveraged ETFs in today's markets represent speculation. Again, these types of investments are alluring: picking the right one could lead to huge profits in a short amount of time. Speculation may be the one portfolio that, if done correctly, requires the most homework. Speculative stocks are typically trades, and not your classic "buy and hold" investment. 

The Hybrid PortfolioBuilding a hybrid type of portfolio means venturing into other investments, such as bonds, commodities, real estate and even art. Basically, there is a lot of flexibility in the hybrid portfolio approach. Traditionally, this type of portfolio would contain blue chip stocks and some high grade government or corporate bonds. REITs and MLPs may also be an investable theme for the balanced portfolio. A common fixed income investment strategy approach advocates buying bonds with various maturity dates, and is essentially a diversification approach within the bond asset class itself. Basically, a hybrid portfolio would include a mix of stocks and bonds in a relatively fixed allocation proportions. This type of approach offers diversification benefits across multiple asset classes as equities and fixed income securities tend to have a negative correlation with one another. 

The Bottom LineAt the end of the day, investors should consider all of these portfolios and decide on the right allocation across all five. Here, we have laid the foundation by defining five of the more common types of portfolios. Building an investment portfolio does require more effort than a passive, index investing approach. By going it alone, you will be required to monitor your portfolio(s) and rebalance more frequently, thus racking up commission fees. Too much or too little exposure to any portfolio type introduces additional risks. Despite the extra required effort, defining and building a portfolio will increase your investing confidence, and give you control over your finances.

SEE: How To Pick A Stock

January 26 2013

Sunday 11 December 2011

Record keeping to monitor and manage the performance of your portfolio of shares.

Keeping records of your shares

Many investors put considerable time and effort into the initial planning of their portfolio and choosing the shares they buy.  Yet for some reason, many don't put the same time and effort into monitoring and managing the performance of their portfolio once it has been established.


Regular review of your portfolio is vital to establish whether your investment goals are being met. #    Many investors have a complacent attitude to investing.  As a result, they lack the market information necessary to make informed investment decisions, are forced to behave reactively and may end up losing out.  However by tracking your portfolio, you will give yourself the chance to plan ahead and take advantage of opportunities such as buying more shares in a particular company that, by your reckoning, is trading at a discount.

Example:
June - Check portfolio
July - Talk to accountant
August - Rebalance portfolio
September - Take sharemarket education course
October - Update dividend information in portfolio records
November -
December - Talk to advisor.

As the sharemarket is continually changing, it requires regular attention, yet there are no hard and fast rules as to how often a portfolio should be monitored.  The performance of volatile shares may need to be checked several times a day, while more stable large capitalisation companies can be reviewed at longer intervals.

To track your portfolio effectively, you need to know where to locate useful information and be able to understand how it affects the shares you own.

You may be liable to pay tax on any  money you make from shares in the form of income or capital gain in certain countries.  These tax offices of these countries will need details of both income and capital gains (or losses) that you make to calculate the tax you may owe.  However, by maintaining simple, accurate and complete records you will be able to ensure that you pay the appropriate tax without incurring large accounting fees.

If you do want to do the record keeping yourself, the 2 main types of records required to keep track of sharemarket investments are:

1.  Records relating to income for income tax purposes, including, dividend, dividend reinvestment or interest payment advice slips all of which generally are issued by company share registries to the holder's registered address; and

2.  Records relating to purchase and sale prices for capital gains tax purposes, including contract notes, copies of applications made for initial public offerings, dividend reinvestment and bonus shares plan advice slips.

Generally records are required to be kept for 5 years.  However, the events that mark the beginning or the end of the retention period vary according to the relevant provisions of the particular law.

Computer software packages and ledger sheets are available to assist you with your record keeping.  If you prefer to keep paper-based as opposed to computer-based records, an investment ledger will provide you with an easy and convenient way to keep records of your share transactions.


http://www.asx.com.au/courses/shares/course_07/index.html?shares_course_07
Download example spreadsheets for keeping track of your shares.


 #  For example, you might be aiming to achieve an average after-tax dividend yield of 4% p.a. and capital growth of 8% p.a. over the next 10 years.  In that case, you could buy some shares that provide reliable, tax-effective dividends and the expectation of solid year-on-year growth.

Tuesday 26 October 2010

Balance your portfolio to manage risk involved

24 OCT, 2010, 06.26AM IST, SRIKALA BHASHYAM,ET BUREAU
Balance your portfolio to manage risk involved


Investors face different kinds of challenges at different points in time, and as the investor and investment portfolio get older the challenge is that of managing risk. Not only because there is a change in the age of the investor, but also because a larger corpus always demands prudent investment strategies. That is one of the reasons why you find high net worth individuals (HNIs) also being active investors in a number of debt and structured products with a focus on capital protection. 

At the current levels, those who have a predominantly equity portfolio can look at some amount of unwinding, but should restrict it to a small percentage. The key word here is percentage as it could be in the region of 10-20 percent of a long portfolio, as the short and long-term outlooks continue to carry a positive bias. 

The question is why should you worry about profit booking if you are a long-term investor? 

As has been observed, the worst thing for an investor is the loss of opportunity to make profits and it is not restricted to the buy side alone. In fact, many investors complain that they find the decision to sell more challenging than investing. 

This could become relatively easier if an investor fixes a target for his returns and allocates money across different products. 

The task of managing risk can be a lot easier if the investor allocates his corpus across products which have different risk profiles. In this scenario, the management of risk is a lot easier and one can also take a more passive investment strategy. 

For instance, if the portfolio aims to generate an annual return of 10-12 percent over a long term, it can afford to park a larger chunk of funds in fixedreturn instruments with the ability to generate 8-9 percent. The pressure to generate a 15-percent return would be on a smaller chunk of the portfolio to achieve the overall target. More importantly, the profits generated by the aggressive portfolio can be ploughed back to the fixedreturn corpus as it ensures the achievement of the target over a long term. 

To manage this scenario, of course, you need to be systematic with the portfolio management. At the institutional level, products like portfolio management service (PMS) ensure such actions as a fund manager constantly looks for products that can ensure targeted returns. The task is much more challenging at the individual level simply because it is difficult to keep track of options that come up from time to time. 

One way is a periodic review at regular intervals and rebalancing the portfolio according to performance. Another option is to make use of the products that allow such rebalancing. 

The recently-launched products from insurance and mutual funds with a trigger option ensure profit booking on an automatic basis. In fact, mutual funds have also built in this facility to systematic investment plans (SIPs) that allow higher investment amounts in the event of steep correction. 

The task gets challenging when an investor independently does his investment planning, particularly with respect to stocks. The need for dynamic fund management is a lot lower in the case of other assets, in any case. For instance, an investment in real estate need not be monitored on an annual basis and can be left untouched for a period of 3-5 years. On the other hand, a stock which is not monitored for more than five years can get the investor into trouble, and the chances are that the fortunes of a company may have undergone a drastic change during the period.

http://economictimes.indiatimes.com/features/financial-times/Balance-your-portfolio-to-manage-risk-involved/articleshow/6798768.cms

Monday 4 October 2010

Value in the context of Your Overall Portfolio

A stock's value is the sum of its future cash flows, each discounted to today's value at the base return you're aiming to make.

But that doesn't mean you'd rush straight out and buy stocks at that value - if you did, you'd only expect to make whatever return you'd factored in, and you wouldn't be leaving yourself any margin for error.


Margin of safety

To be interested in the investment, we'd have wanted to see a discount to that fair value, and it's very much a case of the more the merrier.

The larger the discount to your estimate of expected value, 
  • the greater the likely returns and 
  • the less chance you have of losing money.


So how might the margin of safety work with a stock?

Let's say your expectation is for ABC Company to pay dividends in the current year of $1.20, and that you expect this to increase forever by 6% a year.
  • To get a targeted return of 10%, you'd therefore need to pay a price that provided a dividend yield of 4% (so that the yield of 4% plus its growth of 6% would equal your targeted return of 10%), which comes out at $30 ($1.20 divided by 4%, or 0.04.)

Calculations:

$1.20/4% = $30.

Next year, dividend = $1.20 x 1.06 = $1.272
Share price = $1.272/4% = $31.80
Total return = Capital gain + Dividend = ($31.80- $30) + $1.20 = $3
Total return = $3/$30 = 10%.

But that is just your estimate of a fair value for the stock. To get you interested in buying it, you'd need to see a discount to this - and the riskier the situation and the better the opportunities elsewhere, the more of a discount you'd need.
  • Balancing it all up, you decide you only really find ABC Company compelling at $20.
  • That would give you a 33% margin of safety, but it would also increase your dividend yield to 6% and your total expected return to 12% (the 6% yield plus the 6% growth).

The intrinsic value of $30 is also the level you might reasonably expect the stock price to return to (or 6% higher than that for each year into the future to allow for the growth) - so it also defines the capital gain you're secretly hoping to make if the price returns to the underlying value. 
  • The trouble is that you don't know when - or even if - the price will return to that underlying value.  
  • But the bigger the margin of safety and the more confident you are about it, the better your chances of capital appreciation.  
  • And if you're left holding the stock, a large margin of safety should at least make it a decent ride.
The price wobbles around, either side of the underlying value, and your aim is to buy when it's a good way below it.  
  • The further the price gets from the value, in either direction, the more likely a snap-back becomes.  
  • Riskier stocks are those that have a wide range of potential outcomes.  They will probably bounce more wildly, making the prospects of a snap-back less reliable, and you'll want to buy at a wider discount to provide some comfort.


Diversification

Even with a fat margin of safety, you wouldn't put too much just in single stock because of a remote and variable chance of a complete wipe-out.

With stocks, diversification comes from spreading your portfolio over a range of different companies and sectors, and from the amount of time you are invested. 

The more time you allow, the greater the chances of the value being reflected - which, of course, is why the sharemarket beats cash more consistently the longer you give it.



Interaction between diversification and margin of safety.

There's an interaction between diversification and margin of safety, because the more you've got of one, the less you might need of the other.

There is, however, a crucial difference:
  • as you increase the number of stocks in your portfolio, your selections gradually get worse.  
  • An increased margin of safety, on the other hand, will mean better selections.

The flip side is that margin of safety relies on you making correct assessments of value, while diversification will tend to take you towards an average return, whether you're getting the value right or wrong.  
  • So if you're very confident in your ability to assess value, you might focus on finding stocks where you see a huge margin of safety and not worry so much if you end up holding only a few of them.  
  • But if you're less sure about assessing value correctly, you'll want to focus more on achieving a decent diversification, with the inevitable reduction in apparent margin of safety from your additional selections.


Related:

    Sunday 3 October 2010

    It sure beats FD rates and it is safe too.

    It sure beats FD rates and it is safe too.
    http://spreadsheets.google.com/pub?key=tWENexpUrXS_RMxB7k73RgQ&output=html

    Revisiting this old spreadsheet reveals many lessons on "stocks selection" and "buy and hold" strategies.

    There are 9 stocks in this portfolio. 

    Buying prices:  
    Nestle:  10.20, 15.5, 22.80
    PPB:  3.85, 6.80
    Guinness:  4.38, 5.35
    DLady:  1.70, 11.30
    Tenaga:  3.32
    GENM:  1.19
    PBB: 4.48, 5.98, 6.80, 6.70
    PetDag:  3.98, 5.75
    UMW:  2.975

    The returns of the stocks were calculated based on the their prices on 5.3.2009 when the market was at its lowest in the recent Global Financial Crisis.  Even at these "low" prices, it is "safe" to hold onto these stocks in the portfolio.

    Always buy QUALITY.

    Click:
    *****Long term investing based on Buy and Hold works for Selected Stocks

    Friday 2 July 2010

    Do not scoff at an Overall Rate of Return of 8% p.a. of your TOTAL portfolio

    Asset allocation is the next most important factor, after asset selection, in determining the overall rate of return of your total portfolio.


    Here are some illustrations to bring home this important fact.

    Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate  of    8%)

    Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 10%)

    Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 15%)

    Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of  20%)
    http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRdE9yeVRvSzRrMzM5djc0MHA0cERLbXc&hl=en

    Asset Allocation and Overall Rate of Portfolio Return  (Equity  Growth  Rate of    -10%)


    It is common enough to hear of 'investors' and 'speculators' achieving high rate of return on their equity/equities.  An equity portion may give a return of >15% or >50% p.a., but this may only translate into a small overall return to the total portfolio if the percentage of equity is a small portion of the total portfolio.

    Therefore, do not scoff at the investor who is able to grow his/her total portfolio at an overall rate of return of 8% or more p.a.  It is no mean feat indeed.  Just study the spreadsheets to gauge what is required to achieve this.

    On occasions, there are those who are 100% in cash.  This doesn't make sense, as the risk of being in 100% cash compared to being 80% cash: 20% equity is almost the same and moreover, the later has a greater probability of a higher return compared to the former.


    Wednesday 9 June 2010

    Core-satellite Portfolio Management

    The core-satellite portfolio strategy is a relatively new concept that bridges the never-ending debate between the respective benefits of active and passive portfolio management.

    The core-satellite portfolio approach optimises both passive and active management strategies.

    • Such a portfolio approach is divided into a core component, which usually forms the majority of the portfolio that is passively managed.  
    • The rest of the portfolio is called the "satellite", which is an active component in an attempt to generate alpha returns, i.e. risk adjusted returns.  


    The allocation mix between the core and the satellite components within the portfolio is flexible and it allows investors to select and optimal mix that would best represent their desired portfolio risk-return characteristics.

    The core-satellite portfolio concept is very suitable for big investors who are often long-term investors.  


    Sunday 28 March 2010

    How to Build a High Return Low Risk Stock Portfolio



    A proven strategy for building a stock portfolio that gives decent returns while posing minimun risks. This is a long term strategy that has proven itself over 30 years of markets ups and downs.

    There is no single strategy for being successful in the stock market. If we look at the great investors, Warren Buffet, T. Rowe Price and Peter Lynch, they all had different investment strategies. However, few people have the natural investment talents and insights that these men held. Below than is a strategy than can be used by the rest of us to earn high returns while maintaining minimum risks.

    This stock portfolio strategy is based on 3 basic principles:
    1. Diversify
    2. Buy Quality Stock
    3. Pay the Right Price




    http://www.nassbee.com/wealthy/stock_portfolio.


    Read also:


    Wealthy
    The Most Common Mistakes People Make with their Money
    Mutual Funds 101
    How to Select a Mutual Fund
    Bonds & Debt Instruments 101
    Types of Bonds
    Build a High Yield, Low Risk Stock Portfolio
    REIT - Real Estate Investment Trusts
    Asset Allocation / Economic Hedging
    Education and Tool Links for Investing


    Saturday 30 January 2010

    How do asset classes fit in with your profile?

    From answering the 10 simple questions (reference below), your total score tells you more about yourself.  Three basic profiles emerged and helped set the necessary guidelines for your investment portfolio.

    The three basic profiles and their respective investment objectives are:
    • You cannot afford to make mistakes: Conservative investment objectives
    • You are carefully weighing up your options: Prudent investment objectives
    • You want to grow bigger and better: Aggressive investment objectives

    Click here to find out what asset classes these respective investors should include in their portfolios.
    http://spreadsheets.google.com/pub?key=t5u-KMcEYg81UlomoCgxU9A&output=html


    Read also:
    What money means to you? Answer 10 simple questions.
    Understand what money means to you: Answer 10 simple questions : Sheet1

    Three most important personal factors to consider: Your Time Horizon, Risk Tolerance and Investment Objectives

    How well do you know yourself

    In understanding your relationship with money, what are the 3 most important personal factors to consider?

    These are:
    1. how long or short a time you have to invest
    2. how much risk you can tolerate, and,
    3. your investment objectives and whether they fit in with your time horizon and risk appetite.
    Cash flow is another important factor to keep in mind when you assess your personal situation.  You need to have a good idea of your cash inflows and outflows and of how to do a balancing act between the two.  That is why a cash-flow needs analysis is such an important part of any financial advice programme.

    By knowing more about yourself and where you want to be, you can now use this knowledge to construct an investment portfolio that fits your unique needs: 
    • your time horizon,
    • your risk tolerance and
    • investment objectives. 
    In short, you have created an investment portfolio tailor-made, so that your money can work for you.


    Related:
    Understand what money means to you:  Answer 10 simple questions
    http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html

    Asset Allocation:  The Best Way to Minimize Risk of Your Portfolio
    http://myinvestingnotes.blogspot.com/2011/01/asset-allocation-best-way-to-minimize.html

    Tuesday 19 January 2010

    ****Constructing a Portfolio

    Now that you have learned to analyse companies and pick stocks, it is time to focus on putting groups of stocks together to construct your stock portfolio.


    No one answer is right for everyone when it comes to portfolio construction. It is more art than science. And perhaps that's why many believe portfolio management may be the difference that separates a great investor from an average mutual fund manager.


    Famed international stock-picker John Templeton has often said that he's right about his stock picks only about 60% of the time. Nevertheless, he has accumulated one of the best track records in the business. That's because great managers have a tendency to have more money invested in their big winners and less in their losers.




    The Fat-Pitch Approach


    You should hold relatively few great companies, purchased at a large margin of safety, and that you shouldn't be afraid to hold cash when you can't find good stocks to buy. But why?


    Most investors will discover only a few good ideas in any given year - maybe five or six, sometimes a few more. Investors who hold more than 20 stocks at a time are often buying shares of companies they don't know much about, and then diversifying away the risk by holding lots of different names. It is tough to stray very far from the average return when you hold that many stocks, unless you have wacky weightings like 10% of your portfolio in one stock and 2% in each of the other 45.


    About 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks. If you own about 12 to 18 stocks, you have obtained more than 90% of the benefits of diversification, assuming you own an equally weighted portfolio.


    If you want to obtain a higher return than the markets, you increase your chances by being less diversified. At the same time, you also increase your risk.


    If you own more than 18 stocks, you will have achieved almost full diversification, but now you will just have to keep track of more stocks in your portfolio for not much marginal benefit.


    When you own too many companies, it becomes nearly impossible to know your companies really well. When you lose your focus and move outside your circle of competence, you lose your competitive advantage as an investor. Instead of playing with weak opponents for big stakes, you begin to become the weak opponent.




    Non-Market Risk and a Concentrated Portfolio


    Interestingly, holding a concentrated portfolio is not as risky as one may think. Just holding two stocks instead of one eliminates 46% of your unsystematic risk. Using a twist on the 80/20 rule of thumb, holding only eight stocks will eliminate about 81% of your diversifiable risk.


    Unsystematic Risk and the Number of Stocks in a Portfolio


    Number of Stocks   Non-Market Risk Eliminated (%)
    1======== 0%
    2 ========46%
    4 ========72%
    8 ========81%
    16======= 93%
    32======= 96%
    500====== 99%
    9,000==== 100%



    What about range of returns?


    Joel Greenblatt in his book You Can Be a Stock Market Genius explains that during one period that he examined,
    • the average return of the stock market was about 10% and
    • statistically, the one-year range of returns for a market portfolio (holding scores of stocks) in this period was between negative 8% and positive 28% about two-thirds of the time.
    • That means that one-third of the time, the returns fell outside this 36-point range.


    Greenblatt noted that if your portfolio is limited to only :
    • 5 stocks, the expected return remains 10%, but your one-year range expands to between negative 11% and positive 31% about two-thirds of the time.
    • 8 stocks, the range is between negative 10% and positive 30%.

    In other words, it takes fewer stocks to diversify a portfolio than one might intuitively think.


    Portfolio Weighting

    In addition to knowing how many stocks to own in your portfolio and which stocks to buy, the percentage of your portfolio occupied by each stock is just as important.   Unfortunately, the science and academics behind this important topic are scarce, and therefore, portfolio weighting is, again, more art than science.

    The great money managers have a knack for having a great percentage of their money in stocks that do well and a lesser amount in their bad picks.  So how do they do it?

    Essentially, a portfolio should be weighted in direct proportion to how much confidence you have in each pick.  If you have a lot of confidence in the long-term outlook and the valuation of a stock, then it should be weighted more heavily than a stock you may be taking a flier on.

    If a stock has
    • a 10% weighting in your portfolio, then a 20% change in its price will move your overall portfolio 2%.
    • a 3% weighting, a 20% change has only a 0.6% effect on your portfolio.

    Weight your portfolio wisely.  Don't be afraid to have some big weightings, but be certain that the highest-weighted stocks are the ones you feel the most confident about.  And, of course, don't go off the deep end by having, for example, 50% of your portfolio in a single stock.



    Portfolio Turnover

    If you follow the fat-pitch method, you won't trade very often.  Wide-moat companies selling at a discount are rare, so when you find one, you should pounce.  Over the years, a wide-moat company will generate returns on capital higher than its cost of capital, creating value for shareholders.  This shareholder value translates into a higher stock price over time.

    If you sell after making a small profit, you might not get another chance to buy the stock, or a similar high-quality stock, for a long time.  For this reason, it's irrational to quickly move in and out of wide-moat stocks and incur capital gains taxes and transaction costs.  Your results, after taxes and trading expenses, likely won't be any better and may be worse.  That's why many of the great long-term investors display low turnover in their portfolios.  They've learned to let their winners run and to think like owners, not traders.



    Circle of Competence and Sector Concentration

    If you are investing within your circle of competence, then your stock selections will gravitate toward certain sectors and investment styles. 

    Maybe you:
    • work in the medical field and thus are familiar with and own a number of pharmaceutical and biotechnology stocks, or,
    • you've been educated in the Warren Buffett school of investing and cling to entrenched, easy-to-understand businesses such as Coca-Cola and Wrigley.
    Following the fat-pitch strategy, you will naturally be overweight in some areas you know well and have found an abundance of good businesses.  Likewise, you may avoid other areas where you don't know much or find it difficult to locate good businesses.

    However, if all your stocks are in one sector, you may want to think about the effects that could have on your portfolio.  For instance, you probably wouldn't want all of your investments to be in unattractive areas such as the airline or auto industry.



    Adding Mututal Funds to a Stock Portfolio

    In-the-know investors buy stocks.  Those less-in-the-know, or those who choose to know less, own mutual funds. 

    But investing doesn't have to be a choice between investing directly in stocks or indirectly through mutual funds.  Investors can - and many should - do both.  The trick is determining how your portfolio can benefit most from each type of investment.  Figuring out your appropriate stock/fund mix is up to you.

    Begin by looking for gaps in your portfolio and circle of competence. 
    • Do you have any foreign exposure?
    • Do your assets cluster in particualr sectors or style-box positions?
    Consider investing in mutual funds to gain exposure to countries and sectors that your portfolio currently lacks.

    Some funds invest in micro-caps, others invest around the globe, still others focus on markets, such as real estate.  Stock investors who turn over some of their dollars to an expert in these areas gain exposure to new opportunities without having to learn a whole new set of analytical skills.

    Ultimately, your choice depends on your circle of competence and comfort level.  While many may feel comfortable with picking their own international stocks, others may prefer to own an international equity fund.



    Our Objective

    Modern Portfolio Theory has been built on the assumption that you can't beat the stock market. If you can't beat the market porfolio, then the best you can do is to match the market's performance. Therefore, academic theory revolves around how to build the most efficient portfolio to match the market.

    We have taken a different approach.  Our objective is to outperform the market.  Therefore, we believe that our odds increase by holding (not actively trading) relatively concentrated portfolios of between 12 and 20 great companies purchased with a margin of safety.  The circle of competence will be unique to every person; therefore, your stock portfolio will naturally have sector, style, and country biases.  If lacking in any area, such as international stocks, a good mutual fund can be used to balance your overall portfolio.

    Thursday 18 June 2009

    Tips on how investors could build a large portfolio

    Wednesday June 17, 2009
    Tips on how investors could build a large portfolio
    Personal Investment - A column by Ooi Kok Hwa



    OWING TO the global economic downturn, some investors may have to put aside their aim of wealth accumulation lately. (Comment: This is the best time to invest.)

    For now, wealth accumulation seems to be far away given their current low salary level, worsened by lower bonuses received or no salary increment.

    As a result of the uncertainty arising from salary reduction or getting retrenched, some may even need to tap into their savings to survive through this period of difficulty.

    We can fully understand this situation. However, we believe that we should consider building a portfolio at this time.

    We may not want to rush in to buy stocks now in view of the current high prices. However, we need to prepare ourselves to “fish” good quality stocks at reasonable price levels if the market turns down again.

    We will regret if we are not investing during this period because usually the best opportunities are discovered during a downturn.

    Nevertheless, some investors think that it may not be realistic for them to invest now given that they are already having difficulties making ends meet.

    However, we believe that we need to start somewhere. Every big portfolio always starts from a small one. If we never sit down and start thinking about building a portfolio, we will never get a big portfolio. Hence, we should start now and start small.

    When our portfolio is about RM10,000 in size, a 10% return means a return of only RM1,000. However, when our portfolio grows to RM1mil, a 10% return means RM100,000!

    Some investors may have the intention of building a portfolio but they do not know how to do so. In fact, some may depend on wealth advisers on this issue.

    However, even if we get a very good, knowledgeable and responsible wealth adviser, we also need to equip ourselves with some knowledge in this area to make sure we make sound investment decisions; after all, we need to be responsible for our future.


    We can gain this knowledge by reading books related to this topic or attending some training courses. (Comment: Get good financial education early.)

    Know what we want to achieve

    T. Harv Eker says in his book, Secrets of the Millionaire Mind, that “the number one reason for most people who do not get what they want is that they don’t know what they want.”

    For example, if we want to have a good retirement, we will have to know how much we need for our retirement and plan ahead for it. To give you some ideas, there are quite a few websites that can provide free advice on how to determine your retirement needs.

    Once we know how much we need for retirement and set it as an objective, we need to focus on growing our net wealth to achieve it.

    Sometimes investors are too focused on their current income level and short-term gain that they end up neglecting the long-term growth of their net wealth. (Comment: Focus on the long-term, grow your portfolio, allowing compounding to work its magic over a long period.)

    High income does not mean high net wealth if your expenses are higher than your income level. Hence, we need to control and monitor our expenses in order to have a net positive cash inflow instead of outflow.

    If possible, we should have a cash budget that will guide us on the expected income to be received as well as the expenses to be incurred in the coming periods. We should try our best to stick to the plan and be committed to build our wealth.

    Lately, some investors have been affected by high credit-card debts, which may be due to high expenses that cannot be supported by their current income.

    During hard times, we need to plan carefully for big expenses and, if possible, we should delay expenditures which are not critical.

    Given that nobody will know when our economy will recover, it is safer to spend less and try to reduce our debts.

    In fact, if we have cultivated good spending habits from the start, regardless of economic situation, we will not have the problem of having to trim down unnecessary expenses during bad times. We have seen a lot of successful people living below their means and being very careful in spending money on luxury items. We should learn from these examples.

    Don’t look down on low returns

    Sometimes, a guarantee of low returns is better than the uncertainties of high returns, depending on the risk tolerance level of individuals. Always remember that risk and return go hand-in-hand. Not every investment product suits our return objective and risk tolerance level. (Comment: The smart investor searches for high returns with low risks ... yes, these investments are available, just be patient and be ready when the opportunities appear.)

    Therefore, we need to understand the characteristics and nature of investment products that we intend to invest in before we make any investment decisions.

    We cannot always think of big returns without considering the potential risks that we need to encounter. (Comment: Always assess the risk of downside first, then the reward of any upside. The risk/reward ratio should be favourable to your requirement of safety of capital and with a reasonable moderate return, before you invest.)

    For those who like to play it safe, it will be wiser to go for defensive ways of investing, which means looking for stocks that pay good dividends and have solid businesses. (Comment: This is the safest route for the less savvy investors.)

    Remember, we need to be patient, go slow and steady. If we can avoid making losses during this period, we should be able to achieve our financial goals when the economy recovers again.


    Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.


    http://biz.thestar.com.my/news/story.asp?file=/2009/6/17/business/4131454&sec=business