Showing posts with label portfolio rebalancing. Show all posts
Showing posts with label portfolio rebalancing. Show all posts

Sunday 17 December 2017

Some stocks will perform better than others and these "stunners" will dominate the investor's portfolio.

You won’t improve results by pulling out the fl owers and watering
the weeds.
— Peter Lynch, ONE UP ONWALL STREET


For an investor who—like Keynes and Buffett—adopts a buy-and-hold policy in respect of stocks, portfolio concentration is something that tends to happen naturally over time. 

Inevitably, some stocks within a portfolio will perform better than others and these “stunners” will come to constitute a large proportion of total value. A policy of portfolio concentration cautions against an instinctive desire to “re-balance” holdings just because an investor’s stock market investments are dominated by a few companies.

Buffett illustrates this point with an analogy. If an investor were to purchase a 20 percent interest in the future earnings of a number of promising basketball players, those who graduate to the NBA would eventually represent the bulk of the investor’s royalty stream. Buffett says that:

To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.

Buffett cautions against selling off one’s “superstars” for the rather perverse reason that they have become too successful. 

The decision to sell or hold a security should be based solely on an assessment of the stock’s expected future yield relative to its current quoted price, rather than any measure of past performance  

Wednesday 11 July 2012

Tactical dynamic asset allocation or rebalancing based on valuation, sounds easier than is practical


Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.  


Tactical dynamic asset allocation or rebalancing involves selling at the right price and buying at the right price based on valuation.  


Assuming you can get your buying and your selling correct 80% of the time;, to get both of them right for a profitable transaction is only slightly better than chance (80% x 80% = 64%).  


Except for the extremes of the market, for most (perhaps, almost all of the time), for such stocks, it is better to stay invested (buy, hold, accumulate more) for the long haul.




Ref: My 18 points guide to Successfully compounding your money in Stocks

Thursday 12 April 2012

The Best Portfolio Balance

The Best Portfolio Balance
April 11, 2012

There isn't one. Wasn't that easy?

In the same manner, there isn't one diet that fits everyone. Depending on your body fat makeup and what you're trying to accomplish (increasing endurance, building muscle, losing weight), the proportions of protein, fat and carbohydrates you should consume can vary widely.

SEE: Introduction To Investment Diversification

Balancing Act
Thus it goes for balancing your portfolio. A former client of mine once stated that her overriding investment objective was to "maximize my return, while minimizing my risk." The holy grail of investing. She could have said "I want to make good investments" and it would have been just as helpful. As long as humans continue to vary in age, income, net worth, desire to build wealth, propensity to spend, aversion to risk, number of children, hometown with its concomitant cost of living and a million other variables, there'll never be a blanket optimal portfolio balance for everyone.

That being said, there are trends and generalities germane to people in particular life situations; many investors don't balance in anything approaching the right mix. Seniors who invest like 20-somethings ought to, and parents who invest like singles should, are everywhere, and they're cheating themselves out of untold returns every year. 

Fortune Favors the Bold
If you recently graduated college – and was able to do so without incurring significant debt – congratulations. The prudence that got you this far should propel you even further. (If you did incur debt, then depending on the interest rate you're being charged, your priority should be to pay it off as quickly as possible, regardless of any short-term pain.) But if you're ever going to invest aggressively, this is the time to do it. Yes, inclusive index funds are the ultimate safe stock investment, and attractive to someone who fears losing everything. (The S&P 500's minimal returns over the last 13 years is a testament to its "safety.") Still, why not incorporate a little more unpredictability into your investments, in the hopes of building your portfolio faster?

So you put it all in OfficeMax stock last January, and lost three-quarters of it by the end of the year. So what? How much were you planning on amassing at this age anyway, and what better time to dust yourself off and start again than now? It's hard to overemphasize how important is to have time on your side. As a general rule of life, you're going to make mistakes, and serendipity is going to smile on you once in a while. Better to get the mistakes out of the way early if need be, and give yourself a potential cushion. "Fortune favors the bold" isn't just an empty saying, it's got legitimate meaning.

Retirement Years
Fortune doesn't favor the reckless, however. If you're past retirement age and think that going long on mining penny stocks on the TSX Venture Exchange will make you wealthy beyond measure, well, hopefully at least one of your children has a comfortable couch for you to sleep on.

Start with the three traditional classes of securities – in decreasing order of risk (and of potential return), that's stocksbonds and cash. (If you're thinking about investing in esoteric like credit default swaps and rainbow options, you're welcome to sit in on the advanced class.) The traditional rule of thumb, and it's an overly simple and outdated one, is that your age in years should equal the percentage of your portfolio invested in bonds and cash combined. (Which is why George Beverly Shea has -3% of his portfolio in stocks.)

It's unlikely that there is someone on the planet who celebrates his birthday every year by going to his investment advisor and saying, "Please move 1% of my portfolio from stocks to bonds and cash." Besides, life expectancy has increased since that axiom first got popular, and now the received wisdom is to add 15 to your age before allocating the appropriate portion of your portfolio to stocks and bonds.

That the rule has changed over the years should give you an idea of its value. The logic goes that the more life you have ahead of you, the more of your money should be held in stocks (with their greater potential for growth than bonds and cash have.) What this neglects to mention is that the more wealth you have, irrespective of age, the more conservative you can afford to be. The inevitable corollary might be less obvious, and more dissonant to cautious ears, but it goes like this: the less wealth you have, the more aggressive you need to be.

The Bottom Line
Investing isn't a hard science like chemistry, where the same experiment under the same conditions leads to the same result every time. Investing's most exciting chapters are still being written, and the one that states that there are exactly three possible portfolio components needs to be put through the shredder. Real estate is neither stock, bond nor cash equivalent, and the same goes for precious metals. The former can increase your wealth rapidly with sufficient leverage, and the latter can maintain your wealth regardless of whether inflation or deflation besets the underlying currency that you conduct transactions in. As for the best portfolio balance, it's the one that fits the criteria you determine, but only when you assess your unique situation and regard your capacity for risk and reward with the utmost frankness.


Read more: http://www.investopedia.com/financial-edge/0412/The-Best-Portfolio-Balance.aspx#ixzz1rmK2PKWi

Saturday 3 March 2012

Substantial rise in the market: Practical questions and psychological problems confronting the investors


A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.


But what about the longer-term and wider changes in the stock market? Here practical questions present themselves, and the psychological problems are likely to grow complicated.

A substantial rise in the market is 
  • at once a legitimate reason for satisfaction and 
  • a cause for prudent concern, 
  • but it may also bring a strong temptation toward imprudent action.

Your shares have advanced, good!  You are richer than you were, good!
  • But has the price risen too high, and should you think of selling? 
  • Or should you kick yourself for not having bought more shares when the level was lower? 
  • Or— worst thought of all—should you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments
Presented thus in print, the answer to the last question is a self-evident no, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.

It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio.
  • The chief advantage, perhaps, is that such a formula will give him something to do. 
  • As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. 
  • These activities will provide some outlet for his otherwise too-pent-up energies. 
  • If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.*




* For today’s investor, the ideal strategy for pursuing this “formula” is rebalancing.

Sunday 11 December 2011

Why is it important to regularly review your share portfolio?

Why is it important to regularly review your share portfolio?

Answer:  To determine whether your investment goals are being met.


You need to review your portfolio regularly to ensure your investment goals are being met.  To maximise your investment potential, you will want to be proactive rather than being forced to react to market trends.  Speculative stocks will need to be monitored more frequently than blue chip stocks, but even the latter need regular review to ensure they are serving the purpose for which you bought them.

Wednesday 7 December 2011

Sell bonds and buy equities? Maybe not

Sell bonds and buy equities? Maybe not
Written by Celine Tan of theedgemalaysia.com
Tuesday, 06 December 2011 09:40



KUALA LUMPUR: Which was the best asset class in the first three quarters of 2011?

Given the volatility on Bursa Malaysia’s Main Board, it may not be surprising that the local bond and money-market funds performed better than equity funds in the one-year period ended October 28 (see table), but still, the institutional investors were caught flat-footed.

“This [underperformance of equities] was not expected early in the year. But seeing how the Greek sovereign debt issue has remained unresolved and the situations that followed the US’ credit rating downgrade, the underperformance is not a surprise [now],” says Koh Huat Soon, chief investment officer of Pacific Mutual Fund Bhd.

Similarly, Azian Abu Bakar, executive director of Apex Investment Services Bhd, did not expect bond portfolios to outperform their equity counterparts until Bank Negara Malaysia (BNM) hiked interest rates and the macroeconomic situations in developed economies kept “turning turtle”. BNM hiked the overnight policy rate by 25 basis points to 3% in May.

Throughout the year, the local bourse’s performance was mainly news-driven. “The poor performance of equity funds was due to major sell-offs in 3Q2011, as investors sought refuge and shifted to safer assets such as bonds and money-market instruments,” says Yeoh Mei Kei, research analyst at Fundsupermart.com.

Koh says the local bond market benefited from foreign investments while Azian attributes demand for sukuk issued during the year. For both, the interest-rate hike in May was also a factor.

The equity funds’ performance was attributed to the bearish sentiment on the local equity market throughout the year, says Azian. “Generally, the performance of the banking sector affected conventional equity portfolios. Islamic equity portfolios were impacted by the doldrums in the plantation sector and, to some extent, the construction sector.”

What to do?
Everyone has heard of the old adage — what goes up must come down. “We advise investors — be they conservative or aggressive — to rebalance their portfolios from winning positions [bond and money-market funds] to losing positions [equity funds],” says Yeoh.

“This prevents investors’ portfolios from [suffering a] ‘style drift’, which means a divergence from the original investment objective or investment style. Also, it forces investors to be disciplined and to manage their emotions when investing.”

Koh suggests switching to European equities. “The eurozone had bought more time to resolve their crisis. This region managed to avoid a messy default in the near term. Since many equity funds are holding cash, the potential for short-term gains is there.”


But this move requires a stomach for risk and constant surveillance of the situation in Europe. Key risks — such as the success of austerity measures in countries such as Greece and inadequate amounts of bail-out funds — remain.


This means that conservative investors should hold on to their performing bonds and money-market funds as equities are likely to remain very volatile, given the uncertainly in the global economy. Institutional investors are also likely to take their time before acquiring equities.

“Most asset managers have implemented trading or benchmarking tactics. This conservative approach is taken in lieu of the global uncertainty,” says Azian.

Thursday 30 December 2010

FTSE Bursa Malaysia KLCI closed for the year at 1,518.91







52wk Range:1,072.69 - 1,531.99


Interesting graphs of FTSE Bursa Malaysia KLCI over different periods.  Do you have a strategy to protect your downside and to profit from the upside, from the volatility of the stock market?

Warren Buffett lamented that many business schools are teaching the wrong stuff to their students.  He is of the opinion that basically to be a good investor, you need to be taught two topics in great detail.

Firstly, you need to have a very thorough understanding of how to value various assets.  Secondly, you need to understand the behaviour of the stock market, so that you can take advantage of it and not fall folly to it.

This year has been another very rewarding year for my investing.  My portfolio has shown good returns.  A worrying point now is that in my portfolio of stocks, twenty-two stocks have huge gains and two stocks have small losses.  The two small losses were in stocks bought in 2007 and they constitute a very small proportion of the overall portfolio.  It wasn't a surprise that most of my stocks would be showing gains, especially those that have been in the portfolio for a very long time and bought at regular intervals (dollar cost averaging).  However, when almost ALL the stocks bought in recent years showed gains from their cost prices, one has to be apprehensive of the stock market.

Many geniuses are born in a bull market, so the saying goes.  Therefore, one may assume that either one is a genius (don't be fooled) or perhaps the market is too gregarious and optimistically overpricing most stocks (one can be easily and unknowingly fooled by this too).

Perhaps, with the New Year approaching, a re-look at my portfolio with view to re-balancing is not inappropriate.

Happy New Year to all.

Saturday 17 April 2010

The China bubble: don't predict, prepare


GREG HOFFMAN
April 16, 2010 - 9:42AM

Even dyed-in-the-wool, bottom-up stockpickers like me have to accept one inalienable fact; economies and markets are now so interconnected as to be systemically linked; a problem in one area of the system rapidly moves to another.
That fact does not demand predictions as to what will go wrong, when or where. But it does imply preparation for scenarios that would impact your investments. Don't predict, prepare.
For Australian investors, leveraged as we are to the China growth story, that preparation should include an assessment of how your portfolio would stand up were China's growth to slump, if only temporarily.
''Up ahead they's a thousand' lives we might live,'' counselled Ma in John Steinbeck's The Grapes of Wrath, ''but when it comes, it'll only be one.'' And so it is with our portfolios.
It's prudent not to weight your portfolio wholly towards any single possible ''life''. And, several factors are leading The Intelligent Investor's analysts to recommend investors consider building some protection into their portfolios.
These factors include the fact that many previously unloved stocks are now back in vogue, the possibilities of China's growth slowing, inflation and the substitution of private for public debt by governments around the world.
I'd encourage you to consider your own exposure to currently fashionable cyclical stocks like One.Steel, Seek and Amcor. If you find you're a bit heavy, then it might be a reasonable time to think about re-weighting your portfolio.
Bolstering your cash balance is a great way to build capital stability and also maximise your flexibility for any future dip or downturn in the market; the proverbial financial ''dry powder''.
We're also looking to build in another layer of protection through careful re-investment. A number of top-class blue chip stocks have been left behind by those rushing back into cyclicals and some of these might make great additions to a long-term portfolio.
Current stock recommendations
Stocks such as Foster's Group, Santos and Insurance Australia Group are on our current shopping list, as are several quality stocks with significant offshore income (such as QBE Insurance and Sonic Healthcare).
These stocks offer the potential for significant gains if the Aussie dollar were to take a tumble for any reason (bear in mind that a little over a year ago, our dollar was fetching less than 70 US cents).
We also have a few carefully-selected infrastructure stocks on our buy list as well as a property developer or two. We expect the latter to provide more cyclical oomph if Australia manages to skirt any major economic setbacks from here. 
By combining a higher cash balance with a re-weighting towards less cyclical stocks, we hope to maintain a sensible equilibrium between offence (should markets continue higher) and defence. But how you react from here will be crucial.
We're now recommending investors begin changing their stance in the expectation that further gains will be much harder fought. A number of commentators seem confident that the Australian business sky is blue as far as the eye can see.
It's an increasingly fashionable idea and we've been around long enough to know that in financial markets, danger can lurk in such trendy consensus views.
Our preference is to begin buttressing our portfolios for any potential bumps in the road. Our weapons of choice are increased cash holdings and a higher weighting to more stable, defensive businesses, which currently strike us as offering better value than the more expensive and volatile cyclicals.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor



Sunday 28 March 2010

Asset Allocation and Economic Hedging in Various Economic Environment


Asset Allocation

This is also referred to as economic hedging and can be defined as a conservative method of diversifying assets so they will react different under various economic conditions.

Successful investing can be based on 4 key characteristics as follows:
  • Discipline
  • Patience
  • Historical Prospective
  • Common Sense Strategy
Reasons for using asset allocation:
  • History repeats itself
  • No one can predict the future – not even the experts
  • Comfort in knowing you have not painted yourself in a corner
  • Acts as a hedge against financial risks you cannot control
To protect against risks, the risks must first be identified and then investments set up to diversify around them. Listed below are the main types of economic environments.
  • Hyper Inflation (100%+/year)
  • Double Digit Inflation (10%+/year)
  • High Inflation (5 to 9%/year)
  • Normal Inflation (2 to 4%/year)
  • Recession
  • Depression
Now lets look at a couple examples of how various investment types do in these differing environments.

In a depression we see the following:
  • Stocks go way down (85-90%)
  • Real Estate – Also tends to go down
  • Interest Rates – drops to very low rates
  • Unemployment – this goes way up
  • Property – material things tend to lose value
  • Bonds – These do well, as bonds tend to vary inversely with interest rates.
Recommended investment in a depressed economy then would be high quality, intermediate term (2-4 year), discounted corporate bonds.

On the other hand in a Hyper-Inflation economy the situation would be completely different.
  • Stocks – do well for a while, then collapse
  • Real Estate – depends, because it is often bought with debt
  • Gold – this has done well in keeping its value in hyper-inflation conditions
Of note, the last time the US was in a hyper-inflation economy was during the civil war. However several other countries have been in this situation in recent years.

Now that we know how the environment can affect different investments, let's look at what investments are best for each environment and how to protect your investments in these changing economic times with economic hedging.

http://www.nassbee.com/wealthy/asset_allocation.html



Economic Hedging

Following our discussion on asset allocation, below is a list of the best types of investments for each type of environment.

Economic EnvironmentBest Investment
Hyper InflationGold
Double Digit InflationReal Estate
High InflationReal Estate / Stocks
Normal InflationStocks
RecessionCash
DepressionHigh Quality Corporate Bonds

How you will allocate your assets will depend on if you are in or near retirement as well as other personal circumstances. Below are two basic allocation structures. You should review your own needs to decide what type of allocation meets your needs best.

Aggressive
CashBondsREITStocksGold
15-20%15-20%30%30%2-5%

Retired
CashBondsREITStocks
25%25%25%25%

(These percentages can be vaired slightly to fit in 2% Gold for better hedging.)

Over the past 30 years, average yields for these types of investments has been about as follows:
InvestmentAvg Yield
Cash4%
Bonds7%
REIT8%
Stocks10%

For the retired plan then this would have yielded a safe 7.25% annual return. For the aggressive investor it would closer to 8%.

Rebalance

In order to keep the advantage of asset allocation you should rebalance your investments every year. When this is done is not important as long as it is done at least once per year. By taking profits from the investment types that are doing well and putting the money in those that are down, you are buying low and selling high without any emotional input that may cloud your decision. Rebalancing should then be done as follows:
  • Periodically (at least once per year)
  • If there is a major change in your life
  • If there is a major change in the financial market

Thursday 4 February 2010

The buy-and-hold strategy

The buy-and-hold strategy

Jonathan Chevreau, Financial Post Published: Friday, April 17, 2009


Among the many casualties of the great bear market of 2008-09 may be the buy-and-hold strategy or the Warren Buffett approach of buying good businesses and waiting patiently for the market's perception of their value to catch up.

Indeed, when it seemed the market had hit new lows last November, CNBC aired a feature declaring the "death of buy-and-hold," with pundits claiming only suckers hung on through thick and thin. And value-oriented fund company AIC Limited, which still uses the slogan "buy, hold and prosper," has suffered from such derogatory variants as "buy, hold and perspire" or "buy and fold."

But rumours of the death of buy-and-hold may be premature.

The Investment Reporter, a well-regarded newsletter founded in 1941, recently concluded buy-and-hold portfolios do better over the long and short run, citing an academic study (by Lakonishok, Schleifer and Vishny) that looked at returns of actively managed pension funds over six years. It found that, on average, buy-and-hold portfolios beat actively managed portfolios by 0.78% a year, not factoring in taxes, management fees or high cash positions.

A buy-and-hold approach
  • minimizes commissions and tax events and, naturally, 
  • lowers the chances of mistiming the market. 
It's compatible with passive indexing strategies, but you don't have to be an indexer to benefit from this approach. It can be used equally with quality dividend-paying stocks, ladders of bonds or GICs.
Dan Richards, president of Strategic Imperatives, says investors have swung from buy-and-hold to frequent trading but either extreme is a "prescription for disaster." He says academic research from Terrence Odean and Brad Barber shows frequent trading hurts investment returns. The two American business professors wrote a seminal article in 1999 called Online Investors: Do the slow die first?

Vancouver financial advisor Clay Gillespie believes buy-and-hold works for various forms of managed money, such as mutual funds, wrap accounts and other fee-based investment management solutions, although it may not always work with stocks. "An individual company may go out of business and thus have a return of zero." With a particular stock, it may be necessary to sell when
  • there are changes in one's personal situation, retirement, for example, and
  • it's advisable to reduce volatility. 
  • Portfolio rebalancing may also require some tweaks in the buy-and-hold approach. 
But "style drift" usually tends to produce poor performance over time, he says.
Mutual fund companies encourage buy-and-hold, often levying short-term trading penalties on those who trade in and out too often. Typically, fund unitholders buy high and sell low when they switch too often. "It is this multi-percentage point drag that buy-and-hold investors are trying to avoid," says Norm Rothery, chief investment strategist for Dan Hallett & Associates.

Joe Canavan, chairman of Assante Wealth Management, believes fund investors can successfully build portfolios that include both fund managers who use a buy-and-hold approach as well as managers who use a frequent-trading approach. The danger is in trying to do only one or the other, then changing your horses midstream.

That is more likely to result in being "whipsawed," Mr. Canavan says, incurring losses with one strategy, then abandoning that for the opposite approach just as the tide was about to turn.

In his Canadian Capitalist blog, Ottawa-based Ram Balakrishnan advises to "keep faith in buy-and-hold." He reassures readers it's "hard to maintain equanimity in the face of such a steep decline as right now. But what other strategy is there other than buy-and-hold, where almost everyone can have a good shot at reasonable returns? I don't think there is one."

Unlike most advisors, Robert Cable, Toronto-based head of ScotiaMcLeod's Cable Group, is a strong believer in "seasonal" market timing, also called a "sell in May and go away" strategy. While investors may want to emulate Warren Buffett and buy and hold forever, in practice "nobody does it," he says. He recalls asking 300 advisors at a Florida conference how many of their clients had bought and held the same portfolio a decade or more. The only hand that went up represented a client who was literally in a coma following an accident and whose account could not be traded.

"Anyone who goes into investing with the intent of buying and holding virtually always succumbs to outside pressures to abandon the strategy. My guess is when we have nobody believing in buy-and-hold again, we will again be ready for one big bull market to take off," says Mr. Cable.

Markham-based advisor Robert Smith says buy-and-hold works, but not in isolation. Investors need
  • proper asset allocation geared to their risk tolerance, 
  • portfolios must be well-diversified and 
  • investments can't have been purchased at bubble-like prices. 
  • They also need to buy during the tough times to bring down their average costs, he says.

"If the investor follows all these requirements, buy-and-hold will not fail them," Mr. Smith says.

Read more: http://www.financialpost.com/story.html?id=1507182#ixzz0eYEmvC9K
The Financial Post is now on Facebook. Join our fan community today.

http://www.financialpost.com/story.html?id=1507182




Comment:  My personal experience of 20 years, buy and hold is safe for selected stocks. 

Wednesday 3 February 2010

Good strategies for buying in and for preventing big losses

Strategies for buying in:
  • Lump sum investing
  • Dollar cost averaging
  • Phasing in

Strategies for preventing big losses:
  • Stop loss strategy
  • Rebalancing


Dollar cost averaging and phasing in strategies are useful for those who wish to reduce the risks associated with market timing. 

Regardless of the buying in strategies (lump sum, dollar cost averaging or phasing in), acquisitions should only be done when the stock is available at bargain price or fair price, and certainly never when it is overpriced.

Stop-loss maybe unnecessary for some or many investors if the other risk management ideas are followed.

Value investors with a long term investing time horizon rarely need to use stop loss strategy.   In fact, the drop in price offers an opportunity for the value investor to reduce his cost per share.  This is safe provided he has not made a mistake in his initial assessment of the quality, value and management (QVM) of the stock.

Rebalancing at regular or fixed intervals can be usefully employed to bring his equity portion to a previously determined set proportion of his asset allocations in his portfolio.  This is particularly useful for those who are unable to take big risks (big losses: real or missed profit losses) during the bear or bull markets.

Though theoretically attractive, to be able to profit through rebalancing, near the peak of the bull or near the depth of the bear market, assumes one has the ability to predict (time) the market consistently.  This is of course not possible.

Always keep in perspective the 3 personal factors that are very important in your investing:  time horizon, risk tolerance and investing objectives.

Tuesday 2 February 2010

Two important strategies to help you avoid large losses: STOP LOSSES and REBALANCING

Stop losses and rebalancing are strategies to help you avoid large losses when you invest in equities.

Stop-loss strategy

A stop loss is a specified minimum price at which you will sell a particular share in order to stop the loss.  This is a good strategy with which to protect yourself against large capital losses.  You decide on a percentage loss that you are prepared to take on your investment, and sell when it reaches that percentage.  Stop losses are implemented when the buying of shares (normally not unit trusts) takes place, i.e. an instruction is given by the investor to the stockbroker to buy 1000 shares in XYZ at, say $10,00 and to implement a stop loss at, say $9,00 (the investor perceives XYZ to be a somewhat risky proposition).  The investor has done his sums and comes to the conclusion that the maximum loss he can bear is $1000, hence he limits his potential losses to $1000 by implementing a stop-loss strategy ($1000 divided by 1000 shares = $1.00 per share; $10.00 per share - $1.00 per share = a stop-loss level of $9.00)


Rebalancing

This strategy is best explained by an example.  Following the analysis of your investment profile (time horizon, risk tolerance, and investment objectives), you decide to invest 50% of an amount of $1000 in equities and 50% in other asset classes, such as bonds and cash.

Assume that after a year your equities have decreased to $400 and your other investmens have increased to $800.  This means your original $1000 portfolio is now worth $1200.

Rebalancing means that you adjust your portfolio constituents to get back to a point where half is again invested in equities and half in bonds and cash.  You will therefore have to sell some bonds and buy some equities.  This is an important strategy to keep your portfolio diversified and in line with your time horizon, risk appetite and investment objectives.

Sunday 10 January 2010

The New Year's No. 1 Investing Tip

The New Year's No. 1 Investing Tip
By Tim Hanson
December 31, 2009

Take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond. If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance.

What I'm about to tell you could be the most important investing tip you get this year -- even better than if I gave you the name of some race-car growth stock that might double in 2010. But for you to appreciate its importance, I need to tell you two true stories.

True story No. 1
2007 had been a flat year for the market, but we started getting signs at the end of the year that all was not well with the housing market. The S&P took a sharp 10% dive from October to December and newspapers were reporting more and more about a looming "subprime" crisis. Yes, Ben Bernanke cut interest rates, but by the end of 2007, though the scale of the eventual crisis was not yet clear, it was obvious that there were at least a few weak links in the financial sector.

It was at this time that I took a look at my portfolio and realized that I was more than 25% weighted in the financial sector stocks such as Berkshire Hathaway (NYSE: BRK-A), optionsXpress (Nasdaq: OXPS), and International Assets Holding (Nasdaq: IAAC).

Before you call me daft, let me explain how such a thing could happen. First, financial sector stocks were coming out of a period of healthy growth, and my holdings had grown in size from their original positions. Second, financial stocks generally look like attractive buys because of their asset-light business models and high returns on capital. And third, I hadn't paid attention to my overweighting in real-time because these companies weren't operating in the same parts of the financial sector.

Yet overweight position across financials scared me when I saw it at the end of 2007 since my outlook for financials in 2008 wasn't all that rosy.

What happened? I rebalanced my portfolio by selling some of my financial stocks and saved myself a lot of pain as a result.

True story No. 2
Fast-forward to the end of 2008. The entire stock market had dropped nearly 50% and stocks with higher risk profiles -- such emerging markets names -- were down even more than that.

As a consequence, when I looked at my portfolio, I realized I now had less than 10% of my money invested in emerging markets even though I believed countries such as China, India, and Brazil were going to lead the world into recovery in 2009. After all, these countries were still posting positive GDP growth and had attributes -- such as a higher savings rate in China, a younger population in India, and a wealth of natural resources in Brazil -- that seemed like they could better help them survive and perhaps even thrive through the downturn.

So what did I do? I rebalanced my portfolio by selling some U.S. stocks and buying more shares of promising emerging markets names such as America Movil (NYSE: AMX), Mercadolibre (Nasdaq: MELI), China Fire & Security (Nasdaq: CFSG), and Yongye International (Nasdaq: YONG).

As you can see from the returns below, my emerging markets thesis played out as expected and my decision to buy more of those stocks helped make my returns dramatically better than they would have been otherwise.

Stock
2009 Return

America Movil
55%

Mercadolibre
217%

China Fire & Security
103%

Yongye International
425%


The New Year's No. 1 investing tip
Now that you know those two true stories, I hope you can appreciate the importance of taking time at the end of each calendar year to take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond.

If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance. Not only could rebalancing save you a lot of pain (as it did me in 2008), but it can also help you make a lot more money (as it did me in 2009).

http://www.fool.com/investing/international/2009/12/31/the-new-years-no-1-investing-tip.aspx