I like to learn from my investment experiences. I asked myself: What did I do right and, above all, where did I fail? What happened in the past 17 months offers thought provoking lessons. Listening to my friends is a privilege. Their ideas and plans are eye-openers. Each one follows different approaches. These experiences can be condensed as follows.
1. Have a short list of stocks. A short list of stocks in your portfolio makes the management task easier. 15 stocks or 5 ETFs should be enough. Refrain from adding positions just because a friend gives you a special insight. Every time you feel like you have to buy a stock, check it against your existing portfolio. Which one should you sell if you decide to buy the latest suggestion?
2. Diversification is bad. Too many stocks across many sectors will make your portfolio perform like the averages. If you feel you have to diversify, make your life simple. Just buy the S&P 500 (SPY). However, if you want to outperform the market, follow a selective strategy. Use only 2-3 investment themes. This approach will keep your list of stocks from becoming unmanageable.
3. Long-term investing is grossly misunderstood. In October 2008, the market is at the same levels as May 2002 and February 1998. In 1982 the market was almost at the same levels as in 1969. Long-term investing is great only when you look at history, but it does not exist. If you enter one of those long periods of market stagnation, you are bound to have a portfolio showing little or no returns. You have to believe an important tenet: things do not last forever. John Maynard Keynes once said: In the long term, we are all dead.
4. You need a timing model. Market timing models are imperfect, but they provide a sense of risk. They are important and there is no excuse for not using them. The main issue is that market risk changes and your portfolio has to reflect changes in risk.
5. The business cycle works. The global business cycle is perfectly synchronized. All foreign stock markets have the same turning points at major tops or bottoms. A corollary is that when you buy emerging foreign markets you buy volatility. When you buy foreign illiquid markets, the performance of your portfolio becomes highly unpredictable because of its volatility.
6. Choose your investment wisely. You cannot ignore the crucial relationship existing between asset classes and business cycle. Commodity driven stocks (materials, energy, agriculturals, infrastructure, transportation) strive in a strengthening economy, not in a slowing business cycle. Interest sensitive sectors perform well when the economy weakens and grows below par. Your portfolio needs to reflect business cycle developments. In other words, your portfolio has to reflect changes in risk and changes in the business cycle.
7. Momentum works. The odds favor a strong sector to remain strong and a weak sector to remain weak as long as economic conditions do not change. Changes in business cycle conditions change the momentum of stocks. Choose stocks in strong sectors. Rising water lifts all boats and minimizes the odds of being wrong.
8. Do not try to catch a falling knife. Do not even think to buy a stock on a free fall. It is financial suicide. Buy stocks that go up, not down.
9. Hedging your portfolio. The introduction of “short” ETFs such as SH, PSQ, or DOG allow you to hedge your portfolio and make it less volatile. Avoid the “ultra” short. They are too volatile. Leave them to the gamblers.
10. Investment strategy. Act slowly, but act. Inaction will produce losses and profound pain in a down market.
11. Does it sound too complicated? If all these thoughts sound complicated, you should buy TIPS (inflation-protected bonds) from the Treasury by accessing their website www.treasurydirect.gov. You will avoid frustrating and time-consuming work and will gain peace of mind.
More, much more when you subscribe to The Peter Dag Portfolio by going to https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
