Jerry asked a good question at our latest “coffee group” session. We were looking at a chart showing the price pattern of some commodity-sensitive stocks and financial stocks. The message was obvious: commodity sensitive stocks have been outperforming the financial stocks. Questions: “What should we do now?” And SNS added: ”This is history”.

Charts, as in sailing, are an aid to navigation, part of the process of planning your trip, managing your money. Managing money is a process involving continuous decisions which have to be taken at the frequency suited to each investor. Every week, every month…you decide.

The first step is to determine the investment scenario and evaluate which asset classes are most likely to benefit. The outcome of this step is usually a multiple set of scenarios. Start with the one with the best odds. The lower probability ones will also be used.

The second step is selecting stocks for each scenario. If the main scenario reflects a strong economy, then a high percentage of your portfolio should be in commodity-sensitive companies. If one of the scenarios is a slower economy, then some money should be allocated to, for instance, financial stocks.

The third step is allocating money to each stock reflecting the odds of success assigned to each sector. A chart showing the graphs comparing the price of all the stocks is an invaluable aid. Capital should be allocated according to the relative strength and financial appeal of each stock as it compares to the S&P 500.

The fourth step, probably the most important, is to evaluate the performance of your portfolio by looking at the change in the balance of your portfolio and at the chart showing the relative performance of your stocks. You have to decide how often you want to do it.

Are you making money? Is most of your money in the strongest sectors and the strongest stocks? What are the scenarios you are considering? You need to change your portfolio according to this new evaluation.

The answer to Jerry and SNS is: The graphs of your stocks are part of the process. They give an idea of where you have been and where you are going.

(This Observations appeared in the 6-11-2007 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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1 comment:

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