Taking Care Of Business

I went to the dentist yesterday, fortunately I had an easier time than Thomas Levy.

Taking care of yourself means going to the doctor and dentist every once in a while and getting some regular exercise. Do these things and you improve your odds for success.

The right approach to your portfolio also improves your odds for success.

Based on emails, comments and talking with people I get the impression that a lot of folks make investing more complicated than it needs to be. Everyone knows they should be diversified but how many people are diversified?

Plenty of people have been burned making a big bet on something speculative yet they keep making big bets. A lot of people worry about a 5% decline even though history is on their side. Beating the market becomes an obsession when saving properly is far more important than year to year results. People who save properly just need to stay relatively close the market, even if they never beat it.

The realization that it can be simple is an important building block. A moderate mix of best of breed companies, foreign countries and a couple of narrow themes, combined with proper saving, will do the trick for a lot of people.

There will be market cycles, proper asset allocation in relation to when you need to start drawing income is always important and if you are so inclined and want to take steps to smooth out your ride, ok, but keeping it simple works and big bets will bite back more often than not.

Everyone knows these sorts of things but very few people act on them.

28 Comments

  1. Rodger,
    More of a question than a comment; can passive investing or holding a long term portfolio, which is well divirsified (hopefully)be considered a sort of personnal mutual fund?
    Bernie

    Reply
  2. A couple of years ago I had a post called Build Your Own ETF that I think broaches this question.

    I tend to prefer 40-45 holdings but some people prefer 100. Opening an account at Zecco and owning 100-125 small positions is valid and clearly would be cost effective.

    Wouldn’t that be the same as your own mutual fund?

    The next question would be does the MF label matter?

    Reply
  3. keep it simple?

    40 to 45 holdings, but 100 to 125 small positions is valid?

    Simple?

    who has this time? will not most people just buy stuff they hear on tv or read in a magazine?

    I do not see how people doing this at home can keep it simple without ETFs and mutual funds.

    Roger you are a professional. Everybody else has day jobs, need to walk the dog, etc.

    I do not think single stock investments are the friend of the large majority of investors trying to diversify. Sure it may work if they have a trusted professional like yourself working for them, but not on their own.

    Reply
  4. 100 is valid even if it is too many for some; obviously as stated it is not what I do.

    40 though… two core holdings per sector and you are at 20. add in one or two more smaller/themier/nichier stocks and you get close to 40 over all.

    Three years of writing this blog tells me that most readers (so people willing to devote a little more time to their portfolios) make a time priority out of managing their money.

    Point readily conceded that this is not for most people but in the subset of stock market blog readers I think it fits.

    Reply
  5. Roger, okay, your 7:39 comment on allocation helps. Thanks, that’s what I was looking for. John

    Reply
  6. I am interested in a portfolio of ETF’s that are already available. Do you think it should be a portfolio or ETF’s that are at the top of the performance list for last 3 months or 6 months etc, regardless of what sector or industry or broad market domestic of international? Or a fixed percent with asset allocation of small, mid, large growth and value, international, fixed income etc?

    How can I have your newsletter delivered each day? Is there a way to sign up?

    Reply
  7. Ron,

    The last 3-6 months whatever is 180 degrees from what I try to do.

    I believe in being diversified across all sectors and owning many different countries. I benchmark to the S&P 500 which means, in this context, seeing what weight each sector has and then overweighting and underweighting based on my assessment of the stock market and economic cycles.

    Tilting growth/value or cap size also depends on where we are in the cycles–all stuff I have written about in the past.

    For now, no email delivery of of the posts.

    Reply
  8. It’s not really difficult to closely track 40 or more names these days but finding well-designed software that makes it easier for ordinary mortals can be a challenge. What do you think Roger, maybe an open thread asking participants to discuss their favorites and what features they like (or need)?

    OT but I want to sincerely thank Dubya for making it really inexpensive to buy puts today, particularly on the financials.

    Reply
  9. Roger, I appreciate your column the other day stating that DBA, or something similar might be a better hedge than GLD or IAU given the enormous growth of
    those two and the fact that they generally track with the market now.

    Talking about defensive posturing now, DBA is not doing nearly as well as other basic areas of the food chain….fertilizer and containers/shipping.
    Here is the question…aren’t a basket of those, like POT,DRYS,SSW,MON, etc. going to do predictably better than something like DBA in the food commodities arena?

    Thanks, Scoot

    Reply
  10. RW,

    I may be a bit of a Luddite WRT to software. We have a very expensive program at the office that I ask one of my colleagues to get me what I need from it. I also have a subscription to morningstar and portfolio science. Neither one by themselves is complete but both together seem to have the info i think most people would need for managing the portfolio.

    As for following the stocks? newsfeeds make it easier I suppose.

    Reply
  11. Scoot,

    predictably? why/how predictably?

    Every ticker you gave has a higher correlation to the S&P 500 than DBA. “doing better” does not necessarily address correlation.

    Reply
  12. for a small investor just starting out, give or take a few years, 40 to 100 holdings is a stretch. where would you even begin and at what point would it be financial prudent to make enough trades to accumulate 40 ETFs, and in what order? sure, a lot of investors know that asset allocation is king, it’s just that most advice assumes you have enough money to start buying 40 ETFs. probably most of your readers do, but should the small investor start indexing from the the VTSMX or SPY and narrow it down slowly from there?

    Reply
  13. sorry for the lack of clarity. the vast majority of what i own for clients is individual stocks with only a couple/few ETFs.

    However you can click here for something I wrote about an all ETF portfolio that had almost 30 holdings. This might give some idea about portfolio construction but to be crystal clear that was an academic exercise and I do not have that portfolio for anyone.

    Reply
  14. Roger, correct my logic here.
    Ag Commodities will always fluctuate in price,
    but whether a farmer has a good or bad year,
    he HAS to use fertilizer and pesticides, year in, year
    out.

    Container shipping. Our Ag industry is a net exporter and will always need containers and carriers to transport their goods, independent of the commodity
    pricing. That’s is one reason, I think, Buffett is buying RR’s and containers. Also, the shipping/container companies move not only Ag stuff but everything Walmart sells comes in by container on ships owned by SSW and the like.

    Lastly, maybe I am dense, but POT and SSW have Betas of .75 and .83 respectively. I couldn’t find the Beta on DBA. Doesn’t a lower beta mean lower correlation with the Dow and S+P?
    Thanks for the education.

    Scoot

    Reply
  15. Ron,
    you can subscribe to this blog’s feed by pointing your RSS reader to
    http://randomroger.blogspot.com/atom.xml

    you can do this in dedicated RSS readers, most email clients (works great in Thunderbird for me), and most browsers (works great in FireFox’s live bookmarks).

    If you do it in your email client it will show up few minutes after Roger posts just like a regular email message.

    Reply
  16. what i think you are doing is making a fundamental case for those stocks and you might be 100% right. Beta is more about volatility. I looked up the correlation of all of those tickers you left on portfolio science for a six month correlation number. They all correlated between .35-.65, which is quite low. DBA was about 0.10.

    one last thing, you say the farmer HAS to use fertilizer. Ok, but the why would that necessarily have to move the stock?

    We all HAD to use Windows at the start of the decade but the stock cut in half anyway.

    Stocks don’t have to do anything.

    Reply
  17. thanks Sami, I really am a Luddite, lol

    Reply
  18. Roger, the link on your blog “Syndicate this site (XML)” is “http://randomroger.blogspot.com//atom.xml” which has an extra slash and doesn’t work correctly. You’ll need to remove the extra slash.

    Reply
  19. On Fertilizer, one of the issues out there is natural gas. Fertilizer right now is typically made using large quantites of natural gas. Given how burdensome sea transport of nat gas is, as nat gas supplies deplete here (and thus become more expensive) production is moving offshore.

    On containers, the story is probably good, but depending where you are parking money things can move around on you. I know in Los Angeles most of the container haulers are going to be shut out in the next couple of years to allow tighter control of envirmental issues (one big company running new low-emissions equipment instead of lots of small companies using lots of owner drivers in old high pollution equipment). In British Columbia, companies are being forced to use a standard contract (with a price floor) with owner-drivers. Also some ports ar growing and some are shrinking (cf TraDoc). All of the changes are going to affect steamship lines.

    The railroad/containers story is a bit odd too. Because of the rental charges on international containers it is cheaper to take the container to a west coast warehouse and reload into a domestic trailer or container than it is to load the container on a train at the port and send it east (which is part of why the Alameda rail corridor is underutilized).

    There will be winners but I don’t know if I would say all fertilizer, railroads, and containers are sure bets.

    Reply
  20. If I purchase an international index ETF that re balances yearly are they tax efficient? I have a very hard time picking international stocks and getting diversified, so I like international ETFs.

    What I want to know is how much does the rebalancing affect me over time if I hold the ETF?

    Reply
  21. Roger:

    I own both DBA and DBV in my portfolio. My guess is that both have low correlation to the general market. Is there a place I can go to get correlations? Any other good ideas with low correlation to the rest of the market?

    Reply
  22. roger, what do you think about the new super sector etfs from claymore/m.star? I see potential IF the subindustries within each show good intracorrelation and low correlation between the three supersectors. Are there existing indices for each etf that would offer a glimpse into the intercorrelation issue? Less moving parts to keep track of…I like that and would like the industry to move in that direction.

    Reply
  23. Roger,

    From what I can see, when the market falls you start selling. And you drone on about having a strategy to lighten up.

    Most people call that “weak hands” selling into weakness. Classic retail small guy investor mistake.

    A simpler strategy would be to buy into weakness, and sell into strength.

    Reply
  24. wow, lotta comments to catch up on.

    HoosierDaddy left some good info about the container, food and fertilizer stocks brought up earlier. I don’t follow these that closely but regardless of which way the fundamental wind is blowing right now these are volatile holds.

    For the question about tax efficiency when an ETF rebalances, look at the history of capital gains for the fund you care about, that might provide some insight.

    I use portfolioscience.com for correlation info. It costs money, don’t recall how much but it is less than $200 and is worth it for me–I do not get get any compensation for mentioning them.

    RE: the new M-star super sector funds; I go narrower than that so I am not sure what kind of answer i can give since I know i won’t use them but the track record of the back test compared to SPX growth and value ETFs from iShares looks pretty favorable but candidly I am not sure how that can be. It seems that instead of splitting the SPX into two components it splits it into three. Again, though, i won’t use them.

    Anon at 6:48 heckles me as being a weak handed seller, well maybe I am but how is buying weakness simpler? At times it will net a better result and at times it won’t. I have conceded that many times. I don’t tell anyone to do what I do I tell them to come up with their own plan.

    No strategy can work every time, buying on weakness is a lousy idea anytime the market goes down a lot and a good trade when it only goes down a little. Feel free to explain simpler.

    Reply
  25. Just my luck, I went heavily short near the bottom a few days ago. My timing could not have been worse as my portfolio has actually gone down a few percent this month now.

    Reply
  26. Anon 2:21–

    There’s a very good free correlation tracker at sectorspdr.com.

    Reply

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Taking Care Of Business

I went to the dentist yesterday, fortunately I had an easier time than Thomas Levy.

Taking care of yourself means going to the doctor and dentist every once in a while and getting some regular exercise. Do these things and you improve your odds for success.

The right approach to your portfolio also improves your odds for success.

Based on emails, comments and talking with people I get the impression that a lot of folks make investing more complicated than it needs to be. Everyone knows they should be diversified but how many people are diversified?

Plenty of people have been burned making a big bet on something speculative yet they keep making big bets. A lot of people worry about a 5% decline even though history is on their side. Beating the market becomes an obsession when saving properly is far more important than year to year results. People who save properly just need to stay relatively close the market, even if they never beat it.

The realization that it can be simple is an important building block. A moderate mix of best of breed companies, foreign countries and a couple of narrow themes, combined with proper saving, will do the trick for a lot of people.

There will be market cycles, proper asset allocation in relation to when you need to start drawing income is always important and if you are so inclined and want to take steps to smooth out your ride, ok, but keeping it simple works and big bets will bite back more often than not.

Everyone knows these sorts of things but very few people act on them.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing