I’m afraid my recent foray into the land of Mad Max has diluted what I once preached and practiced for a long, long time, which is diversification. Now this post is for those of you who are interested in self-directing your accounts, without big turnover, minimizing the chance of a blow up.
Let’s start with the foundation. Most managers are unable to beat the S&P 500. It’s not that the folks at S&P are great stock pickers, but has a lot more to do with the structure of it. When building a portfolio, you have to think macro, and try not to get hung up on any one cog in the wheel. You can fine tune the wheel as you go; but it’s vitally important to set yourself up for success.
The S&P 500 is made up of 8 principle sectors.
Tech: 20%
Healthcare: 13%
Financials 15%
Energy and Materials: 13%
Industrials: 11%
Consumer Goods: 10%
Services: 15%
Utilities: 3%
What I like to do, just like I did with my semi-annual managed portfolio inside of The PPT, is pick two stocks per sector, weighted equally, except for utilities. With just a 3% weighting, I just go with 1. The stated goal is to assemble a portfolio that will be judged per quarter, adjusted per quarter to correlate with S&P weightings, and of course beat the S&P. In other words, if the S&P is 20% tech and your tech holdings soared, sending your weighting to 25%, you’d have to sell enough to get back down to 20%. The same goes for underperformance. If your energy stocks tanked, lowering the weighting to 8%, you’d add to those positions to get the weighting back to 13%.
Now the median market cap in the S&P is $17 billion. With smaller market caps, more concentrated on high growth, I am confident anyone can crush the S&P; it just won’t be nearly as fun as trading in and out of pin less hand grenades.
Here is what a typical portfolio of this nature would look like:
Tech: SNDK (1.2% yield), SFUN
Healthcare: BIIB, AET (1.3% yield)
Financials: BX (7.8% yield), IEP (6.3% yield)
Energy and Materials: CXO, OII (1.3% yield)
Industrials: ETN (2.8% yield), TOL
Consumer Goods: KORS, CREE
Services: LVS (2.7% yield), EBAY
Utilities: TRP (3.7% yield)
Or, you can just ebb and flow between TNA and TZA positions, using The PPT‘s propietary Overbought/Oversold signals as your guide.