Portfolio Diversification

Portfolio Diversification Simplified

“Minimize expenses and emotions; maximize diversification and discipline.” Allan Roth, Certified Financial Planner, defines investment in these eight simple words. My second blog ever was a little listicle; ‘10 simple tips for a successful investment club’.  Simple Tip No.6 was ‘Diversify’.

portfolio diversificationPortfolio Diversification decreases your risk. Asset allocation is the first pillar of portfolio diversification. It involves considering dividing your investments across the three main asset classes –

  • Cash and fixed income – lowest return and lowest risk
  • Property – either listed or direct
  • Shares – generally the highest risk category of the lot

Deciding on the initial size of your investment stash as well as the balance between these three asset classes demands a long hard look at yourself…

Surprisingly enough, some of the questions you need to ask are intensely personal – what is your appetite for risk, & how well could you sleep at night if you were unable to close a large and risky position in an illiquid market, for example.

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How to Buy and When to Sell in Your Stocks Portfolio

Key #6 To Building a Successful Stocks Portfolio: How to Buy and When to Sell

Dr. Thomas K. Carr

We have come to the end of our process for building a winning stocks portfolio.  You now have a full course on how to find the best possible long-term investments.  This is the very same research system I use to find the best investments for my IXTHYS Letter and The IXTHYS Portfolio (www.ixthysletter.com).

By the time you get to this stage, you should have one or two companies that have passed through your various filters.  Any company that comes close but for whatever reason is not quite there yet – perhaps its HPLM is too high, or it has a negative earnings report it needs to work out – put on a watch list for monitoring.  As for any passing candidates, you know that they are companies with a strong track record of organically growing earnings and sales; they are currently undervalued; they have a strong mission statement and cultural values you agree with; they are technically poised to move out from a bullish base; they are well liked by the analysts; and they have supportive items in their newsfeeds.  With all that going for what companies now remain on your list, all that is left to do is to buy some shares and start building your stocks portfolio.

Now, it might be possible that no company has made it through your gauntlet of critical research.  Know this: it is perfectly fine, even after devoting hours to research, to having nothing on your “buy now” list.  Get out of the trader’s mindset that you always need to be working your funds in and out each day.  You don’t.  Cash is seed, and seed can remain vital a long time without being planted.  What you need is good soil, and if you don’t have any this week, try again next week.  In some markets, you might go a few months before finding anything investment-grade.  That’s okay.  This is a marathon, not a sprint.

How (and How Much) to Buy

stocks portfolioLet’s assume, however, that your research process has highlighted a stock that you want to buy for your long-term stocks portfolio.  Your task now is to buy shares at the next market open.  To do this, simply put in a “market on open” order (sometimes listed as “OPG”), limiting either the number of shares you want to buy, or the amount of capital you want to invest, and hit “transmit.”  Once you’re in, you’re in.  All the hard work is behind you.

As far as deciding how much money to put into each position, I recommend maxing your number of concurrent positions at 18.  Why 18?  First, I know from experience that anything more than that and I cannot adequately keep track of the companies I’m investing in.  This is important because you need to keep tabs on what you’ve bought so you know when it is best to close out the position.  Second, I know from experience too that any fewer than 18 causes undue volatility in my stocks portfolio.  Yes, you may need to begin your investing with fewer than 18 positions because you have less than $18,000 with which to open your first investing account.  That’s okay.  It’s a necessary inconvenience.  But your goal is to get fully invested with 18 stock and cash (if needed) positions in your stocks portfolio.

My experience with the number 18 is actually backed up by evidence.  In their 2011 book, Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown report that “about 90% of the maximum benefit of diversification” is derived from equally weighted stocks portfolio’s holding 18 stocks.  Beyond that number, the benefit begins to diminish.

So with that in mind, when I want to buy a new stock I take my current cash account’s net asset value (i.e., the total of all cash, dividends, interest and current market value of the stocks I own) and divide it by 18.  I then invest that amount into the new stock I’m buying.  Interactive Brokers makes this step simple.  I simply type in the amount of market value I want to purchase, and the trading platform automatically calculates how many shares I’ll be buying at the open.

Once you have bought your first stock, you are an investor in the underlying company.  Of course, your relationship to that company has only begun.  While the company no longer needs to “prove itself” to you in terms of its growth, valuation, mission and momentum, it still needs to uphold its side of the relationship.  Remember, by placing your seed capital into the company’s coffers, you have “clothed yourself” in the culture of its business and its mission in the world.  You have married a part of your destiny to its destiny.  From here on, what the company does matters to your stocks portfolio and you.

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Investing In ETFs: Look At Liquidity

ETFs

I am always amazed how little investors know about the vital importance of liquidity and its direct co-relation to the risk they are taking on with an investment. In recent years ETFs have gained hugely in popularity. Granted, they have many benefits over trading individual stocks: You do not have to worry about dividends, as there are dividend oriented ETFs trading baskets of high dividend stocks. ETFs typically tend to be less volatile than most stocks, at least the frequently traded ones.

This is obviously due to the fact that you are trading a basket of individual shares rather then one individual stock. If you have an underperforming stock as part of the basket, and the remaining basket performs well, this will cushion you to some extend against news reaction spikes from an individual stock. News spikes are common with individual stocks and can alter the chart pattern of an individual stock in a matter of hours.

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Momentum

The 6 Keys to Building a Winning Portfolio of Stocks – Part 5 of 6

“Momentum”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous articles in this series Pt 1 , Pt 2 , Pt 3 and Pt 4 , I looked at how “organic growth” that can be sustained over time, “fair value” as measured by the price to sales ratio, “relative weakness” in the stock price, and analysis of a company’s “mission statement” are all essential to finding great long-term investments in the stock market. In this article we are moving on to key number five: “momentum”.

All these articles are from a FREE BOOK I’m giving away to subscribers of my new service, The IXTHYS Letter (www.ixthysletter.com – coming in August, 2015). The book details at length everything you need to know to find winning stocks. If you want to know more about this new service, you can sign up here.

Once we get to this point, we should have five or six solid long-term investment candidates remaining on our short-list. This then brings us to the fifth and final key to finding the very best long-term investments currently on offer in the stock market: momentum. Everything we have done up to this point has been about finding great long-term investments. This final step is more about the short-term. Here we are looking for stocks that are positioned in such a way that they are likely to rise soon after we buy the stock. If the stocks on our short list of stocks are not positioned this way, we keep them on our watch list for regular monitoring, but we will not buy them until they are so positioned.

momentumMomentum as I define it, is not simply a matter of the stock price. The kind of momentum I’m talking about here comes in three different forms: momentum in the stock price, momentum in the opinions generated by the professional analysts who follow the company, and momentum generated by the financial media. Let’s look at each one of these separately.

 

Company Mission and Values

The 6 Keys to Building a Winning Portfolio of Stocks – Part 4 of 6

“Company Mission and Values”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous three articles in this series( Pt 1, Pt 2 and Pt 3 ) we looked at how “organic growth” that can be sustained over time, “fair value” as measured by the price to sales ratio, and relative price weakness are essential to finding great long-term investments in the stock market.  In this article we are moving on to key number four.

The previous three screens all required the use of screening software.  In my full-length book on this topic, I let you know what software I use and how you can program in the same screens I use to find winning stocks.  If you want to know when this book is ready for purchase, you can sign up here for an instant alert (don’t worry, I never sell email addresses).

company missionIn presenting the fourth key to finding the best stocks for investment we will need to leave the screening behind.  With the three previous keys in place, we have an awesome screen that will give us a handful of great companies to consider for long-term investment.  But we can’t just buy every stock that passes through.    Each run of the screen will produce a list of 15 to 20 stocks, maybe more, depending on market conditions.  That is too many.  We need to do further research in order to whittle this number down.

As we move beyond screening, we leave the mechanical part of the process behind and move into the more discretionary part.  From here on, you will need to apply some common sense, as guided by the following parameters.

The next key to finding great long-term, investment-grade companies is to go to the website of the company and do some digging around.  There are a number of questions you will want to answer before any stock makes it to your “buy now” list. These are questions related to the “mission” of the company.  The Company Mission defines what it is about, what it is trying to accomplish as an organization, its vision what it hopes to accomplish as an organization.

You should be able to find answers to each of the questions I have listed below on the company’s website. Unfortunately, there is no universal template for how company websites are set up, but nearly every company will have “About Us” and “Investor Relations” pages.  Start with these.  If you find either of these pages confusing or non-informative, that is a red flag.  You might also find pertinent information on “company mission statement”, “ethics,” “compliance” or “legal” pages, all of which or normally reached via the Investors Relation page.

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Relative Weakness

The 6 Keys to Building a Winning Portfolio of Stocks – Part 3 of 6

“Relative Weakness”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous two articles in this series Pt 1 & Pt 2, we looked at how “organic growth” that can be sustained over time and “fair value” as measured by the price to sales ratio are essential to finding great long-term investments in the stock market.  In this article we are moving on to key number three.

The third key to finding the best stocks for investment is to look for stocks that show relative weakness.  Okay, this one may have you scratching your head.  Weakness?  Really?  Let me explain.

relative weaknessRelative strength in a stock is a function of the stock’s price per share.  Relative strength measures the amount of change in share price over a given period of time relative to a benchmark index (typically the S&P 500).  When a stock compared to its benchmark is moving up at a faster rate or down at a slower rate, it is said to have relative strength.  When a stock compared to its benchmark is moving up a slower rate or down at a faster rate, it is said to have relative weakness.

Stocks with relative strength can be great trading stocks.  Unfortunately, they make lousy candidates for long-term investing.  The reasons for this are numerous and complex.  But I don’t have to explain them to you.  I can simply show you.

Let’s take our base screen as we have set it up so far:

  • Price to Sales Ratio < 1.0
  • Earnings Per Share growth this year > 10%
  • Earnings Per Share growth the past 5 years > 0%
  • Sales Revenue growth the past 5 years > 0%
  • Sales Revenue growth quarter over quarter > 10%

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Introduction to Factors which can affect the Price of Gold and Silver.

Everyone who has bought Gold and Silver, at one stage in their lives did so for the first time. As precious metal investors ourselves, we really value helping our clients explore their way into this fascinating market rich with tradition, beautiful products and introducing that feeling of security which only holding precious metal can provide. It is often interesting to see the reason that pushes someone into their first purchase, is it an investment? is it a gift? We are happy to say that a large majority of our clients return again and again to save more Gold and Silver.

One of the first questions many new investors will ask is: What affects the price of Gold and Silver?

gold and silver

Today we are going to explore some of the different factors which can affect the price of precious metals and how to identify them when watching the news. We’re going to give you some words and names that will then act as your own inside information to help you as your own inside information to know when you should be thinking of buying and selling both short and long term, to get the most out of your precious metal investment you need to try to stay ahead of the crowd.

Rather than feeling like a gamble, we would like to enable you to get to a place where your understanding of how to profit from owning Gold and Silver feels as straight-forward as owning a house, stocks & shares or an ISA.

So, first, to recap, if you have questions regarding your first steps into your Gold and Silver ownership, please read our previous introductory article which we wrote for My Investing Buddy HERE. This covers topics such as:
  • How Can Buying Physical Gold and Silver Protect My Wealth?
  • What Forms of Precious Metals Should I Buy?
  • How Much Will I Get When I Sell My Gold and Silver?
  • Is There a Legal, Transparent Way to Avoid Some Taxes When Buying and / or Selling Gold and Silver?

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Fair Value Stocks

The 6 Keys to Building a Winning Portfolio of Stocks – Part 2 of 6

“Fair Value”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous article in this series that can be read HERE, we looked at how “organic growth” that can be sustained over time is essential to finding great long-term investments in the stock market.  In this article we are moving on to key number two.

fair valueThe second key to finding the best stocks for investment is to make sure that the stocks that show sustainable organic growth are also fair value; i.e., stocks that are trading at a fair price.  When you buy a stock, what you are buying is the right to share financially in the company’s current generation of net income (if the company pays a dividend) and in the company’s future growth prospects as appreciated by the market through rising share prices.  Since that right can be extremely valuable, you will always be paying a premium for it.  This is to say that, in most cases you are going to be paying more money per share than the company is actually worth now.  This premium is, in effect, your deposit on the right to participate in the future growth of the company the value of which, if you implemented the first key (“organic growth”) correctly, should be much greater than the premium paid.  Here in implementing the second key, what you want to avoid is paying a premium that overvalues that future growth and pay a fair value.

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How can you use Gold and Silver to help protect your wealth?

Building your own stash of gold doesn’t have to be this risky…!

italainmain_716397a

Perhaps, at some point in your life you have imagined what it would be like to own a safe full of bars of gold or even a big treasure chest full of silver..  Far from the sometimes risky image portrayed in crime films, Gold and Silver is the most traditional safe haven known to the financially prudent.

Wealth held by banks, other financial institutions and governments is not considered as safe as it once was.  Consequently, we at Bleyer have seen an increasing demand in the precious metals market over the past couple of years.  We continue to meet the changing and varied needs of clients wanting to flexibly hold a percentage of their wealth in this trusted and ancient form.  A generation is beginning to return to the wisdom of their grandparents, when owning Gold and Silver (British coins particularity) was a perfectly normal thing to do.  In 1970 you could buy an ounce of gold for £14.60, an ounce of gold in 2015 is currently looking incredibly appealing again at the low price of £780.  This may seem comparatively high but gold actually almost reached £1,200 an ounce in 2011.  Precious metals have long been seen as a strong asset in a diverse portfolio, the ultimate hedge against financial unrest because metal performs when other stocks don’t, the tax advantages can also be fantastic.

​Today we will be looking into the fundamentals of precious metal investments, we will show you why you should start to think about buying now to avoid missing the horse!

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Organic Growth

The 6 Keys to Building a Winning Stocks Portfolio – Part 1 of 6 “Organic Growth”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

The first key to finding investment-worthy stocks is to find companies that display organic growth.  I’ll explain what that phrase means in a moment.  First let me prove to you just how powerful a predictive indicator this first key is.  Typically, financial analysts measure growth by noting increases in both bottom-line (earnings per share) and top-line (sales revenue) numbers.  So what would happen if we took the companies in the S&P 500 that ranked among the top 20 for their 5-year earnings per share growth rates. And of those we took the top 5 ranked companies for their 5-year sales revenue growth rates.  If we bought only those companies at the beginning of each year, held them for one year.  Then ran the screen again at the end of each year and changed positions accordingly. What would our returns look like over time?  Take a look below in Fig. 5.  Here are the results over the past 15 years of buying only the best top-line and bottom-line growth companies among the S&P 500: (Click on the image to enlarge, then press the back button on your browser to return to the article)

stocks portfolio

Fig. 5: 15 Year Test of S&P 500 Growth Companies

You can see that while the S&P managed a total gain of around 70% (3.6% annualized with compounding), our top 5 growth companies gained more than 20 times that!  Had you invested only $2,000 in each of those 5 companies back on January 2nd, 2000, by December 31, 2014, you’d be sitting on a stocks portfolio account worth over $157,000!

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