Portfolio Review 24 Feb 2008
Been a busy week. And its gonna get more busy next week.. This doesn’t mean that i don’t have time to do a mini review of my portfolio.
The objective of this round of review is more to align my current allocation to an allocation that i believe will do better going forward.
Macroeconomics
While i believe in holding a portfolio in the long run, your allocation should evolve to target the world going forward. Some instruments that work in the past might not be the best instrument going forward.
Take the example of bonds. Bonds have a place in the portfolio due to its historical low correlation with equities and it reduces the volatility of your portfolio. However, going forward, the greatest disadvantage of bonds will rear its head if you like me believe that inflation is going to be above historical average.
The thing about macroeconomics is that you can make a good gauge about how its gonna be but you cannot be 100% sure, and this is how i am feeling now.
The main views:
- The inflation situation is going to be above the last few year’s average.
- US Big Caps hasn’t outperform for sometime.
- Commodities demand is sustainable due to emerging market demand.
- Brazil, Russia, South Africa, Australia is both a domestic consumption play and also a major commodities exporting play.
- Small Caps are in a bad position. Careful selection needs to be exercised
- More negative news is expected to come out. I don’t see a bottom yet.
- Agriculture is both taxed by energy needs and increasing demand from increasing consumption
This would shape the decisions that i take when i structure my portfolio.
Target Allocation
So how does that add up to the macroeconomic opinion? A 20% allocation to alternatives such as energy, agriculture and gold stocks is to hedge the portfolio and ride the inflationary cycle. Many would ask, since you believe its inflationary, why not a large % in this area? That is the contradiction that i am fighting with myself. In the medium term, there is every bit of chance that deflationary forces will take place. The primary role of alternatives in my portfolio is to act as hedge.
Having a 10% allocation to growth stocks allows me to overweight on alternatives or cash/money market should i feel whether the outlook is going to be deflationary in the short run.
Another reason I don’t overweight on alternatives: my 20% allocation to emerging markets. If you take a survey of the holdings of most unit trusts that invests in emerging markets, you would have observed that many top holdings are energy or commodities related. That is what emerging countries such as mexico, south africa, russia, brazil are driving all our economy. With that in place, I am actually having much more exposure to that class.
I still like dividend investing but I have to re-evaluating my holdings. Dividend investing isn’t about getting the best yieids. Its also about a few other criterias. Which is something i would talk about sometime later.
Current Allocation
The figure below shows my latest allocation:
Yes i have a big allocation of cash. I am controlling my purchases during this correction. I believe that there will be periods of better opportunity. The key is not to buy every fxxk i like.
- Detail analysis prevents past mistakes
- Some good companies have not corrected much!
- Look at things from a long term perspective. The company must sustain in the future economic scenario.
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