Beats the S&P 500 Significantly the First Half of 2010
In an environment where Treasury Bills remain near a yield of zero percent and FDIC insured moneymarket cash remains low at 2.00 percent, for the first six months of 2010, our extremely conservative portfolio model generated a 4.25 percent return, which is an annualized return of 8.50 percent. This compares to a 7.57 percent decline (loss) in the S&P 500 during the first half of 2010. In other words, our portfolio returned 11.82 more than the S&P 500 did the first half of 2010.
The S&P 500 remains deep underwater from October 1st, 2006, when we started this portfolio with $500,000, whereas our portfolio is presently 61 percent higher than had we invested our funds in the S&P 500 over that same period of time, from 10/1/2006 through 6/30/2010. In other words, over the past three and a half years, our conservative portfolio outperformed the S&P 500 by 61 percent, preserved capital, and fully protected our life's savings during a crash period of time when many folks got wiped out. Put another way, our conservative portfolio has 61 percent more value at June 30th, 2010 than had it been placed and kept in the S&P 500 over the past three and a half years.
The whole point of a conservative portfolio is to avoid catastrophic times in the markets, and continuously enjoy high, yet safe returns in good times. Let's put this in a different perspective: If someone invested $500,000 three and a half years ago, in October 2006, and invested the money similarly to our conservative portfolio model, even after a cataclysmic market collapse, three years later they would have a portfolio with a market value as of June 30th, 2010 of $621,940.31, up $121,940.31 over the original investment, for a 24.39 percent gain over a three and a half year period. If we had invested that same original $500,000 in the S&P 500 on October 1st, 2006, it would be worth only $385,788, $236,152 less than our portfolio has. With our Conservative Portfolio, there were no Madoff funds, no high risk stuff, no wipeout of life savings. Basic high quality securities and returns.
At the Conservative Investment Portfolio button at the left of our home page at www.technicalindicatorindex.com, subscribers can check out the full details of how we have accomplished this with little risk. We present every transaction and provide strategic insights on the past, and what we expect to do in the future.
We update our Conservative Investment Portfolio report periodically for subscribers, with comments on decisions we make. We publish transactions in our daily newsletters in a timely fashion. Early-in-the-day transactions are published in our Mid-day International market report, which is usually posted intraday Eastern Standard time. Not all days will see transaction activity. Our aim is overall return, within the constraints of wealth preservation and liquidity. The portfolio must be safe, offer strong returns potential, and liquidity, in most economic environments. In catastrophic economic times, we are looking primarily for wealth preservation and liquidity. We believe this portfolio has delivered as expected, and performed quite well.
Over the years, we have had many requests from subscribers to construct a conservative balanced portfolio model. We have also had many requests for wealth management of subscriber funds. Our plate is full, so we have had to pass, but we have come up with an idea that might have some appeal. One of the problems with publishing one conservative portfolio model is there is no such thing as a one size fits all portfolio, or portfolio strategy. However, what we have decided to do is run a paper portfolio for ourselves that includes several elements of a balanced portfolio, but leans conservative. It offers several segments with different objectives, diversification, liquidity, earnings, capital gains, and speculative profits, for educational purposes. If you are interested, read on as we discuss the theoretical makeup of this portfolio.
First, procedure. How this works is, we presented a start-up investment portfolio, as if we inherited $500,000, or picked up a windfall, on October 1st, 2006, and needed to manage this money. Our aim is overall return, within the constraints of wealth preservation and liquidity. It must be relatively safe, offer strong returns potential, and liquidity, in most economic environments. We are heavy cash at the onset, and then over time put the cash to work in a variety of ways. We publish all transactions as they are performed, even daily if we work the portfolio that hard, and periodically publish the latest portfolio inventory which can be compared with the original starting position, available in the Guest Articles section at www.technicalindicatorindex.com.
While this is fictitious, we use actual investments, actual pricing, and operate in real time as much as possible given this forum. It is not to be construed as trading advice, but rather is educational in nature, perhaps entertaining, and hopefully idea-generating and informative. Investment segment allocations can be altered based upon a person's risk appetite, investment experience, or financial position. It is not intended to be a financial plan, as that would include life insurance, real estate, estate and tax planning. This conservative balanced portfolio is just a piece of our financial plan pie, nothing more.
We will not get into tax planning vehicles too much, except maybe add some instruments that may be tax free either from state or federal taxes if we happen to like the risk/reward from time to time, but, total return will be computed on a tax equivalent basis. We will not deal with transaction costs to simplify the accounting, but understand every transaction has costs. Broker fees, etc... It is a plain and simple approach for idea generation in a real-time setting with real investments for our conservative leaning. Every investment advisor will have his or her own preferences in vehicles, strategies, etc... so don't be surprised by independent reviews that are critical. So be it. This is just one approach that we feel is of interest to a broad spectrum of subscribers. Everyone is different, and if you were to apply any of this portfolio management to your own unique circumstances, no doubt you'd tweak what we do to be more suitable to your needs, which is great. Before you follow anything we do with our portfolio, we suggest you check first with your financial advisor.
Our portfolio management is dynamic, which should be interesting. There will be long-term strategies, which will forfeit returns now for higher returns later. We have portfolio segments that utilize our key trend-finder indicators, and we have segments that do not market-time, but are more buy and hold. We like cash. That won't excite everyone, but part of running a conservative portfolio is the wisdom to be prepared for future opportunities.
The following are six segments to our conservative balanced portfolio and some basic theory for each.
Segment A: Cash
The purpose of cash is for emergency liquidity and to be in a position to seize future opportunities. We will use primarily FDIC insured moneymarket funds. Return is a minor consideration here. Initially, we will have a large cash position, that will eventually be put to work.
Segment B: Gold
The purpose of holding gold is for protection against inflation, against a debasement of our currency, and as catastrophe insurance. We accumulate ounces of the metal in either coins or a Gold ETF. We'll use the daily spot prices for simplicity.
Segment C: U.S. Treasury Bills, Notes, and Bonds
Here we will see the guts of the portfolio. It will include a laddered selection of Maturities that will provide safe, risk-free, state tax-free income, a continuous flow of liquidity, and potential capital gains, probably about every three years which will improve long term total return. The ladder may resemble a barbell from time to time, depending upon the economy and the interest rate cycle. This strategy is laid out in detail in an article in our Guest Articles section called, "Up the Investment Ladder," from July 2004.
Segment D: Stocks -- Buy and Hold
Here we will employ a Dollar Cost Averaging strategy for long-term capital gains. We may include some consideration of dividend yield as a component of decision making, but for the most part will trade index ETFs, not individual stocks. We are not stock picking here. We may select different sectors of the broad equity market if we favor one sector over another. Essentially, here we buy a minimum amount of dollars worth of stock each month, with the quantity of stock varying as prices do. This is a time-tested strategy that works best in either volatile markets or long-term rising markets. The idea here is that when prices drop, we get to buy more quantity for the same dollars in the short run, and that larger quantity grows exponentially in value at the next real bull market. It is basically what is going on with 401 (k) plans where the same amount is withdrawn from each pay and invested in the market. Dividend paying stocks fit here.
Segment E: Stocks -- Market Timing
Now we move into a more aggressive strategy which is capital gains focused. Using our key trend-finder indicators, we add to long positions in stock index ETFs when key trend-finder indicators generate new "buy" signals, and increase cash (or purchase ETF short funds) when either hitting a target profit objective, or when new "sell" signals are generated. We may not go to all cash when "sells" are given, but will increase cash.
Segment F: Market Speculation (Traders' Corner)
This is essentially our Traders' Corner program, where we will speculate in non-cash instruments such as stock index put or call options, where we can leverage our investment returns, but at high risk. We will use the full body of technical analysis covered in our newsletters to play with a very small percentage of our entire portfolio with an aim of generating large gains from time to time, by both going long (buying calls), and going short (buying puts). We will not write or sell uncovered options here, as this is a conservative portfolio and those are not conservative strategies. Writing covered calls can be considered acceptable for this segment, but is not going to be used for the sake of simplicity. Heavy reliance will be placed on the use of our key trend-finder indicators.
Initial target allocations were 40 percent Bills, Notes, and Bonds, 10 percent Gold, 10 percent stocks - Buy and Hold, 5 percent Market Timing, and 5 percent Speculation, with the remainder in cash. This allocation has changed over time, and will continue to change, depending upon where we see risks and opportunities.
Periodic updated inventories of this portfolio are posted at our Conservative Investment Portfolio button at www.technicalindicatorindex.com. We do not clutter up our regular market analysis newsletters with this managed portfolio, however we do announce current transactions at the end of our newsletters. This initial start-up portfolio ws placed in the Guest Articles section in a separate article for easy comparison.
We'd love to hear your feedback in the future as we manage the portfolio. Again, this is not trading advice, merely a fictitious game that uses real-time, real investment data to model a conservative balanced portfolio with the objective of safety, liquidity, and total return for most economic environments. For those of you who choose to subscriber, we hope you enjoy.
"Bring the whole tithe into the storehouse,
so that there may be food in My house,
and test Me now in this,"says the Lord of hosts,
"if I will not open for you the windows of heaven,
and pour out for you a blessing until it overflows,
then I will rebuke the devourer for you,
so that it may not destroy the fruits of the ground;
nor will your vine in the field cast its grapes,"
says the Lord of hosts."
Malachi 3:10, 11
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