Friday, November 5, 2010

Investment Strategy

I was looking at my portfolio this past week and noticed a real imbalance in my portfolio.  Diversification is a key word that I've adhered to most of my investing life.  I realize that if we put all our eggs into one basket, one little drop can crack a LOT of eggs.  If we have many baskets, then one drop only affects a small portion of our eggs.  BUT there is opposite is also true.  Finding those many other baskets takes time and requires more work so collecting your more eggs is a slower task than if you just carried one basket.

Last month, on the advice of some advisors and some research,  we purchased some stock in our retirement fund that went high pretty quickly.  I ended up buying more shares as well as some call options.  Usually I don't buy naked calls and if I do I usually balance with a covered call or some other hedge. 

But I got carried away and by the end of this week, we had about 90% of our ROTH IRAs in 5 stocks.  THAT's RIGHT. FIVE STOCKS.  This is NOT good.  Although the gains have been astronomical, doing so incurs great risk.  The same upside gains could equally be downside losses.  So why did I do this and HOW do I know this this will work? 

Good question.  First off, I can't predict the future.  I just know that it is earnings season, that stocks historically go up during Thanksgiving/Christmas time, that these companies are growth companies, that they have good balance sheets and that they have been helped by a weakening dollar, some are international stocks, others are commodities, and some are US stocks.  So even in these five stocks there is a bit of diversity, but still not enough to justify such a large position in them.

REASONS FOR RISK:
Here are some reasons I did this. 

1) I only have 50% of my money in individual stocks.  The other 50% which is in my work TSP is split into 4 funds, S&P fund, Small Cap fund, Gov Bonds and International Fund.  So I do get some diversity there.
2) They are in my ROTH account.  Which means I can't touch it until I retire.  I have a long time horizon for this money, so taking a bit of risk is definitely warranted.
3) I get greedy and sometimes I bite off a bit more than I can chew.

So if I was a portfolio manager of $100k, I would definitely have to diversify.  I cannot justify putting 100% of my money in one or two stocks. THat's just plain stupid/insane.

My breakdown is this:
15% S&P Fund
15% Technology (semiconductors, computers, automobile)
15% Financials, Real Estate
15% Commodities (oil, metals, industrial materials)
15% Retail, Food (entertainment, clothes)
15% International
10% Cash/Bonds

I'm a little bit imbalanced in my current portfolio, ideally this is what I would do. Have fun investing. Play safe but definitely take calculated risks and track them like a hunter... :)

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