Recently I've been analysing the performance of my investments over many years and one way I looked at it was by dividing the portfolio into four parts.
The first part of the portfolio is in a couple of actively managed funds and listed investment companies. The case for this is simple. Let the professionals manage it, just in case I blow myself up, there's something to fall back on.
The second part is a handful of stocks I know a lot about - there's usually about five or six that fit the bill, like PNV. Let's call them the 'sweet six' (even though sometimes its less than this). I researched them deeply, a couple of them sos far up the wazoo I am borderline stalking those companies in a range of ways. Each of these stocks have a big weighting on them. The more I learned a bout them, and the more goals they kicked, the more I added to them as my confidence grew. The notable behavioural trend is that in all case, I generally averaged up with these stocks.
The third part of my portfolio is more speculative - a bunch of stocks I like, have done some research on... but not a lot like I have with the sweet six. It could be big caps, small caps... anything, but I just know a lot less about these companies compared to the sweet six. At any point in time there is about 8-15 of these stocks in my portfolio. I'm hoping over time, as I learn more about them and if they start ticking boxes I've set for them... one of these babies can justify a bigger holding like my sweet six. But for now, it's small investments in each of them (usually .5% to 1.5% max).
The fourth part of my portfolio is where I get to play and try and be a hero trader. It can involve investing in stocks I know only a little about, as well as stocks I know a lot about - and often overlaps with stocks I own in the other parts of my portfolio. A small amount of cash is allocated to this. Maybe a max of 1% to 1.5% of the portfolio is allocated to playing these games.
This is where regardless of my depth of knowledge (or lack of it), I try to dance in and out, on announcements, pending announcements, macroeconomic factors, charts, changes in the weather, I try to trade of hope and fear. About anything, even corona. Anything I think could remotely have some sort of predictive indicator I will try.
Here are the results:
- The sweet six outperformed the other parts of my portfolio by a long long long long shot. Turns out, Warren Buffett was right. Buy great companies and you don't have to do much. Just let the thing compound like friggin' crazy. The biggest enemy is yourself. Sometimes you do need to sell due to valuation grounds or to rebalance, but most of the time the best thing to do is let the thesis play out - for years.
Finding excuses to turn these long term investments into trades is where I miss opportunities. Distractions and noise like corona, what the fed is doing, trump getting elected, brexit, oil price crash etc etc... the list goes on and on and on.
Ignoring them and doing FA is often the hardest decision, but doing nothing is also often the best decision. If in doubt, re-read 'Thinking, fast and slow" to re-learn again how we're our own worst enemies.
- Next best was the managed funds and LICs that did what I expected them to do... provide steady risk adjusted returns. Build wealth slowly. They haven't shot the lights out in the past few years, but they do give me peace of mind which helps my decision to not panic with my sweet six.
- In third place was the portfolio of speculative stocks. They're not speculative necessarily because of the types of companies involved. They can include big companies like BHP, TPG ,S32 etc. I just consider them more speculative because I know less about them.
- In last place was my attempts at being a hero trader - dancing in and out of stocks.
This may be different for everyone, I'm sure someone out there is a true hero trader (though I suspect there are very very few of them); but at the end of the day, my biggest learnings are that the companies I know the most about tend to be the ones that not only do well... but exceptionally well.
What I did learn on reflection however, was that there was a role for each part of my portfolio to play, even though the performance between them was very different. I need that portfolio of speculative stocks, because with a little skin in the game, it helps me stay engaged... and it is how some of my sweet six were discovered.
I also think that very very small allocation I've allocated to trading... even though the results show I've done poorly at it is of benefit. It's a small sandpit that lets me scratch my itch, so I don't go messing about with the other parts of my portfolio.
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