Sunday, September 22

Week 116 - Is there an “Optimum Portfolio” for the retail investor?


Situation: There has always been this myth of the “optimum portfolio” but exactly whose interests are best served by such a portfolio? We’re all different, after all, and of many minds. You may know that the left brain rationalizes everything to make us look better than we are and the right brain spouts poetry, solves math problems, and creates art, music, novels, architecture (along with gambling and other addictions). Ah, did I just mention gambling? There’s our clue to the optimum portfoliio. Pretty much any investor will take a risk once in awhile but she also wants most of her money to be in a safe place. So there’s the dichotomy.

Here at ITR, we keep gambling corralled in a small corner, writing only occasional pieces about commodity-related investments. The idea there is that (with enough basic information) the average investor can look at how commodities are used and make an investment where future benefits are more than likely to offset the not inconsiderable risks.

In Week 3, we set out our ideas on asset allocation, namely by proposing a recipe that calls for 3 helpings of bonds, two helpings of Core Holdings (Week 102), and one helping of Lifeboat Stocks (Week 106). The accompanying Table breaks out our current choices in each category.

Starting with bonds, US Treasuries are the place to be because all other bonds go down in value during a financial crisis but Treasuries go up, a lot. Some companies that make or market essential products also shine: People will pay the price dictated by supply and demand rather than go without heat, light, water, baby formula, Band-Aids, Tylenol, pizza, trips to the nearest McDonald’s, clothes, shoes and cleaning materials. Previous necessities, like a new car every 3 years, cable TV, soda pop, beer, quick stops at Starbucks, an evening out for dinner and a movie, and holiday travel soon become “out of reach” for the unemployed.

All 27 companies in the Table are A-rated by S&P, and none are rated high risk. This means that the second letter in the S&P stock rating is either an “L” for low risk, or an “M” for medium risk. 

14 are in defensive industries (healthcare, consumer staples, utilities). 
The remaining 13 stocks represent Core Holdings:
   5 of those are in S&P’s “consumer discretionary” industry (ROST, FDO, MCD, TJX, NKE)
   2 are in the “materials” industry (SHW and SIAL)
   2 are in the “information technology” industry (IBM and ADP)
   2 are in the “financial” industry (CB and TRV)
   1 is in the “industrial” industry (JBHT) and 
   1 is in the “energy” industry (CVX).

The Table has red highlights for metrics that underperform the Vanguard Balanced Index Fund (VBINX), which is weighted 40% in a bond index and 60% in a stock index.

Bottom Line: Every portfolio is a form of personal expression. In providing a "guide" to help you construct an optimum portfolio, our first concern is to guide you away from foundering on the shoals in a storm.

Risk Rating: 5

Full disclosure: my trading positions on companies in the Table consist of monthly automatic electronic additions to DRIPs in WMT, NKE, ABT, JNJ, IBM, and NEE.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

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