Question: Hi, in the recent growth portfolio article in the Switzer newsletter Paul Rickard states that, “as a growth-oriented portfolio, our investment timeframe is in the three to five year range….our aim is to deliver slightly above market performance over that timeframe.” He also says that the portfolio has beaten the index over the last three years by net 2.85%.
Does this 2.85% take into consideration that each year he starts the portfolio afresh, without reference to selling the existing previous year’s stock for either a profit or loss when rebalancing? That is, each year is a new discrete portfolio that, at the end of the year, disappears into the ether. If it was assumed that the portfolio continued from year to year with rebalancing, what would the total net profit/loss be against the index?
Answer (by Paul Rickard): The model portfolio calculations do not take into account any transaction or bid offer costs – it is assumed that holdings are purchased/disposed at the closing price at the end of the month. For example, when re-balancing at the end of the year, holdings are disposed of at the closing price at 31 December – and new holdings are acquired at the closing price on 31 December.
Obviously, if transaction costs were taken into account, the return would be marginally lower. The converse to this is that transactions are kept to the absolute minimum, they only occur on the last working day of the month, and then at the closing price, and the portfolio does not get the benefit of corporate actions.
Question: I’ve been following two technical analysts for several years after the crash of 08/09, which killed my portfolio. Both are saying that the US is in a bear market. Analyst 1 says SPX headed to 1400 to 1575 during 2016. Analyst 2 says SPX headed to about 1100 during 2016/17. Hong Kong stocks have fallen below the value of their net assets for the first time since 1998. Singapore has been smashed. Whilst most brokers retain a positive bias, just like what occurred in 2008! If it looks like a duck, swims like a duck, and quacks like a duck, then …
I’m afraid we are on the slope of hope and are about to get badly burnt for a second time within eight years. So my question is: What do we do with our portfolio, if this is another bad bear market?
Answer (by Paul Rickard): I don’t agree with the assessment, however, let’s assume your analysts are correct and it is the start of a bad bear market. You largely have three choices:
1. Sell your stocks and move back into cash.
2. Change your portfolio into more defensive stocks – for example, switch into less volatile annuity-style stocks, such as infrastructure, utilities, perhaps stocks like Medibank (while beta is not a perfect measure, change the beta of your portfolio to well below 1).
3. Take out protection. Buy index put options or specific stock puts, potentially an ETF like the BEAR ETF from Betashares.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
