Portfolios and weights 101

So a friend messaged me about her BFC3540 debates asking “how do you weight your portfolio”. And it really struck me as an area that might be really difficult to grasp for someone who’s just had this weird assignment thrown at them. So here we are.

Weights, weights, weights, for the average person the concept of weight only really comes by when you start shredding for music festivals, consumed too many Daniel’s Donuts or the top button of your shirt no longer closes … But when it comes to portfolio weights, they aren’t stagnant or linear – they continuously adjust to their surroundings and your style/appetite for risk/reward.

So I’ll make things easy by referencing the six stocks in your BFC3540 debates. Let’s first of all give them each an identity.

  1. NAB – Bank, slow growth, not volatile, moves maybe -/+ 1% a day, moves with the market and macroeconomic news
  2. MQG – Sorta bank, moderate growth, not volatile, moves maybe -/+ 1.5% a day, moves generally with the market and macroeconomic news
  3. SYD – Industrial/utility, slow growth, not volatile, moves maybe -/+ 1% a day, moves with the market and sector specific macroeconomic news
  4. TCL – Industrial/utility, slow growth, not volatile, moves maybe -/+ 1% a day, moves with the market and to a lessor extent, sector specific macroeconomic news
  5. A2M – Consumer staple, steroid-like growth, volatile, moves -/+ 3% a day (I’m just guess-estimating here its an average), and sometimes moves with the market
  6. TWE – Consumer staple, strong growth, volatile, moves -/+ 2% a day, somewhat moves with the market

Now the way the stock moves is just an estimate – but you get the idea, some stocks move slower than others, some are more volatile with different growth perspectives.

Balancing your portfolio is like … making a meal – you balance it with adequate sides, drinks, condiments etc. Let’s touch on a few examples.

1. The “I didn’t prepare for these debates but you can’t ask me questions” portfolio 

For this portfolio – you hold 100% cash because you have no idea what you’re doing. BUT WAIT. THIS DOES NOT MEAN YOU’RE A LOSER. Let’s say the ASX index was down 3% for the week and everybody else only LONGED stocks. There is a very slim chance that their stocks who “move with the market” managed to finish the week in green.

This means that while most portfolios are down somewhere between -1% to -5%, you’ve just chilled on 0% gains – beating EVERYONE.

Cash plays an important role as it demonstrates that you’re playing it safe, you want to wait for opportunities and you’d rather not participate in uncertainty.

2. The “It’s going up” portfolio

You’d generally be NET LONG (you might short something, but your overall portfolio is long) if you feel like the market is going up. Let’s say the market is for certain going up – then what would you long? You’d obviously want to long the stocks that move more strongly when the market is up – so in this case – TWE and A2M.

But sometimes the market is random and unforgiving – sometimes a random rich person might sell all his stocks, the company comes out with a bad announcement, some political sector specific news comes out and your company is gutted or general sentiment for your company is poor. Maybe your company has been going up for five consecutive days and some people decide to take profits and the share price stagnates. We really don’t know.

So what do you do?

You diversify.

You’d make a mix exposures – something like 30% banks, 20% industrials and 50% consumer staples. Your plate still has the faster mover, but some chunks of safety incase things go wrong.

3. The “Worlds going to end in 2018” portfolio 

Global warming, running out of coal, a2 is a fake protein, Trump is going to get impeached blah blah blah. To be fair, there is quite a bit of negative news going about these days and equity markets have actually struggled for the past week.

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If you felt like this trend was going to continue, or if some of the stock debate stocks have reached their all time highs. Then you’d definitely consider shorting. And like the long instance, you’d short the stocks most vulnerable to a bear market/sell-down – A2M and TWE.

You could try to maximise downside, but not overdose by shorting 20% bank, 20% utility and 10% consumer staple, but holding the rest cash.

4. The “I have already voted” portfolio 

This is my portfolio because I have already voted – oh wait … I don’t go to Uni anymore.

I’m not here to be a boastful lucky winner, nor am I here to be the loser. I’m consistent. I’m balanced. I take calculated risks. This is not a Casino.

As I said before, the market is pretty skittish at the moment. It’s had a good run, and it’s come down. General economic conditions are actually pretty good, but there is just so much drama with Trump, our new PM, the banks/property kerfuffle, material/metals prices are softening etc. I’d honestly consider long on the ‘better’ consumer staple, and shorting the other two.

Banks – banks are market movers. Our big 4 banks make up a large proportion of the ASX, so if they are up, our market is generally up.

I’m not a big fan of NAB, especially since they’ve decided to hold their interest rates. I’m also a big fan of MQG because they’ve always financially performed.

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Consumer staples – these guys are in a world of their own. They’ve come from humble beginnings and worked their way up to a billion dollar company. For A2 and TWE – they’re all about China. How to sell in China, ecommerce, regulatory requirements etc. Investors love these guys and have a VERY optimistic view. This optimism usually leads to a stock moving up much higher than what they’re actually worth. If the stock can keep performing – then great, no worries. But if they ever dare hiccup – they will stagnate, they will struggle.
Changing regulatory conditions resulted in A2M falling from its highs of $13.00 to $9.00.

Utilities – they’re sort of the same as banks, just in a different sector. They move with the market and old people love them because they pay solid dividends.

In this current market, I my portfolio would be … jks I’m not giving you answers.

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