Posts tagged ‘objectives’

Building Your All-Star NBA Portfolio

Player Attempting to Get Rebound --- Image by © Royalty-Free/Corbis

Image by © Royalty-Free/Corbis

You may or may not care, but the NBA (National Basketball Association) playoffs are in full swing. If you were an owner/manager of an NBA team, you probably wouldn’t pick me as a starting player on your roster – and if you did, we would need to sit down and talk. I played high school basketball (“played” is a loose term) in my youth, and even played in my early 40s against other over-aged veterans with knee braces, goggles, and headbands. Once my injuries began to pile up and my playing time was minimized by the spry, millennial team members, I knew it was time to retire and hang up my jockstrap.

The great thing about your investments is that you can create an All-Star NBA portfolio without the necessity of a salary market cap or billions of dollars like Mark Cuban. You can actually put the greatest professional players in the world (stocks/bonds) into your portfolio whether you invest $1,000 or $10,000,000. Sure, transactions costs can eat away at the smaller portfolios, but if investors are correctly managing their funds over years, and not months, then virtually everyone can create a cost-efficient elite team of stocks, bonds, and alternatives.

Now that we’ve established that anyone can create a championship caliber portfolio, the question then becomes, how does an owner go about selecting his/her team’s players? It may sound like a cliché, but diversification is paramount. Although centers Tim Duncan, Dwight Howard, Chris Bosh, Marc Gasol, and DeAndre Jordan may get a lot of rebounds for your team, it wouldn’t make sense to have those five starting centers on your team. The same principle applies to your investment portfolio.

Generally speaking, the best policy for investors is to establish exposure to a broad set of asset classes customized to your time horizon, risk tolerance, objectives, and constraints. In other words, it is prudent to have exposure to not only stocks and bonds, but other areas like real estate, commodities, alternatives, and emerging markets. Everybody has their own unique situation, and with interest rates and valuations continually changing, it makes sense that asset allocations across all individuals will be very diverse.

In basketball terms, the sizes and types of guards, forwards, and centers will be dependent on the objectives of the team’s owners/managers. For example,  it is very logical to have Stephen Curry (see great video) as the starting guard for the fast-paced, highest scoring NBA team, Golden State Warriors but Curry would not be ideally suited for the slow, grind-em-up offense of the Utah Jazz (one of the lowest scoring teams in the NBA).

In order to build a consistent winning percentage for your portfolio, you need to have a systematic, disciplined process of choosing your all-star-team, which can’t just consist of picking the hottest player of the day. Not only could it be too expensive, the consequences of over-concentrating your portfolio with an expensive position can be painful….just ask Los Angeles Laker fans how they feel about overpaying for Kobe Bryant’s $23.5 million 2014-2015 salary. Investors who chased the overpriced tech sector in the late 1990s, with stock prices trading at over 100 times trailing 12-month earnings, understand how painful losses can be in the subsequent “bubble” burst.

Having a strong bench of players is crucial as well. This requires a research process that can prioritize opportunities based on quantitative and fundamental processes (at Sidoxia we use our SHGR model). Sometimes your starters get injured, fatigued, or bought out by a competitor. Interest rates, valuations, exchange rates, earnings growth rates and other economic factors are continually fluctuating, so having a bench of suitable investment ideas is critical for different financial environments.

Beating the market is a challenging endeavor, not only for individuals, but also for professionals. If you don’t believe me, then check out what Dalbar had to say about this subject in its annual report entitled, Quantitative Analysis of Investor Behavior:

Dalbar found that in 2014, the average investor in a stock mutual fund underperformed the S&P 500 by a margin of 8.19 percent. Fixed-income investors underperformed the Barclays Aggregate Bond Index by a margin of 4.81 percent.

 

Ouch! If you want to generate winning returns matching the likes of the 1,000-win club, which includes Gregg Popovich, Phil Jackson, and Pat Riley then you need to avoid some of the most common investor mistakes (see also 10 Ways to Destroy Your Portfolio). Chasing performance, ignoring diversification, emotionally reacting to news headlines, paying high fees, and over-trading are sure fire ways to get technical fouls and ejected from the investment game. Avoiding these mistakes and following a systematic, objective process will make you and your investment portfolio a successful all-star.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

May 16, 2015 at 10:09 am Leave a comment

Skiing Portfolios Down Bunny Slopes

Oh Nelly, take it easy…don’t get too crazy on that bunny slope. With fall officially kicking off and the crisp smell of leaves in the air, the new season also marks the beginning of the ski season. In many respects, investing is a lot like skiing.  Unfortunately, many investors are financially skiing their investment portfolios down a bunny slope by stuffing their money in low yielding CDs, money market accounts, and Treasury securities. The bunny slope certainly feels safe and secure, but many investors are actually doing more long-term harm than good and could be potentially jeopardizing their retirements.

Let’s take a gander at the cautious returns offered up from the financial bunny slope products:

Source: Bankrate.com

That CD earning 1.21% should cover a fraction of your medical insurance premium hike, or if you accumulate the interest from your money market account for a few years, perhaps it will cover the family seeing a new 3-D movie. If you also extend the maturity on that CD a little, maybe it can cover an order of chicken fingers at Applebees (APPB)?!

We all know, for much of the non-retiree population, the probability that entitlement programs like Social Security and Medicare will be wiped out or severely cut is very high. Not to mention, life expectancies for non-retirees are increasing dramatically – some life insurance actuarial tables are registering well above 100 years old. These trends indicate the criticalness of investing efficiently for a large swath of the population, especially non-retirees.

Let’s Face It, One Size Does Not Fit All

Bodie Miller & Grandpa

As I have pointed out in the past, when it comes to investing (or skiing), one size does not fit all (see article). Just as it does not make sense to have Bode Miller (32 year old Olympic gold medalist) ski down a beginner’s bunny slope, it also does not make sense to take a 75-year old grandpa helicopter skiing off a cornice. The same principles apply to investment portfolios. The risk one takes should be commensurate with an individual’s age, objectives, and constraints.

Often the average investor is unaware of the risks they are taking because of the counterintuitive nature of the financial market dangers. In the late 1990s, technology stocks felt safe (risk was high). In the mid-2000s, real estate felt like a sure bet (risk was high), and in 2010, Treasury bonds and gold are currently being touted as sure bets and safe havens (read Bubblicious Bonds and Shiny Metal Shopping). You guess how the next story ends?

Unquestionably, coasting down the bunny slopes with CDs, money market accounts, and Treasuries is prudent strategy if you are a retiree holding a massive nest egg able to meet all your expenses. However, if you are younger non-retiree and do not want to retire on mac & cheese or work at Wal-Mart as a greeter into your 80s, then I suggest you venture away from the bunny slope and select a more suitable intermediate path to financial success.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, and WMT, but at the time of publishing SCM had no direct position in APPB,  or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

September 22, 2010 at 1:24 am Leave a comment

One Size Does Not Fit All

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When you go shopping for a pair of shoes or clothing what is the first thing you do? Do you put on a blindfold and feel for the right size? Probably not. Most people either get measured for their personal size or try on several different outfits or shoes. When it comes to investments, the average investor makes uninformed decisions and in many instances relies more on what other advisors recommend. Sometimes this advice is not in the best interest of the client. For example, some broker recommendations are designed to line their personal pockets with fees and/or commissions. In some cases the broker may try to unload unpopular product inventory that does not match the objectives and constraints of the client. Because of the structure of the industry, there can be some inherent conflicts of interest. As the famous adage goes, “You don’t ask a barber if you need a haircut.”

Tabulate Inventory

A more appropriate way of managing your investment portfolio is to first create a balance sheet (itemizing all your major assets and liabilities) individually or with the assistance of an advisor (see “What to Do” article) – I recommend a fee-only Registered Investment Advisor (RIA)* who has a fiduciary duty towards the client (i.e., legally obligated to work for the best interest of the client). Some of the other major factors to consider are your short-term and long-term income needs (liquidity important as well) and your risk tolerance.

Risk Appetites

The risk issue is especially thorny because the average investor appetite for risk changes over time. Typically there is also a significant difference between perceived risk and actual risk.

For many investors in the late 1990s, technology stocks seemed like a low risk investment and everyone from cab drivers to retired teachers wanted into the game at the exact worst (riskiest) time. Now, as we have just suffered through the so-called Great Recession, the risk pendulum has swung back in the opposite direction and many investors have piled into what historically has been perceived as low-risk investments (e.g., Treasuries, corporate bonds, CDs, and money market accounts). The problem with these apparently safe bets is that some of these securities have higher duration characteristics (higher price volatility due to interest rate changes) and other fixed income assets have higher long-term inflation risk.

Risk-Return Table

Source (6/30/09): Morningstar Encorr Analyzer (Ibbotson Associates) via State Street SPDR Presentation

A more objective way of looking at risk is by looking at the historical risk as measured by the standard deviation (volatility) of different asset classes over several time periods. Many investors forget risk measurements like standard deviation, duration, and beta are not static metrics and actually change over time.

Diversification Across Asset Classes Key

Efficient Frontier

Source: State Street Global Advisors (June 30, 2009)

Correlation, which measures the price relationship between different asset classes, increased dramatically across asset classes in 2008, as the global recession intensified. However, over longer periods of time important diversification benefits can be achieved with a proper mixture of risky and risk-free assets, as measured by the Efficient Frontier (above). Conceptually, an investor’s main goal should be to find an optimal portfolio on the edge of the frontier that coincides with their risk tolerance.

Tailor Portfolio to Changing Circumstances

BellyIn my practice, I continually run across clients or prospects that initially find themselves at the extreme ends of the risk spectrum. For example, I was confronted by an 80 year old retiree needing adequate income for living expenses, but improperly forced by their broker into 100% equities. On the flip side, I ran into a 40 year old who decided to allocate 100% of their retirement assets to fixed income securities because they are unsure of stocks. Both examples are inefficient in achieving their different investment objectives, yet there are even larger masses of the population suffering from similar issues.

Financial markets and client circumstances are constantly changing, so the objectives of the portfolio should be periodically revisited. One size does not fit all, so it’s important to construct the most efficient customized portfolio of assets that meets the objectives and constraints of the investor. Take it from me, I’m constantly re-tailoring my wardrobe (like my investments) to meet the needs of my ever-changing waistline.  

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

*DISCLOSURE: For disclosure purposes, Sidoxia Capital Management, LLC is a Registered Investment Advisor (RIA) certified in the State of California. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 10, 2009 at 2:00 am 2 comments


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