Allocating your investments is critical for those who want their money to work for them rather than fade into worthlessness while their funds sit in a savings account or a certificate of deposit (CD); those methods have not been keeping up with inflation. Asset Allocation can also mitigate emotional risks, and allow investments to mature or have losses without wreaking havoc on an investor’s psyche. Overall, my ideal asset allocation looks like the following:
- Hard Assets include real estate, commodities, and things like collectables
- Equities can be divided into domestic and international holdings, mutual funds, and exchanged traded funds (ETFs)
- Bonds cover a wide range of options, including corporate, Treasury, and municipal
- Cash is cash and short maturity investments
Stock Losses Unavoidable
There are going to be dramatic losses in the stock market, no matter your investment experience, caution, or vigilance. In fact, Warren Buffett, arguably the greatest investor in history, saw his $1.9 billion investment in UK grocery giant Tesco lose $750 million this week! He is the third largest shareholder of Tesco, with a stake close to 4% of the company, and yet he has been caught flatfooted in an accounting scandal. This is not the first time he has lost a ton of money on an idea that seemed rock solid. Of course, he could afford to hold, and perhaps break even in a few years from now.
On that note, the reason Buffett is still smiling, is that Tesco’s loss is just a small part of a balanced equity portfolio. It is the biggest lesson. I cannot stress enough how important it is to have balanced portfolio. I want to take a deeper look at equity portfolio and going for the homerun. Below is an email I received after asking subscribers to take a loss on Rite Aid (RAD), after the most recent earnings report.
“I just took hit on RAD!!!
“Really annoying!!
“I cannot take a chance on anymore of ur ideas!!!”
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No one likes to take a loss, but this guy was more upset than normal because he was swinging for the fences. His portfolio shows him long, with other ideas including:
- GS +6%
- TAP +5%
- AVGO +14%
The 8.3% loss on a single idea nullified these “winners” because he invested 2 times more money on RAD than the other ideas. Why? My guess is (based on price), he saw it as cheap, and was aware it had made a huge move in the past. Interestingly, when the stock was doing well, he had marked RAD in his portfolio as his own idea, not WSS. Nevertheless, I was wrong, but the mistake was compounded. Taking a loss is part of investing, and while I hate being wrong, I was proud of the fact that I watched the action pre-open; and saw the street overreacting, but stock was vulnerable. The exit at $5.74 saved another 11% to the downside. I think it is human nature to take a shot and go for the homerun; it is fine, knowing this means taking this extra risk is critical, so it should not be based on a hunch or the notion that share price alone determines value.
The market is in a shakeout phase. I suspect emotions will be tested, but selling should be based on fundamentals, just like when you are putting your portfolio together. Yesterday, I got another email that surmises what investors should be thinking during a period of pressure for the market:
“Ok there is blood in the streets and I have the mental fortitude to buy on the dips. Where are the recommendations?”
Buying the dips is a smart play, but trying to pick the exact bottom is folly. Let the dust settle, and chase a little off the bottom. I am bullish on the market, but that does not mean it will be smooth sailing; It rarely is, if ever.
Positive signs from Corporate America
Even with the market down, Corporate America showed some positive signs for the future. For starters, Swift Transportation (SWFT) announced that it is joining others in the trucking industry by raising wages and aggressively pushing for more drivers. Nike (NKE) beat the street on top and bottom line, as gross margins expand to 46.6%, that’s +170 bps, and the effective tax rate dipped to 21.7% from 25.0%, reflecting stronger sales outside of the US. On the other hand, Micron Technology (MU) had mixed earnings results, but management offered strong earnings and capital expenditure guidance.
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