Results of 3 Portfolios: Cheap Growth Ready to Breakout (July 16, 2007)

In a previous article, I described the Cheap Growth Ready to Breakout Screen.

In this post, we will continue to track the performance of three portfolios. We are taking the snapshot as of Monday, July 16, 2007.

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Portfolio 1: February 23, 2007     
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# Symbol Start  End     Return
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1 AMX 47.15 64.87 37.58% 
2 TSM 10.91 11.68 7.06% 
3 VIP 85.18 112.50 32.07% 
4 IPR 74.30 89.00 19.78% 
5 AYE 47.90 55.10 15.03% 
6 WCRX 14.45 19.17 32.66% 
7 BRP 43.42 72.89 67.87% 
8 SCS 19.76 18.72 -5.26% 
9 MLHR 39.54 33.37 -15.60% 
10 AIR 30.61 34.10 11.40% 
11 GRT 27.59 24.32 -11.85% 
12 DVR 12.49 16.70 33.71% 
13 TGI 55.02 70.25 27.68% 
14 CRAI 53.88 49.08 -8.91% 
15 TLF 7.99 7.10 -11.14% 
16 APH 33.89 37.07 9.38% 
17 GIL  26.80 35.24 31.49% 
18 MIDD 58.88 62.79 6.64% 
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= Total   15.53% 
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 SPY 144.10 154.83 7.45% 
 IWM 81.64 84.48 3.48% 
 EFA 76.68 83.37 8.72% 
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Portfolio 2: March 14, 2007
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# Symbol Start  End     Return
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1 TSM 11.06 11.68 5.61%
2 DISH 42.50 43.92 3.34%
3 WFR 55.05 63.04 14.51%
4 ASX 5.95 7.23 21.51%
5 SPIL 9.18 11.64 26.80%
6 BRP 44.00 72.89 65.66%
7 LAUR 59.28 61.93 4.47%
8 KSU 33.65 40.67 20.86%
9 BEAV 30.73 43.09 40.22%
10 CVO 24.50 23.42 -4.41%
11 IART 43.45 50.30 15.77%
12 KNL 23.00 22.71 -1.26%
13 AIR 30.25 34.10 12.73%
14 MYE 18.24 22.16 21.49%
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= Total   17.66%
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 SPY 138.13 154.83 12.09%
 IWM 76.91 84.48 9.84%
 EFA 72.83 83.37 14.47%
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Portfolio 3: May 16, 2007    
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# Symbol Start  End     Return
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1 ESV 58.45 60.86 4.12%
2 GSF 65.98 72.07 9.23%
3 TDW 64.90 75.62 16.52%
4 KB 93.35 91.96 -1.49%
5 FCX 71.29 92.94 30.37%
6 VLO 72.03 76.08 5.62%
7 NBG 11.59 12.54 8.20%
8 ACGY 21.35 26.72 25.15%
9 AYR 35.98 38.78 7.78%
10 FTI 73.68 88.97 20.75%
11 HXM 62.29 61.50 -1.27%
12 SZE 57.58 57.11 -0.82%
13 SLB 76.50 90.54 18.35%
14 CLB 92.77 106.41 14.70%
15 CKR 20.38 19.51 -4.27%
16 CEPH 80.14 82.28 2.67%
17 TDK 87.55 92.02 5.11%
18 SNDA 26.65 33.04 23.98%
19 LKQX 24.30 25.38 4.44%
=============================================
= Total   9.96%
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 SPY 150.95 154.83 2.57%
 IWM 81.26 84.48 3.96%
 EFA 80.14 83.37 4.03%
=============================================

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SPY is an ETF that represents that S&P 500 US Large Cap Index.
IWM is an ETF that represents the US Small Cap Russell 2000 index.
EFA is an ETF that represents the developed international market index covering Europe, Japan, and Australia.

Based on this, the three portfolios performed (until July 16, 2007)

1. February 23, 2007: 15.53% return, outperforming all three indices by 8.94% to 14.19%.
   
2. March 14, 2007: 17.66% return, outperforming all three indices by 3.19% to 7.82%
   
3. May 16, 2007: 9.96% return, outperforming all three indices from 13.63% to 15.09%
   

So far, this screen seems to be performing very well. Let us continue to monitor.

Simplest Buy and Hold Portfolio

So you have some discretionary money that you can risk, don't need the money within five years, and want some growth. But you may not know too much about individual stocks and you don't have the time nor the inclination to follow individual stocks.

Here's a very simple and easy Buy and Hold Portfolio that you don't have to monitor often, and offers good performance and diversification. (Do know that while the stock market averages 10% per year over a long time, that during any individual year, you could lose or gain 40%?)

The strategy is based on buying and holding certain ETFs, or Exchange Traded Funds. An Exchange Traded Fund is essentially a mutual fund (mostly indexed to a particular index. The ETF company just mirrors the index, and doesn't make active stock decisions) that trades on the major exchanges just like a regular stock. You normally buy and sell them and pay commissions. For example, the stock symbol "DIA", isn't really an individual company. The "DIA" ETF represents the Dow Jones Industrial Average ETF. It holds the 30 stocks in the Dow Jones Industrial Average. However, from your point of view, you are buying and selling "DIA" directly, a single trading instrument. You lose money and profit just as if you were holding a single stock.

The Portfolio

Here's the recommended simple buy and hold portfolio that you do not have to monitor that often:

• SPY -- The S&P 500 ETF representing 500 of the US biggest and most influential companies.
  
• MDY -- The Midcap US ETF representing the middle size US companies.
  
• IWM -- The Small Cap US ETF representing some of the smaller companies in the US
  
• EFA -- The iShares Developed International Market ETF representing investments in Europe, Japan and Australia
  
• EEM -- The iShares International Emerging Market ETF which covers international emerging markets such as Taiwan, Korea, China, Mexico, Brazil, Russia and India.
  

That's it! You are diversified throughout the US and the world. You can monitor your portfolio once a year, or twice a year.

If you don't have that much money, you can start with one or two ETFs first. I suggest SPY and EFA as your first two ETFs. The third ETF should be IWM. The fourth should be EEM, and the last MDY.

If you wish to learn more, or even start learning about individual stock investments, you might have to do some studying. You can read the books recommended here, or start browsing some good investment sites on the internet.

How Many Stocks Should I Have in My Portfolio?

If you have an all stock portfolio, you should balance several factors to determine how many individual stocks you should have in that portfolio. These stocks should ideally be in several different sectors, or else you'll have concentration and not diversification.

1. If you have too few stocks (4 or less), you will not get enough diversification. If a single stock gets hit hard, your entire portfolio will get hit very hard. By having at least 5 stocks in your portfolio, you get better diversification. Over the long term, studies have shown that a diversified stock portfolio gets a good return with less risk.

2. If you have too much diversification, you may have difficulty keeping track of all your stocks. Owning individual stocks means you have to keep track of the situations on all your stocks. Can you manage a stock portfolio of 20?

3. If the total amount in your portfolio is not that big, you should have less positions. Otherwise, commissions will be too big a percentage to position size. Let's say it costs $10 to buy and sell a stock, and each position of a stock in the portfolio is $500. That means you are spending $20 per trade, or $20/$500 = 4%. For every investment or trade you make, you are spotting the market 4%! That's too much.

4. If the total amount in your portfolio is much bigger, you can diversify more to reduce risk.

5. If you are very young (college, early 20s), you can take a lot more risk in your portfolio. Even if you lose the money, you have time to make it up. So you can be more aggressive, and you could even buy two stocks at $1500 a position. Of course, this money should be discretionary money, and not retirement money, or money that you need.


So, to summarize, in general, Jim Cramer in his book "Real Money: Sane Investing in an Insane World", suggests having a portfolio between 5-10 individual stocks. This is enough for diversification, but not too much that it becomes too much to handle.

If you have the time and inclination, you can hold up to 20 individual stocks, but only if you can handle it.

Alternatively, you can use ETF (Exchange Traded Funds) to supplement your portfolio. You can invest in 5 individual stock for 50% of the portfolio, and in the other 50%, invest in broadbased ETFs such as EEM (Emerging International Market ETF) or EFA (Developed International ETF). This way, you can explore with 50% of your portfolio by investing in individual stocks, and the other 50% for a core ETF position or ETFs that have exposure that your individual stocks lack. For example, if 5 of your individual stocks are all US Domestic stocks, you can use the other 50% to invest in International ETFs as mentioned above.

If you don't have the time or inclination

If you don't have the time and inclination to study and research individual stocks, maybe you should consider a diversified portfolio of ETFs or Mutual Funds instead.

"I have a Sum of Money to Invest. How do I invest it?"

Question:

I have a sum of money to invest. How do I invest it?

Answer:

Before you can think of investing this sum, let us go through these questions:

1. Do you have high interest rate credit card or card loan debt? For example, credit card debt greater than 10%? If so, you can use this money to payoff the debt. If you hold a balance on a credit card that charges you 15%, then if you pay off this debt, you are getting a 15% RISK-FREE return! If you invest in the stock market, expect to gain 8-10% average per year over a very long time (yes, you can gain 20% in a year, then next year, lose 10%), with risk. The better deal is paying off your high credit card debt.

2. Do you have a three to six month emergency cash fund in case you lose your income? If not, you may want to start that fund, by putting the money in a high yielding savings account (getting at least 5% at this time). If you have a safety net (such as having supportive parents), then maybe you can have a smaller emergeny fund.

3. Do you need the money within five years or less? For example, you need the money for a downpayment on a house. Then maybe you shouldn't invest the money in a stock market. You may want to put this money in a high yielding savings account as mentioned above. If you can take a bit more risk, and you don't need the money for 3 years (but need it by 5 years), you can look for a good no load, no transaction fee, Balanced Mutual Fund. A Balanced Mutual fund is a mutual fund that often has a 60% weighting in equities and 40% in bonds.

4. If you don't need to use the money within 5 years, then you can be more aggressive and go with a higher percentage of equities (stocks or stock mutual funds). The next question is whether you have saved at least $1000. If you have not saved at least $1000, start saving using a high yielding money market or savings account until you reach $1000.

5. If you have $1000 or more, start learning more about the stock market and investing.

6. Once you are comfortable with at least a primer on investing, Exchange Traded Funds (ETFs) and the stock market, you can now open a Brokerage account from brokerages such as E*Trade or Ameritrade.

7. Do you have between $1000 and $5000 to invest? Then I would recommend investing in diversified mutual funds or ETFs. ETFs are Exchange Traded Funds, or mutual funds that are often indexed, that trade just like stocks. For example, you can buy and sell DIA ETF from any broker. DIA represents the 30 stocks in the Dow Jones Industrial Average. One company which provides ETFs that are sold by almost any broker is Barclays Ishares.

A Sample ETF portfolio:

1. SPY: S&P 500 ETF representing approximately the largest 500 US Stocks.
   
2. IWM: IShares US Small Capitalization ETF representing the smaller capitalization US Stocks.
   
3. EFA: IShares International Developed Markets including Europe, Japan and Australia.
   
4. EEM: IShares International Emerging Markets including Korea, Taiwan, China, Mexico, Brazil, India, Russia.
   

8. Do you have at least $5000 to invest, and do you have the time an inclination to study stocks and learn more about the market? If you do not, then you can continue using the mutual fund and ETF strategy mentioned above.

9. If you have at least $5000 to invest, and you do have the time and inclination to study stocks and learn more about the market, then you can now invest in individual stocks. You have to continue reading and learning and go deeper in the recommended book list.

10. Once you've studied enough about individual stocks, you can aim to have a 5 to 10 stock diversified portfolio (as recommended by Jim Cramer in his Book, "Real Money: Sane Investing in an Insane World"). Each stock has to be in a different sector for true diversification. Expect to spend one hour each week studying each position. That's why it is difficult to have a portfolio of more than ten stocks because you won't have time to keep track. Of course, you can choose to have a mixed portfolio of ETFs and individual stocks. Also, if you can keep track of more stocks, you can have a portfolio of up to 20 individual stocks.

11. EXCEPTION: If you are very young (college aged or early 20s), and you have at least $3000, and you have the time and inclination to invest in individual stocks, then go ahead an invest in individual stocks. You are young and you can take more risks than someone who is close to retirement. If you only have $3000, you can start with three positions at $1k each, and as you save more money, you can continue adding money until you have a 5 stock portfolio.

12. NOTE ON COMMISSIONS: Be careful about commissions. If it costs you $10 to buy a stock, and sell a stock, then if your position is $500, then that means it costs $20 per $500 position, or $20/$500 = 4%. That means, for every transaction, you are spotting the market 4%! This is not acceptable. You should have larger position sizes but make sure that you have enough diversification (at least 5 stocks in 5 different sectors). The exception in point #11 above still holds.



Don't forget to continue reading and learning! I hope you enjoy the journey and make lots of money in the process.