Bifurcate Your Portfolio.....And Thinking


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As I'm writing this, the stock market lost over 200 points in a little under four hours of trading.  The dilemma du jour is the Greek debt situation.  If not enough bond holders agree to take a loss on their holdings, then certain triggers will go off that will create much havoc.  There's also concern about the Chinese government wanting to slow down its economy (why would they want to rein in 10% annual growth....maybe it's inflationary?).  That makes the whole world shiver as other countries anticipate fewer exports to this large consumer nation.  The market's response to these: drop a short period of time.

So what's an investor to do?  It's time to rethink your thinking about investing.  Time to bifurcate your portfolio into two parts: the core holding part and the "trading" part.  The core holding should be a group of stocks that you are invested in, truly invested in.  As Warren Buffett likes to remind investors: you don't own stocks, you own companies.  If you take that approach, you know there will be ups and downs because Mr. Market is a registered psychopath.  Some days it moves up on the slightest of news.  Other days it crashes on even less.  Some days it moves for no reason at all, other than the ones the news makes up to explain the unexplainable.

So the core portfolio holdings are stocks that are rock solid, ones like IBM, Microsoft, Intel, Johnson & Johnson (even though Buffett says he will most likely sell this one from his portfolio next), Coca-Cola, Procter & Gamble, ExxonMobil, and whatever other leaders in whatever sectors you want to hold.  The more diverse the better.  These are the stocks (companies) that have proven their worth, delivering earnings through good times and bad, and most of them paying dividends as well.  Buy these types of stocks and hold them until there's a good reason not to. 

This is not to say hold them and forget them.  It does mean that you should be loathe to sell them unless there's a fundamental change in their character.  Some examples: accounting fraud, loss of critical patents, technological obsolescence are just a few.  Monitoring them once a day may be too frequent.  More like weekly for most of them will suffice.

The remainder of the portfolio, the part that is "trading" oriented, should be smaller but much more active.  Stocks, and these can be truly seen as pieces of digital "paper", not as companies you're hoping to hold, in this side of the portfolio should be more quickly sold when there are profits.  That's because profits disappear fast in this market.  Ones that take months or years to make are lost in hours or days.  That becomes frustrating.  Many investors stop trying.  They get out of the market and wish their CD's earned more.  But at least they're not losing money.

Investors that stay in the market will evenetually be rewarded, especially with their core portfolio because these are the companies that lead economic recoveries.  The "trading" stocks should also do well.  The key tenent is that investors stay in the market with at least some of their funds.  The "trading" stock side can even go to cash at times, but as long as the core portfolio is fully invested, any rallies will be reflected in them.

Many investors don't like the idea of trading.  It's not what we've been traditionally taught.  But the market currently is so turbulent that it makes sense to be more proactive in capturing profits, even if they come in short bursts and income tax rates are higher.  Much better to pay the taxes than to watch profits quickly turn to losses.  It's time to rethink investing and invest in ways that the market dictates.  When the recovery finally takes hold, then trading activity can lessen, and buy and hold strategies will be rewarded.  They aren't for the moment.

- Ted Allrich
March 6, 2012

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks
Referenced Stocks: IBM , INTC , JNJ , KO , MSFT , PG , XOM

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Ted Allrich

Ted Allrich

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