Monday, November 24, 2008
A great comment came in last week amid the flurry of fear and frustration. A reader shared his asset allocation and noted being down about 11% for the year, obviously a very conservative allocation. A few readers felt the need to pound him in various way to which he responded along the lines of when the market goes up 20% he'll only go up 5%.
Crucial point there! Obviously he doesn't know for sure about being up 5% in an up 20% world but I'm sure he's about right. He structured his portfolio to go up less and go down less, a lot less, and it sounds like that is exactly what it is doing and he knows ahead of time that is what it will do.
This is something I've talked about quite a few times. A portfolio can be constructed such that you have a pretty good idea of how it will do under various conditions. Anyone defensively positioned right now will lag a monster rally, that should be obvious even if not precisely quantifiable. A portfolio that six months ago was fully invested, overweight agriculture, overweight emerging markets, overweight commodities and equalweight financials would have obviously been crushed.
Every portfolio has vulnerabilities. When fully invested you are vulnerable to a big decline, when sitting on too much cash you are vulnerable to a big rally. Going slightly smaller picture a portfolio is vulnerable to any big bets (intended or otherwise) going against them or having too little exposure (intended or otherwise) to something that goes up.
This sort of understanding of how your portfolio is constructed, whether intended or not (an example of not might be a portfolio that just uses broad based index funds), should help smooth out any emotional ups and downs.
The picture is from Lahaina looking out toward the ocean at sunset last night.