Wednesday, July 11, 2007
Part of constructing and then managing your own portfolio is understanding how it will react to certain types of market events, when it will lag and when it will outperform.
On one level, if you are really overweight energy and oil goes down 10% in a week you know your portfolio will have a very bad week and the opposite is also true.
Lately I have noticed that my portfolio does a little better on days the market is down and lags a little if the market is up a lot.
Occasionally on a given day the portfolio will beat by a lot or lag by a lot. Any time this happens there tends to be a catch up effect for a day or three.
Yesterday the portfolio beat by a lot so I know it will lag on the next big up day, obviously I can't know by how much. That I know ahead of time that there will be a lag makes the lag much easier to deal with.
It is the same with the energy example above. Oil has had a nice run of late as have most energy stocks. A normal correction within the group doesn't derail any longterm bullish thesis but it does mean the stocks would go down for a bit.
Got emerging market stocks? Some sort of panic there will hurt whatever you own. Ditto for any other theme.
The point here is not about trading it is about understanding what you are vulnerable to and preparing emotionally for a speed bump. In February the market had a scare over the carry trade and various themes that are vulnerable to the carry trade fared worse than the broad market but now that entire event seems to have been forgotten.
Being out in front of this sort of thing emotionally makes participating in the market much easier for the times that you don't perfectly trade around a correction or dip.
It is a guarantee that something you are vulnerable to will have a bad fill-in-whatever-time-period-you-like. Think about it now so you don't panic later.