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.
2 comments:
Hedgeweek has an article at http://tinyurl.com/3ckpdh discussing Hennion & Walsh's new ETF's that track Lipper indexes optimizing three separate levels of risk/reward. Could be an option for investors who lack the resources or time to develop their own risk-adjusted asset mix and don't care for or need the time-target approach (hat tip to Tom Lydon @ http://tinyurl.com/32rv4n).
Roger,
I really enjoy your thoughts, since they seem to be reasoned, rather than "dramatic". Although not constructed that way by choice, my portfolio tracks the S&P, except for overweight energy (oil/gas), and I've noticed the same effect. I chose the S&P as my "benchmark" for two reasons...one..my prtfolio is most closely aligned to that indice, and secondly...if I didn't enjoy "stock picking" so much, I'd just throw my money into Vanguard Index Funds, and spend the extra time riding my bike... :-)
Jan
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