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InvisibleAhab McBathsalts
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Portfolio Diversification - a little research for those interested
    #19813294 - 04/08/14 02:19 PM (9 years, 10 months ago)

As many members build their stock portfolios I would like to remind them that stocks are a traditionally volatile asset class compared to bonds, real-estate, or commodities. The S&P has run up a tremendous amount and as we break all-time new highs it is a good time to think about diversification. Most trading platforms offer some sort of analysis, although I found the one I was using to be particularly weak.

I was looking for some free online tools to help me with portfolio diversification specifically across asset classes and sectors, but ended up with a mish-mash of tools that gave me a fuzzy idea that I was likely fairly diversified but with no quantifiable measure. Macroaxis has a pretty good tool that most of the features can be used for free.
http://www.macroaxis.com/invest/efficientFrontier

I am somewhat familiar withe the efficient frontier and CAPM pricing as I took some finance classes in college, but my math is a little fuzzy. http://en.wikipedia.org/wiki/Modern_portfolio_theory

http://www.buyupside.com/calculators/stockcorrelationmatrixinput.php

This calculator is great for calculating the correlation co-efficient for a few stocks. The calculator will give you a value between -1 and +1. -1 being a perfect opposite relationship, zero having no relationship at all and 1 having a perfect positive relationship. Ideally, you want your correlations to be as close to zero, whether positive or negative as possible. My current holdings have few strong relationships, but most are below (+/-).5 (weak relationship)
From this values you are able to calculated the weighted average co-variance of the portfolio. I am having a hard time figuring out the expected returns of the portfolio. As I recall it was something to do with Beta and the risk free premium of the asset, which is fairly theoretical. Anyway beyond all this math, this link warns against the over calculation of a risk at the expense of common sense.

http://www.investopedia.com/articles/stocks/11/naive-diversification-vs-optimization.asp

Eventually I'd like to build a basket of 10 stocks with generally equal weighting of across:

REIT
Consumer Defensive
Consumer Discretionary
Utilities
Telecom
Industrial
Financial
Oil
Tech
Gold ETF

Besides diversifying across sectors, geographical diversification is important as well. Currently I am drawn to the RSX - Russian ETF which has many companies trading at P/E multiples below 8 or even 5 because of the geopolitical risk. This is longer term trade that could pay off when those multiples normalize. International exposure is difficult with trading on ADRs and I believe their maybe adverse tax consequences for many countries. But I believe many model portfolios strive for 20 - 40% international holdings.

As my portfolio grows I will eventually add a bond to a weighting of 10%, which is a fairly aggressive growth and allocation towards stocks. Most growth funds will put 25% in bonds, and conservative or balanced portfolios may have 50% or more in fixed income.

Diversification requires that you know what drives your holdings and where they make their money. It is a fuzzy art rather than hard science, but all experts will agree that diversification lowers your portfolio risk and will give you superior returns over the long term.


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"Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."

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InvisibleDestitute
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Re: Portfolio Diversification - a little research for those interested [Re: Ahab McBathsalts]
    #19816233 - 04/08/14 11:48 PM (9 years, 10 months ago)

well-written

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OfflineManianFHS
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Re: Portfolio Diversification - a little research for those interested [Re: Destitute]
    #19821634 - 04/10/14 01:09 AM (9 years, 10 months ago)

I have also heard about shorting the Japanese Yen, since their currency is losing quite a bit of value. This can be done in many different ways, including taking out loans in Yen. Then as the currency devalues in comparison to the dollar, your loan decreases.

Any thoughts on this?


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notapillow said: "you are going about this endeavor all wrong. clear your mind of useless fear and concern. buy the ticket, take the ride, and all that.... "

ChrisWho said: "It's all about the journey, not the destination."

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OfflineBrian Jones
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Re: Portfolio Diversification - a little research for those interested [Re: ManianFH]
    #19821859 - 04/10/14 03:18 AM (9 years, 10 months ago)

Quote:

mick said:
I have also heard about shorting the Japanese Yen, since their currency is losing quite a bit of value. This can be done in many different ways, including taking out loans in Yen. Then as the currency devalues in comparison to the dollar, your loan decreases.

Any thoughts on this?




My only thought on this is that currency trading is for real experts. Big fish. The sharks are going to devour everything else in the water.


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"The Rolling Stones will break up over Brian Jones' dead body"    John Lennon

I don't want no commies in my car. No Christians either.

The worst thing about corruption is that it works so well,

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InvisibleAhab McBathsalts
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Re: Portfolio Diversification - a little research for those interested [Re: Ahab McBathsalts]
    #20010444 - 05/19/14 03:28 PM (9 years, 9 months ago)

I would like to bump this thread because the S&P is looking especially toppy, and I have taken some SPY Put options at the 185.00 mark. Options can be used as fairly inexpensive insurance against short term downside if quantitative measures suggest short term risk. This $120 option order can protect $800 in downside if the market tanks 6%. This option would be appropriate if your portfolio was about $13,000, for a cost of just under 1%. I feel a 6-10% correction could be appropriate given the great performance of the market during the last 18 months.


I was very surprised to see that bonds and gold have a very high correlation, but on average bonds have outperformed gold by 5x on averge over the last 200 years.


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"Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."

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InvisibleLunarEclipse
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Re: Portfolio Diversification - a little research for those interested [Re: Ahab McBathsalts]
    #20010777 - 05/19/14 05:03 PM (9 years, 9 months ago)

Can you even begin to make some kind of technical argument other than "I feel"?


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Anxiety is what you make it.

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InvisibleAhab McBathsalts
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Re: Portfolio Diversification - a little research for those interested [Re: LunarEclipse]
    #20010804 - 05/19/14 05:11 PM (9 years, 9 months ago)

At current levels, nope. But it makes me sleep well at night.



--------------------
"Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."

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InvisibleLunarEclipse
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Re: Portfolio Diversification - a little research for those interested [Re: Ahab McBathsalts]
    #20011170 - 05/19/14 06:45 PM (9 years, 9 months ago)

Quote:

Ahab McBathsalts said:
At current levels, nope. But it makes me sleep well at night.






Buying put options shouldn't make you sleep well.  It's a loser, sorry been there done that.  But keep hoping.


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Anxiety is what you make it.

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