By MoneyMorning.com.au
It has been a tough start to the year for most investors.
Since 1 January, the Aussie market has gained 5.4%.
That’s not bad. But it’s not great either. And with all the volatility we’ve seen so far this year, there’s a better than even chance of the market taking back those gains before the year is out.
But there is some consolation. If you’re feeling bad about your lack of stock market gains, you can take some comfort that you’re not alone.
In fact, one billionaire’s hedge fund has lost 18%…despite the US S&P 500 gaining a whopping 10.9% since the start of the year.
The message for investors is this – it doesn’t matter whether you’re a big investor or a small investor, the market is as risky as heck. That’s why it pays to develop and stick to a simple portfolio asset distribution system…
The billionaire we referred to above is John Paulson. He made a packet for himself and his investors in 2007 and 2008 as the US mortgage market exploded.
You see, he recognised the housing bubble and the bad lending practices that had inflated it. So he short sold mortgages and other debt securities. When the market went bad and crashed, Paulson and his clients cleaned up.
But since then he hasn’t been so lucky. The Sino Forest scandal burnt his hedge fund when those shares collapsed. And for the past year or so his big bets on America’s banks haven’t paid off either.
So far this year one of his funds is down 18%, while his Gold Fund has lost a whopping 23%. That’s not surprising, seeing as the gold price is down 20% from its peak last year and gold stocks are down ever more.
But it’s not just the big hedge funds copping it. As Bloomberg BusinessWeek reports:
‘Morgan Stanley (MS), which had the largest trading-revenue drop among major U.S. banks last quarter, lost money in that business on 15 days in the period, up from eight days a year earlier.’
Even the banks, which are getting access to cash for next to nothing, still couldn’t make money trading markets on almost a quarter of all trading days for the past three months.
So, if even the big end of town can’t make a buck with any certainty, what chance do small investors have?
Strangely enough, small and active investors actually have a better chance than the big boys. Simply because it’s much easier for small traders to get in and out of a position than big investors.
One Portfolio, Ten Assets
As you may know, we’re not a big fan of the idea that you should diversify your investments. That’s not to say you should stick all your money into one thing. Rather, we mean it’s important you don’t over-diversify.
The last thing you want in a volatile market is to have investments all over the place. In fact, right now you should be able to count all your investments on two hands: cash, gold (and or silver), four or five dividend paying stocks, and three or four small-cap growth stocks.
You then mix that around according to your current market view. The more bullish you are the less cash you need and the bigger your exposure to stocks.
But rather than picking a new dividend stock or small-cap, why not top up on a stock you already hold?
Of course, holding ten assets is just a rough guide. It’s not a hard and fast rule. You may be better off with nine…or 11 different assets. The point is, with markets moving around this fast it’s a mistake to own 20, 30 or even 50 different assets.
Because the more stocks you own, the lower your average income from dividend payers, and the lower your average return from growth stocks.
As we say, this approach won’t suit everyone. And the more you’ve got to invest, the more you’ll want to spread your risk among different investments. That’s fine. But rather than buying more and more stocks, why not add an exchange traded fund (ETF) to your portfolio?
The SPDR S&P/ASX 200 ETF [ASX: STW] pays a 4.4% dividend yield (granted, not great), but it gives you a diverse portfolio as it invests in the top 200 Aussie stocks.
You can then boost your portfolio’s dividend yield by investing in two or three individual blue-chip stocks that may pay a 5%, 6% or 7% yield.
One, Two, Three…Ten
In short, if you’re a new investor, setting a maximum of 10 assets is a great way to get started. Even a complete novice will have at least one – cash.
Then it’s just figuring out the next nine investments. We’d suggest numbers two and three should be good dividend paying stocks (there are plenty to choose from on the Aussie market). Investments four and five should be a couple of small-cap stocks for high growth.
Investment six should be gold. And seven through 10 should be a combination of dividend stocks and small-caps. Again, depending on how much risk you’re happy to take on.
Once done it should set you up for life. Invest more cash in the same stocks as you save. Sell stocks if they don’t perform as you’d hoped, and reinvest elsewhere.
With online trading from just $10 a pop, it’s not that expensive to rebalance your portfolio as the market and economic outlook changes.
Naturally, at some point you may want to own more than 10 assets. And that’s fine. If you don’t like the idea of using an ETF, the key is to just make sure that, however many investments you own, it’s easily manageable.
Cheers,
Kris
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