Saturday, February 20, 2010

Portfolio strategy- how to adapt to changing market conditions

Different people have different risk appetites. One should have a portfolio of equities that is best suited to his or her needs and the market conditions, and if possible, other investment instruments such as bonds, commodities or money market funds to hedge against risk.

Efficient asset allocation can make the difference between a good investor and an outstanding investor. He must be able to feel the prevailing trends in the market, have foresight and not be too greedy where profits are concerned. If equities are overvalued, it is perhaps time to take some money out of equities and into lower-risk assets such as market funds, defensive stocks or cash. If equities are generally undervalued or the economy is just coming out of a recession, it is probably wise to increase exposure to equities, particularly growth stocks which are better beneficiaries of the recovery, compared to defensive stocks.

Where equities are concerned, my strategy is to have 3 portfolios with 3 different time frames. The 3 portfolios are for different purposes, have different levels of risk and will usually contain different stocks. Some stocks can fall into more than 1 category. Depending on the individual's preference, one may want to allocate a varying percentage of capital to each portfolio.

The ultimate purpose of each of the 3 portfolios is capital appreciation and growth.

Portfolio 1- Yield/Dividend portfolio

Objective: To generate long-term and stable passive income from dividends ( at least 4-5% annualized return).
Time-frame: 1 year to 5 years or more
Risk: Low to medium
Examples of companies: SPH, Starhub, M1, Singtel, SingPost, Suntec Reit, CapMall Trust, CapitaCom Trust, MIIF

It would be good to buy more on dips when the stock is undervalued and the long-term prospects still look good.

Portfolio 2- Growth portfolio

Objective: For long-term capital appreciation of the stocks
Time frame: 3 years or more
Risk: Medium to High
Examples of companies: Olam, Noble, Oceanus, Ezra, Ausgroup

Companies which fit this portfolio includes those which have plenty of room and potential to grow over the next few years. The quality of the management should be an important factor in this.

Portfolio 3- Short-term trading portfolio

Objective: Short-term trading for capital gains
Time frame: a few days to 1 month
Risk: medium to high

This portfolio is for trading for short-term gains during market swings. Defensive stocks should not be used for short-term trading so much as they usually move less compared to other stocks.
It is better to allocate a smaller amount of capital to this portfolio compared to the other portfolios, say 10% to 20%. Good technical analysis is required.

1 comment:

  1. I like your stock pick. Basically we aim for the same stocks for trading