Tag Archives: nasdaq

The V20 Portfolio #27: When To Rebalance

The V20 portfolio is an actively managed portfolio that seeks to achieve an annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read the last update here . Note: Current allocation and planned transactions are only available to premium subscribers . After a volatile week, the V20 Portfolio declined by 3.2% while the SPDR S&P 500 ETF (NYSEARCA: SPY ) declined by 1.2%. The underperformance can once again be attributed to the largest holding, Conn’s (NASDAQ: CONN ). When To “Average Down” Recently our cash balance has grown as a percentage of the overall portfolio, which can be primarily attributed to the decline in portfolio value as opposed to strategic shifts in allocation. As mentioned earlier, the biggest laggard is Conn’s. You may recall that the V20 Portfolio will continue to purchase shares of a company if fundamentals have not deteriorated, even if price has dropped. In 2016, we did exactly that. Conn’s position would have been 42% smaller had we not made any purchases in 2016. But as share price has continued to drop since the last transaction, I have not yet made any additional purchases for Conn’s, which is a part of the reason why cash allocation has swelled to one of the highest levels since the portfolio’s inception. Why did I make that decision? The truth is that I’ve been looking for the opportunity to “pull the trigger” so to speak. This relates to my rebalancing philosophy. There are many ways to rebalance, but I break them down to systematic and discretionary. The former style follows a predetermined method (e.g. once every quarter according to some specification). As you probably guessed already, the V20 Portfolio’s rebalancing method is discretionary. I believe that too many factors are shifting to warrant a systematic method. However, discretion does not imply randomness. The V20 Portfolio seeks to allocate more capital to stocks with the highest expected rate of return while accounting for the possibility of permanent capital loss . I believe that the smallest position in the portfolio right now, Dex Media, actually has the highest expected return; but due to the high risk of shareholders being wiped out in the restructuring deal, it is not prudent to allocate a significant amount of capital to the stock, no matter the expected return. Bringing the discussion back to the topic of rebalancing; a position essentially shifts between “no exposure” to “too much exposure” at any given time. However, there is no specific number associated with these two groups. Let’s suppose that the ideal allocation is 10% for a certain stock. Should you rebalance when it falls to 9.99%? Or what if it rises to 11%? There is no good answer. However, if we examine the extremes, the answer can become clearer. Using the same example, I don’t think anyone will disagree that rebalancing would be appropriate if the allocation falls to 1%, assuming no changes in fundamentals. There are also short-term considerations. While the focus should be long-term, short-term fluctuations are very real. Each time you place a trade, you are implying that prices shouldn’t go lower, or else you would have waited. This implication exists even if your investment horizon is long-term . There are numerous factors that could lead to sustained mispricing. For Conn’s, the general macro picture for retail has been soft and the credit division’s results may not improve for a while. Both of these factors could put more pressure on the stock, providing better opportunities to accumulate shares. In conclusion, there is no “perfect” time to rebalance. I believe that Conn’s current allocation remains large enough to capture the stock’s significant upside. The allocation could be larger, it could be smaller. However, one thing is certain: if shares continue to fall in the future, there is no doubt that more capital would be allocated to the position. Performance Since Inception Click to enlarge Disclosure: I am/we are long CONN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Market Lab Report – Premarket Pulse – A Major Revision to GDP and Emergency Fed Meeting 4/11/16

Major averages finished Friday slightly higher on lower volume. After an initial upside gap-up the indexes fizzled and gave up most of their gains for the day. The NASDAQ Composite had been up as much as 0.9% earlier in the day only to close once again just below its 200-day moving average. Meanwhile, oil and other commodities continue their bounce. This news driven, rip-tide market with its bullish and bearish events varying day-to-day means keeping your stops tight as always. While the uptrend could continue should news events on further monetary easing come through, it could just as easily roll over on bearish global or domestic economic news. The Federal Reserve is holding an emergency meeting today at 11:30 AM ET. The last time such a meeting took place was on November 21, less then a month before the Fed’s historic first rate hike in years. And in yet another unexpected announcement, the White House said that both Obama and Joe Biden would meet with Janet Yellen today sometime this afternoon ET to discuss the economy. “In the afternoon, the president will meet with Federal Reserve Chair Janet Yellen to discuss the state of the American and global economy, Wall Street reform, and the long-term economic outlook; the vice president will also attend,” the statement said. Perhaps this meeting is about reversing that rate hike? CME FedWatch futures puts the odds of a rate hike at the next fed meeting at near zero, but they don’t have odds for a rate reduction. Indeed, in another shocking revision, the Atlanta Fed has revised its GDP growth rate from 2.3% to just the 0.1%, a slowdown well beyond any expectations. Also contributing to the issue are the major eurobanks such as Germany’s Deutsche Bank (DB) and Switzerland’s Credit Suisse (CS), both which are retesting major lows. This could be the beginning of bank buy-ins in other European countries as happened in Greece. In related news, Italian banks rallied today on news of a meeting between Italian government officials and Bank of Italy executives to discuss the implementation of a fund to free lenders of non-performing loans. Naturally, this bails out banks once again and puts financials on stronger footing at the cost to the taxpayer. Nevertheless, European markets trade higher pushing futures up by almost half a percent on the news. Alcoa (AA) kicks off the earnings season after the close. Earnings have deteriorated over the last few quarters with the current quarter expected to come in significantly worse than the prior quarters. This will put further pressure on the quickly sinking GDP growth rate.