After the fall (and partial recovery): Portfolio evolution

[Shakespeare]

I was going to suggest one of the Moderators split the relevant posts into a new thread entitled "If you don't know, squat."

[BRIAN5000]

I was going to suggest one of the Moderators split the relevant posts into a new thread entitled "If you don't know, squat."

Squats exercise some of the most important muscles in your body, the ones that help yo get off and on the toilet. Go to a nursing home and check out a lift. Even with a careful operator yor going to get pinched, left on the toilet for 10 to 30 minutes not be able to wipe your own butt etc.. This may be one of the most basic quality of life issues being able to control when where and how long your on the can.

[2 yen]

The upshot is, to return the thread to its origins, that I'm 10% financials as opposed to 30% at the peak. Sleep ok now, too.

[Peculiar_Investor]

As "the fall (and partial recovery)" fades further into the distant past, I find topics like this one and also this one well worth the time to re-read them. As we head into 2011, I've been making minor adjustments to our asset allocations (the leading digit in our age is changing, so reducing equities 5%, increasing fixed income 5%), but otherwise we are just sticking to our investment plan and strategies.

I wonder if others reflect back using topics such as these and have an updated view of their portfolio evolution and investing philosophy?

[Shakespeare]

I've reduced financials, added low-beta utilities/telecoms, reduced my foreign equities, halved my REITs, and halved my PH&N HYB.

So my portfolio now is significantly less volatile than 3 years ago.

[deaddog]

I've reduced financials, added low-beta utilities/telecoms, reduced my foreign equities, halved my REITs, and halved my PH&N HYB.

So my portfolio now is significantly less volatile than 3 years ago.

How about your returns? Are you giving up anything so that you can sleep better?

[like_to_retire]

halved my REITs

So, are you predicting a weak or negative future for REIT's this coming year?

Can you share why you reduced REIT's?

Some say the valuations may be too high and that they've recovered too quickly from the demand for yield. I suspect that demand will remain after trusts become corporations. Certainly rising rates won't help REIT's.

I own a small portion of REIT's and do enjoy the current income, but I'm always interested when someone halves their allocation.

ltr

[Shakespeare]

How about your returns? Are you giving up anything so that you can sleep better?

Returns so far have been OK. In principle they should drop, but the low-beta stocks have done very well.

Can you share why you reduced REIT's?

They had a nice run and got to be 10% of the portfolio. I cut them to 5%.

It's worth repeating that the job of the manager is to manage the risk. The returns will be what they will be.

[biker]

I've reduced financials, added low-beta utilities/telecoms, reduced my foreign equities, halved my REITs, and halved my PH&N HYB.

So my portfolio now is significantly less volatile than 3 years ago.

Please define "low Beta" . Any examples appeciated.

[AltaRed]

No 'real' change in asset allocation for me since my 2009 post. I did sell a few legacy foreign equity mutual funds and bought XWD as the replacement (one for one). Will finish that exercise off sometime in 2011 once I see more XWD market behaviour. Added a GIC to my TFSA from my cash allocation.

Cash and fixed allocations have marginally slipped due to equity market gains but have not seen the need to re-balance yet. No further change considered in the foreseeable future unless a significant equity buying opportunity arises -- and then it will likely be selling one to buy one.

[Shakespeare]

"Low beta" has fallen into some disrepute, but means lower-than-market volatility. Examples generally include utilities and pipelines.

The actual measured beta depends upon the measurement period. Globeinvestor gives a beta of 0.36 for TRP, which is much lower than the market (beta=1 by definition).

Added: a few more from globeinvestor:
TRP - 0.36
ENB - 0.26
FTS - 0.13
TA - 0.80
T.A - 0.34
SJR.B - 0.31
RCI.B - 0.5
CU - -0.06(!)
BCE - 0.39

For comparison:

RY - 0.69

[NormR]

"Low beta" has fallen into some disrepute

Really? Maybe I missed something, but avoiding high beta has been a mighty fine strategy over the long term...

(Perhaps you're just commenting on some short-term trends?)

[Shakespeare]

avoiding high beta has been a mighty fine strategy over the long term

Agreed; I'm aware of that "anomaly". I was actually referring to the decline of CAPM.

[NormR]

avoiding high beta has been a mighty fine strategy over the long term

Agreed; I'm aware of that "anomaly". I was actually referring to the decline of CAPM.

Ah yes, quite so. For instance, The Scope of the Empirical Failure

[newguy]

I think people should look at a graph and try to figure just what is meant by "beta".

Here's CU

newguy

add: Here's what globe says

Search Investopedia
Sorry, there are no results matching beta

[Shakespeare]

I think people should look at a graph and try to figure just what is meant by "beta".

Here's CU

newguy

add: Here's what globe says

Search Investopedia
Sorry, there are no results matching beta

From Investopedia:

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market....

Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.

Now, there's a leetle problem with that theory, which is part of CAPM: it says that the higher-beta stocks should have higher returns - only it turns out the lower-beta stocks have higher returns.

Like it says on the sticker, YMMV.

[newguy]

Well I just downloaded the data for CU and XIC and Excel's regression analysis differs from the Globes on monthly over the last year.

Code: Select all

Regression Statistics   
Multiple R         0.86797734
R Square           0.753384662
Adjusted R Square  0.730965086
Standard Error     1.663297048
Observations       13

I didn't really need to do this since looking at the graph tells me it's near 80 and certainly not negative. So how do they do the calculations, and what do they really mean?

newguy

[Shakespeare]

Beta is a slope coefficient, not a correlation coefficient.

http://www.statistics-help-online.com/node76.html

Regression fitting constants are often referred to as "alpha" (intercept) and "beta" (slope).

[newguy]

So over the last year the beta has been .72, XIC is the x-axis, percent returns per month

But if you change how many months you look back the beta changes. I'd suggest to you the beta is closer to 0.20. It seems that in the crisis CU didn't fall nearly as much as XIC, giving a slight negative beta for a few data points.

At least now I have a decent definition of beta. Lets call it monthly returns for x years.

newguy

[Shakespeare]

But if you change how many months you look back the beta changes.

Beta, like many financial "constants" a computer can calculate (including correlation coefficients), isn't particularly stable. Only the first digit is of arguable significance.

(For details on the calculation see http://en.wikipedia.org/wiki/Beta_%28finance%29 ).

[like_to_retire]

XIC is the x-axis

Note that Globe Investor shows the Beta of XIC as 1.269 - I've often wondered why it isn't 1.000.

Isn't XIC the TSXC-I market that it is being compared to?

ltr

[newguy]

Only the first digit is of arguable significance.

Well then 1 sig. fig. gives me betas for 1 stock over differing time frames of -0.2 to +0.8. So I'm not really sure what you mean. The number printed in the g&m still doesn't make sense to me, I would rather just look at the graph and see how it performs compared to the market.

newguy

[BRIAN5000]

I've reduced financials, added low-beta utilities/telecoms

So your trying to "build a better mousetrap" by weighting sectors differently then they are in XIC/XIN in hopes of reducing volatility ? And you may even benefit by having a higher return?

So what sector weights would such a portfolio have?

[Shakespeare]

I've never been able to make money on cyclicals/resources/gold, which periodically dominate XIC. So I stick to financials and utilities (including telecoms and pipelines), and REITs.

The number of companies one needs to follow (excluding REITs, which I self-index) is only around 20. These form the "usual suspects" of the dividend investing crowd: the banks; Power group; the big lifecos (perhaps excluding MFC, which is the 'bad egg' in the basket); the pipelines; the telcos/cablecos; the power generation utilities; etc.

[BRIAN5000]

I've never been able to make money on cyclicals/resources/gold

So you have none of these or only smaller amounts?