I'll be candid with you about my portfolio performance if you'll agree to be candid about yours.
This is the time of year when I subscribe to the routines outlined in Stage 10 of our book, Tensile Trading. The section entitled "Revisit, Retune, Refine". I do a deep dive into my holdings and YTD performances. The data here is through December 22, 2020.
The objectives and benefits of these annual efforts are many (see our book) but the four questions from 30,000 feet are the same each year.
- Did I outperform the market?
- Which tickers are responsible for the outperformance?
- Which tickers underperformed?
- Was it my asset allocation or my stock selection skills which generated the most profits?
Some quick background on my portfolio structure . I keep 80% in my CORE, which is entirely ETFs and no-load mutual funds with the key objective being asset protection. I invest across 20 asset classes in what I call "Best of Breed" (for a detailed description see Trader's Journal Blog - March 20, 2018). The other 20% of the portfolio is in stocks. I refer to this as my EXPLORE portion, and the objective here is growth.
It's a bit crass, but as J. Paul Getty liked to say, "Money is like manure. You have to spread it around to make things grow". I agree, but diversification is an entirely separate blog. After completing my analysis, I realized that overwhelming my readers with ALL the data would drive you to the eggnog bowl. Therefore, for clarity and illustration I've limited my descriptions to the top half-dozen tickers in both the CORE and EXPLORE portions of my portfolio. That's adequate to illustrate my points.
Remember that YTD (through December 22, 2020) the Vanguard Total Market Index (VTI) is up 20% while the S&P 500 (SPY) is up 17%. In addition, remember my four objectives that I listed previously.
Diving into my Asset Allocation analysis, the asset classes to which I made the biggest commitment in 2020 were Technology and Biotech. Next in line was Global Equities which means the funds do have approximately 20% exposure to USA stocks with the majority of the equities spread around the world. For a whole host of reasons, I also bulked up on mid-cap stocks, and specifically growth-oriented mid-caps. To be candid, I've never been much of a value investor, although I'll speak later to my failed attempt to venture into the low volatility arena which I deemed an alternative to value investing.
So, the six funds I used to cover these asset classes and their YTD performance are as follows:
- ARTYX + 80%
- VWIGX + 56%
- PRGTX + 79%
- SMH + 52%
- XBI + 59%
Mid Cap Growth
- JKH + 48%
Keeping the math silly-simple, the average performance was 62% for this group. Clearly, with my CORE I made money while I slept because of my asset allocation decisions - not my stock picking skills.
Now, let's contrast this with six stock positions from the EXPLORE portion of the portfolio. Please note that the key decision in 2020 I made was the Sector choice. Had I picked the Energy Sector (XLE) and not Technology (XLK), the results would have been devastating. The point being, my asset allocation decision amongst the sectors made the big money — not necessarily my individual stock picks.
Yes, all six equities are in the Technology Sector. The reality is that stocks seldom levitate by themselves. The markets obey the laws of groupings. Therefore, the big returns come from your Sector and Industry choices. As much as we'd all love to boast that it was our acumen as stock pickers that made the big profits, in reality it comes down to our skills as asset allocators first and foremost. This, therefore is worthy of the majority of your money and time.
So, these are six of my tech stocks:
- AVLR + 148%
- AAPL + 81%
- AMZN + 73%
- QCOM + 73%
- ADBE + 52%
- MSFT + 43%
Some of you might rightfully point out that the average return of these EXPLORE stocks' tallies 78% and thereby exceeds the paltry 62% return of CORE asset classes. True, but the caveat is that my CORE accounts for 80% of my portfolio and the stocks in the EXPLORE portion only account for 20%
In other words:
- The CORE holdings pay the majority of my bills
- My Asset Allocation skills are far more important than my stock picker skills.
The bottom line here is that if you see the merit in expanding your own skills in this area, I'd suggest a detailed seminar on the subject. It will be worth it!
I did mention that I'd briefly discuss a poor asset class decision, so here goes! About three years ago, I pretty much threw in the towel on my "value stocks" as an asset class and replaced it with "low volatility" stocks. There are a number of ETF options, but at the time, I bought into Vanguard's Global Minimum Volatility Fund (VMNVX) because in 2017 it had been outperforming SPY with less volatility. I thought I'd found the Holy Grail being higher rewards with less risk. I was stunned this year when it significantly underperformed the market. I sold if for a modest profit and have sworn off value and low volatility as an asset class for the most part!
Let me say that diversification doesn't give you permission to ignore your portfolio. But strategically executed asset allocation can do the following:
- minimize your taxes.
- customize the market's risk to match whatever tolerance you deem appropriate for yourself.
- minimize the possibility of watching your blue chip stock (i.e. General Electric) go from $29 down to $6.
- provide both safety and income yet offer some growth as well which even retirees need.
Closing thought for 2020: First of all, wear your mask! Secondly then, the question of which asset classes to buy (in our book, we graph 59 assets and show their correlations to the S&P 500) and how much to buy is far more important to your long term financial success than deciding which hot stocks to buy today.
Don't miss my interview on this month's year-end StockCharts TV special, "Reflections 2020: Re-Evaluating Your Process"
Trade well; trade with discipline!
- Gatis Roze, MBA, CMT
- Author, "Tensile Trading: The 10 Essential Stages of Stock Market Mastery" (Wiley, 2016)
- Presenter of the best-selling "Tensile Trading" DVD seminar
- Presenter of the "How to Master Your Asset Allocation Profile DVD" seminar
- Developer of the Tensile Trading ChartPack for StockCharts members