3 Theoretical Portfolio Case Studies

by: Quoth the Raven


I only do what I like for myself and it's always been my primary strategy to trust myself and my own due diligence. Right now, I actually have a large part of my portfolio in cash, as these last few weeks have churned some unease in me and I want to wait on the sidelines and see how things play out over the summer.

I had since sold my Apple (NASDAQ:AAPL) position that I bought at $396 and made some money on VXX calls on the Nikkei slaughter the last couple of weeks (I sold my $18 June calls at the VXX spike to $19.50).

Right now, I don't have a ton going on in my portfolio. I'm long Celsion (NASDAQ:CLSN), bought FuelCell (NASDAQ:FCEL) at $1.40 pre-earnings, playing some type of longer term options spread of both Amarin (NASDAQ:AMRN) and J.C. Penney (NYSE:JCP), I'm long Metalico (NYSEMKT:MEA), Disney (NYSE:DIS) and Silver (NYSEARCA:SLV), and I'm short TripAdvisor (NASDAQ:TRIP). I took a haircut on TRIP's earnings a couple weeks ago and then doubled down on my short position. I also recently opened up an options straddle on the Wet Seal (NASDAQ:WTSL), post-earnings.

In an effort to define some investing strategy as a whole from a macro level, I wanted to explore three fun, very different ideas for portfolios.

As time moves on and I become less and less aggressive with my investments, I find myself thinking about strategies that other people use and how they could impact my portfolio from a macro level. Whatever the market happens to be doing at the time, I'm trying to seek out what correlates appropriately with what the market's doing to make money.

Here's three fun, theoretical ways to build three very different portfolios.

"The Bull Market Isn't Ever Going to Stop" Portfolio

This is the portfolio for the QE lovin' bullish of the bullish. Framed pictures of Ben Bernanke hang in this investor's trading room, next to a couple of small pieces of gold and silver, kept there on display in frames as if they were some type of alien archaic artifact.

"Before this century is over, the Dow Jones Industrial Average will probably be over one million versus around 10,000 now. So, for the long-term, the outlook is tremendously bullish if you buy stock blindly to keep for a century."

-John Templeton

"This is what we used to use for money," this portfolio manager says, laughing, as he/she gestures towards the small pieces of the precious metals on the wall like he/she is pointing out relics from another dimension.

"Oooh," the crowd touring the room will murmur, as they snap photos and point. "That's not paper at all," they'll exclaim to one another.

But seriously, bull markets are generally surrounded by mania and panic buying, euphoria of money making, and loss of memory as towards how quickly markets can turn downward. Bull markets crush the skulls of short sellers like beach balls being thrown in front of freight locomotives.

From my perspective, a truly bullish portfolio allocation at this point would include:

  • Small long positions in REITS, for dividends like Vanguard REIT ETF (NYSEARCA:VNQ), iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR), SPDR Dow Jones REIT ETF (NYSEARCA:RWR)
  • Small position in bonds
  • Small cash position
  • Large long position in large cap dividend payers (like T, KO, MMM)
  • Large long position in tech heavy staples (like MSFT, GOOG, INTC, CSCO)
  • Large long position in sector ETFs like Energy Select Sector ETF (NYSEARCA:XLE), Financial Select Sector ETF (NYSEARCA:XLF), Healthcare SPDR ETF(NYSEARCA:XLV)
  • Large long position in small to mid cap up-and-comers with growth potential (NGS, KONA, AMCX)
  • Small long position in micro-caps/speculative (OTCPK:GNBT, OTCQB:CTIX)
  • Small bullish options positions in major Dow (NYSEARCA:DIA) and S&P (NYSEARCA:SPY) Components

"I'm Running My Personal Hedge Fund" Portfolio

This is the portfolio of someone that loves to make money both when the market is up and down. Most investors, including myself, would probably fit into this category. You try to create balance and harmony, making investing a bit less stressful and lowering your risk.

"Remember, I am neither a bear nor a bull, I am an agnostic opportunist. I want to make money short and long-term. I want to find good situations and exploit them."

-Jim Cramer

Someone in this category pulls from all different types of financial instruments, both long and short. The key here is to find balance, sector-wise, long vs. short-wise, and financial instrument-wise. Then, the key is to unload positions as they become profitable, depending on which way the market chooses to move. Hedge funds work almost the same way as a sports book - move the line so that you can get equal action on both sides of the game, cash in the losers (your winners) and scrape up the vig.

A great "hedge fund" thinking investor secures profits and returns through dividends and other low yield conservative means, but also has a hand in every single direction the market could possibly swing, and takes profits accordingly.

A hedged portfolio would include:

  • Small long positions in REITs, for dividends like Vanguard REIT ETF, iShares Dow Jones US Real Estate ETF, SPDR Dow Jones REIT ETF
  • Small long positions in silver and gold, as broad market hedges using iShares Silver Trust (SLV), SPDR Gold Trust (NYSEARCA:GLD)
  • Small long positions in bullish ETFs, for short term swings like S&P SPDR ETF Trust
  • Small positions in bond ETFs, as broad market hedges, like iShares Barclays Aggregate Bond Fund (NYSEARCA:AGG)
  • Large long positions in big dividend payers (T, KO, AAPL)
  • Sector wide hedges for these by short positions like (VZ, PEP, INTC )
  • Long positions in companies with growth potential
  • Short positions in companies who do not seem fundamentally sound (like JCP, RSH, SHLD)
  • Small cash position
  • Short term options spreads on sector wide ETFs like (SPDR Technology ETF (NYSEARCA:XLK) for quick smash and grabs

"There's a Good Chance the World Will End Tomorrow" Portfolio

These are the high caliber individuals that you see on the Discovery Channel building bomb shelters in their homes for fear of the world ending or a government takeover.

"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."

-Peter Lynch

On one hand, these people can sometimes seem like total nuts. On the other hand, people like Ron Paul who admit to simply hoarding gold over the years have seen extremely handsome returns, and I've learned that you can't argue with profits.

Most people that are trying to build these types of portfolios insist that precious metals and bonds are the only way to go, but there's a small argument for about a 10% allocation in safe stocks (like food companies, healthcare companies), so that's how we're going to build this portfolio.

  • Small 5%-10% long position in staple stocks (PG, MMM, KO)
  • Medium sized position in actual gold or silver bullion
  • Medium sized cash position in FDIC insured account or in person
  • Small position in volatility ETFs and ETNs (like VXX) to be traded in the very short term
  • Small long positions in gold and silver trusts (GLD, SLV)
  • Medium sized long positions in inflation-adjusted Treasuries (AAA rated)


I'd love to hear from my followers how they're weighing their portfolios nowadays. Do you think we're on the verge of another bubble bursting, in the midst of a bull market that isn't going to end soon, or somewhere in between? In the comments, give me a nod as to what macro strategy you're currently employing.

I hope this article has given some investors thoughts about weighing their own personal portfolios based on their market sentiment, and some of the tools available to do so. As always, best of luck to all investors.

Disclosure: I am long CLSN, SLV, MEA, DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm playing spreads on AMRN, WTSL, JCP.