Those who had a truly diversified portfolio during the financial crisis experienced more moderate losses than the broad market. A friend of mine had turned his portfolio over to private wealth managers, and his portfolio was only down 32% at its worst, compared to 55% for the market's major indices. On the way back up, his portfolio has performed slightly better than the indices. So I decided to have a look at his portfolio mix with one goal in mind: Creating the perfect portfolio. This is intended as a series of articles to help position myself and offer suggestions as I prepare to go into the market in a big way later this year.
This Perfect Portfolio (capitalized for a reason) is based on my own risk tolerance. I went through many online questionnaires and determined that I was comfortable with moderate tolerance. This jibed closely with my friend's portfolio as well. So I started with the asset allocation in his portfolio and tweaked it to conform to my own philosophies and gut instincts.
Today I'll present the asset allocation as a whole. Going forward, I'll dive into each asset class and get into specific holdings. Then, sometime around November 1, I plan to create a real-money portfolio that everyone can follow.
Here's the breakdown (Note: International and Emerging Market include all asset classes).
Large Cap Value: 16%
Large Cap Growth: 16%
Mid Cap Value: 3%
Mid Cap Growth: 4%
Small Cap Value: 4%
Small Cap Growth: 3%
Emerging Markets: 3%
Real Estate: 5%
High Yield Bonds: 2%
Muni Bonds: 2%
Other Bonds: 4%
Preferred Stock: 6%
Special Situations: 10%
What will each asset class consist of, specifically? I'll establish a core position in an ETF or benchmark-beating mutual fund for each asset class. Since I want to beat benchmarks, though, I'll turbocharge each class with individual stocks I plan to hold for a long time.
As an example, I want some solid dividend-paying stalwarts in my large cap portfolio, companies with global brand names I can count on for the long haul. Coca-Cola (KO) comes to mind, with its 9% annualized growth and 2.8% yield. Walt Disney (DIS) is a slam dunk, especially now that Pixar and Marvel are in-house, which should yield tons of new revenue. I'll want General Electric (GE), as analysts still see 14% annualized five-year growth and a 4.1% yield. There are definitive growth plays I'll want in there. Apple (AAPL) trades at a 22.5 p/e on 2012 earnings while growing strong. I will put DirecTV (DTV) in the mix, as it expands its market share domestically and continues to generate huge free cash flow. Google (GOOG) might even be considered a value stock, if one believes the five-year annualized growth estimates of 17%, with the stock trading at a 13.5 p/e.
Some readers may ask why my bond position is so low. I am very uncomfortable with the state of U.S. bonds right now, and their high-yield brethren. So I chose to introduce a hefty slice of preferred stock in there. Until bond yields rise, the preferred stock of financially solid companies provide stable yields with minimal underlying price movement.
What are special situations? I reserve this portion of my portfolio for either swing trades in stocks I know extremely well and have followed for years. I'll go into detail about those. In addition, they will hold purely speculative plays. For example, I might normally choose Wynn Resorts (WYNN) or Las Vegas Sands (LVS) gaming exposure, but if the economy continues to improve, the bolder choice is MGM Resorts International (MGM). We'll see.