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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.