A Young, Amateur Investor's Portfolio: Unique Approach To Asset Allocation

by: Experiential Investor

Summary

I am a relatively recent and young (31 years old) stock market investor who has not yet seen a full fledged bear market.

Keeping that in mind, I have tried to build a portfolio mix that should provide growth and be somewhat strong during the downturn.

I have tried to accomplish this by utilizing a mix of investment strategies and assigning a strict % range for each in my portfolio.

Resulting portfolio is made up of selected ETFs, stocks, bonds, mutual funds and options. These components are methodically selected to achieve my growth and protection objectives.

At the end, I talk a little bit about the online brokerages that I use and that I have to use along with my impressions as amateur investor.

This is my first article on Seeking Alpha. After browsing through various articles and comment sections for about a year, I finally found the courage to contribute and learn from the experience of the incredibly smart (more or less) SA community. I have no doubt that I will make a fool of myself from time-to-time, however, my hope is that it will make me a better investor to have my thought process & method analyzed and critiqued by a lot of intelligent people.

I am dividing this article into three parts:

1. First, a little bit of background is necessary to explain how I got to where I am in terms of investments.

2. Next I am going to talk about the approach I follow to asset allocation.

3. Lastly, I will provide my impression of some of the various online brokerage accounts that are available to individual investors.

4. In subsequent articles, I will go through individual portfolio constituents and selection criteria for holdings that I have and what I continue to look for.

The start

As is the case with many, my investing journey started with a few acts of faith and hope that were centered on familiarity. Around 2010, I was working for a prominent public company in the field of solar energy and had built a decent sized equity position through stock grants from my employer. As you can probably guess, I was quite bullish on the industry as a whole and further bought shares in two of our most promising competitors.

So, I now have a portfolio built with approx. 60% of my employer's stock, 30% of our primary competitor and 10% of the best emerging player (2 in the US, 1 in EU). All of them in the same niche and highly volatile sector.

Ha, diversification of any kind is for weaklings!

It has to be said that even then I was not after making quick bucks with these bets but thinking about my returns in the long term. My thesis was that the renewable energy area is extremely promising in the long term and the strong players would have a decent chance of being successful.

Boy, how wrong I was! I did not take into account the fact that tomorrow's promise can become yesterday's news for an amateur and fast moving industry. Fast forward about a year and the Chinese entrants, helped by state support of course, changed the game from technology leadership to cost & scale leadership. Previously established and emerging players fell away in a swoop and 40% of my portfolio was decimated in a matter of days.

The Process

Lessons learned, that was the time I started serious reading of anything and everything related to investing I could get my hands on. I read books, biographies, research papers, blogs, newspapers, articles, analyst reports and conference calls. Interestingly, reading conference call summaries is how I got introduced to Seeking Alpha. Ironically, I have not watched any TV in the last 10 years which is probably a good thing when it comes to investing. Out of all this 'research', a few investing strategies have really appealed to me and I have tried to make use of them in constructing and managing my portfolio. Of course, I continue to learn new things every day.

Following are the strategies I primarily make use of:

1. Automatic Investments (Dollar Cost Averaging)

2. Event Based Value Investing

3. Dividend Growth (DGI)

4. Commodity/Materials

5. Speculation

6. Alternative Investments

Top 3 are what I consider core holdings and I expect at least ~60% of my portfolio to be from these. This is how I understand and justify each of these strategies in my mind:

1. Dollar Cost Averaging: This strategy can have as much as half of the total value of portfolio at any point in time. I have carefully selected a set of 11 ETFs + 1 stock (NYSE:BRK.B) to a total of 12 securities for automatic investment. These are bought every month at the same day with a preset amount using my primary brokerage account. I pay less than $1 per trade for these.

2. Event Based Value Investing: Best way to describe this strategy for me is when a stock is 'oversold'. There are many stocks that were once a darling of the market but went out of favor for some reason. Sometimes, I find that the initial thesis that took them sky high has not changed significantly but it is just the sentiment that has. "Sentiment is fickle and always comes back". I generally look at the company leadership and financials to see if it is worth it to buy and hold. I expect some pain in the short term (< 1 year) but gains in the long term (>1 year).

3. Dividend Growth: This is very popular on SA so I am not going to spend time on it. I think it is essential to have some part of your portfolio constructed with companies that have shown a commitment to grow dividends. Compounding is too strong a factor to not take advantage of.

4. Materials/Commodity: This is more or less a hedge against the population and environmental challenges that we face today. It is my belief that we are consuming our resources at an unsustainable rate and sooner or later, we will have issues to address. I am also looking at commodities that are out of cycle with their prices as most of them are cyclic. This has been the worst performing area for me (negative) until recently when I bought oil.

5. Speculation: As human beings, we love to speculate (as I did in the previous paragraph) and that's the reason I love strategy #5. Within this category, all bets are off and I can play with anything I like however I like. I generally focus on tech & biotech areas which have been red hot in the past few years and so the returns have been good as well. However, this is a bit like a casino for me and I rarely give much thought to fundamentals. E.g. I recently purchased Lending Club (NYSE:LC).

6. Alternative Investments: I use Lending Club's P2P platform and I have to say that returns in the last 2 years have been excellent. I love what they are doing and I bought their shares as well (speculation). A lot of people say that they are overpriced and such but once you use their platform to invest, you realize that it is definitely something different from everything else that exists for individual investors. I know there are some competing platforms but none is better in my view.

Except for #5 & #6, each of these strategies has a combination of stocks, bonds and ETFs. I also have mutual funds in my portfolio but they are more of a necessity of being able to invest in my 401K rather than my preference.

The Present

As of this writing, this is what the current distribution for investing strategies looks like:

A more detailed look with range rules and cumulative returns till 05/28/2015:

Strategy

% of Portfolio

Desired Range

Cum Profit Margin before Tax

Automatic Investments

26

25 to 50

23%

Event Based Value

19

10 to 20

83%

Speculative

17

10 to 20

54%

Dividend Growth

16

10 to 20

32%

Cash

10

0 to 20

1%

Alternative Investments

6

5 to 10

22%

Commodity

6

5 to 10

8%

Total

100

 

38%

I started constructing this portfolio in late 2011 and have contributed more and more money as the time has gone on except for one year (2014) when I had to put 20% down for our first home. Overall, I have an on-paper pre-tax return of about 38% with all dividends and capital gain returns reinvested. As you can see, this is substantially less than what S&P500 has returned in this timeframe. However, I started with a small base and have continued to increase my principal in subsequent years.

Each strategy has a desired range and my rule is to stay within that range no matter what happens in the market. This may be a strict rule which will probably get tested when the next crash happens but I am planning to stick to it. My most recent purchase was Michael Kors (NYSE:KORS) on May 27, 2015 under Event based Value investing strategy.

Another look at the portfolio in terms of type of investments:

I also want to take a moment to talk about the number of online brokerage accounts I have to manage this portfolio. As of this writing, this is one area where I feel it is unnecessarily complex and I need to do a better job in downsizing so any suggestions are welcome.

1. ShareBuilder: This is my primary brokerage account and I have ~$100K with them. I am a Costco (NASDAQ:COST) member and use ShareBuilder's advantage program which allows 12 automatic investment credits for $10 per month + trades and options at $4.95 each. I have found them to be one of the best values for investing since I also use CapitalOne (NYSE:COF) checking and savings accounts (interest rates of 0.5% & 0.75% respectively). It allows me to buy without having money in my ShareBuilder account as long as I have enough to cover in my checking/savings account. Their margin rates are also one of the best out there although I have never utilized that facility. User interface is extremely clean compared to some others I use; however, there is room for improvement.

2. Fidelity Investments: I have never liked the Fidelity website to do anything. It takes at least 5 clicks to get anything done and nothing is straightforward. However, my wife's previous job had 401K + Pension accounts with them and my current job also has 401K at Fidelity so I am kind of forced to use it. They have recently made some good improvements to make the website more intuitive and user friendly but they are still not on par with ShareBuilder.

3. Vanguard: I have my IRAs with Vanguard. The reason I went with Vanguard initially was that they are the cost leader in the ETF & mutual fund business. For me, a dollar saved in expenses is 10 dollars earned, especially once you take compounding into account. However, I have found that their website is not really conducive to trade anything other than Vanguard funds. Cost of individual trades is high and cost of options is horrendous.

4. Etrade: This is an online brokerage that I have to use due to my employer. I get my ESPP (Employee Stock Purchase Plan) shares delivered here. I have found their website to be extremely complicated and quite expensive. My impression is that it may serve well for an experienced trader or a person who relies on technical charts for frequent trading. However, for an average Joe, there are better and much cheaper alternatives.

5. I have some experience with TD-Ameritrade & Charles-Shwab platforms as well. However, it is from a few years ago when I was starting to invest and was looking for the best platform. They are definitely better than Etrade but I found ShareBuilder to be the best for me.

I have planned a future article on my instablog where I will go into more details and pros and cons of these platforms from the point of view of an amateur investor.

Disclosure: The author is long LC, BRK.B, KORS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.