|
 | ||||
|
| | ||
| ||||
| ||||
By Louis Basenese
In the midst of all the financial noise -- bank bailouts, frozen credit markets and plummeting stocks -- a new idea in portfolio theory is quietly emerging. It’s called the "Barbell Strategy."The strategy calls for an investment on both ends of the risk spectrum, with nothing in between.
That means investing in zero-risk investments, like government debt, money market instruments and CDs. And then investing an equal amount in high-risk, speculative investments, like small-cap stocks.
The portfolio entirely omits the medium-risk/medium-reward investments, like blue chip stocks, that typically dominate most portfolios. Thus, when the portfolio is plotted along the risk spectrum it looks like a barbell.
Nicholas Nassim Taleb, bestselling author of "Fooled By Randomness" and "The Black Swan," first made noise on Wall Street for his brilliant execution of the Barbell Strategy.
He won’t say exactly how well he did, but estimates have him booking anywhere from $20 million to $45 million in profits in a single day. Taleb is obviously an incredibly gifted investor, but the strategy has merit regardless of one's investing IQ.
That said, I'm not advocating a complete barbell strategy for your portfolio. I'm just pointing out that small-cap investing, when implemented properly, will have a huge effect on your portfolio.
Now, because of the speculative nature of these stocks, I recommend that no more than 20% of your portfolio be allocated to such companies. But the impact of that 20% may surprise you. To illustrate...
Take a hypothetical portfolio of $100,000 and allocate 80% of it among stocks, bonds and the traditional range of investments. Put the remaining 20% in more aggressive small-cap stocks (split evenly among 10 companies). Now let's assume that the 80% portion of the portfolio returns 8% a year. And the 10 small-cap companies perform as follows:
We get stopped-out of three companies (losing 50%), two companies trade completely flat (no gain or loss), two companies net 40% gains, one company gains 80%, one company gains 160% and one company nets us a home run gain of 320%.
The table below shows the difference a portfolio that includes a 20% exposure to small-caps can have over time. It's shocking.
We think these assumptions are fair. They’re largely based on the investing exploits of the late Sir John Templeton, who in 1939 bought 100 stocks in the throes of the Great Depression. Back then, any investment in stocks was considered a high-risk endeavor.
But Templeton was betting that the upside potential of the winners would more than offset him for the losses he incurred on the losers. He was right. Between 1939 and 1943, Templeton's investment grew from $10,000 to $40,000, despite several companies going belly up and losing everything.
The important thing to remember is that risk is not to be feared so long as it's managed properly within your portfolio. If you hunt for big gains intelligently and carefully, you’ll quickly find the extra return you've been looking for.
 |
A former Wall Street consultant and analyst, Louis helped direct over $1 billion in institutional capital before founding Wall Street Daily - where he serves as Chief Investment Strategist. In addition to being an expert on technology and small-cap stocks, Louis is also well versed in special situations, including Mergers & Acquisitions and spinoffs. Ever the contrarian, Louis delights in challenging conventional Wall Street wisdom to unearth consistent double- and triple-digit winners. Louis has been featured on CNBC's "Worldwide Exchange" and has appeared as a guest expert on several prominent financial radio shows. His commentary has been published in multiple online media outlets, including The Wall Street Journal, MarketWatch, Morningstar, MSN Money, The Street and AOL's Blogging Stocks, among others. |
| ||||
|
| | ||
| ||||
| ||||
OUR PRINCIPLES |
1. Our Customers
I think it was Frank Sinatra who once said, 'If you think customers are not important try doing business without them for a while.'
Although he was referring to another singer who didn't like to sign autographs, he could have been talking about any customer in any business.
In our offices here in Delray Beach we keep that quote posted on the wall just to remind us how fortunate to have you as part of our family.
2. No Hidden Agendas
Please forgive the populist tone here, but the sheer audacity of what some brokerages pawned off as "research" in the 90's was stunning. As a result, the New York State Attorney General forced many of them to fund separate independent stock research firms.
We here at the Institute for Individual Investors have no interest in the "conflict of interest" business (we've seen what it does to people.) We do what we do because we enjoy it and we're good at it. Therefore know that we will never accept any payment, in any form, to recommend the shares of any company. Period.
Our goal is to not only provide you with our unbiased opinions, but to also bring you behind the scenes and show you exactly how we form those opinions. Knowledge is your best defense in the investing battlefield.
3. Information You Can Understand
In addition to the research and educational courses we offer, we try to present our facts in a way that will help you understand the rationale behind our thinking.
It is our hope that during the course of our relationship you will gain a more sophisticated framework for making investment decisions both as an investor and as a businessperson. We believe that the more educated you become, the more likely it is that you will appreciate and recommend our work.
4. We Will Always Admit Our Mistakes
Only fools never admit and learn from their mistakes. Good investors are not born they're forged. It's that simple.
5. Real Wall Street Experience
Everybody we hire to teach and inform you will actually have real investment experience.
Need I say more? Well, I will. Why?
Because many of our "competitors" aren't real investors - they're marketers and journalists pretending to have the real world experience that separates the men from the boys.
© 2012 Institute for Individual Investors, LLC.
110 East Atlantic Avenue, Delray Beach, Florida 33444, USA
www.ifii.com
Privacy Policy | Disclaimer | Update your Profile, Unsubscribe, & Update Preferences
Whitelist Us
No comments:
Post a Comment
Keep a civil tongue.