Challenges and changes come along frequently to test us. These changes can be in our work or business (investing and trading is a business) or our personal lives. Your investment/trading performance is governed by the ability to be flexible in your thinking, that degree of thinking flexibility and the willingness to embrace challenge and change is inherent in our nature. There are big changes in the Australian economy and therefore the stock market, it will be your ability to change with it that will govern your portfolio performance. Management of money is nearly always in direct correlation to our personality, this is where the ultimate challenge is because change and challenge requires us to move towards fear, not away from it.
In a few short years the ASX top 100 will look very different to how it does now. There is a trend away from large cap stocks to mid-cap growth stocks. That change is not showing up in the major indexes. For example the All Ords or the top 500 stocks in Australia is represented by an index called the XAO (often called the all ords) In 2015 the XAO started at 5388 and ended at 5366, a volatile year ending in a sideways result. However there were stocks (and sectors) that far outperformed that result. The minus result is because the All Ords is unevenly represented. The 4 big banks make up over 30% of the index alone. Add in BHP RIO Telstra Wesfarmers Woolies and CSL and that takes it to over 50% of the index being represented by a handful of stocks. That leaves the remaining 50% of the index to be represented by the other 490 stocks, and even those remaining are not represented in balance.
Is this a new phenomenon? Noooooooooooooooooo! It’s been an issue for a long time, and if market regulators were serious about creating a decent representative index, it would be changed.
This problem has existed for years, but it’s been very noticeable this last year particularly because of the commodities train wreck and a trend away from popular gorilla stocks like the top 10 mentioned. You need to be different now and stop listening to mainstream advice. Index fund managers have been punished last year for investing like they always have. Proportioning their funds according to the market weighting of the companies in the index………….lazy investing, and then they have the hide to charge fees for using a calculator with a division function. What a great way for a portfolio to get pounded in a market with a dynamic economy that is transforming.
So you need to start thinking like you have not in the past, start thinking creatively of what’s possible for the future, not what’s hurting you now. Malcolm Turnbull may not be so popular with you, but he is right on one thing, its exciting times and you need to be where the excitement is. That's with the change and that’s in midcap trending stocks. Is this a new phenomenon? Nooooooooooooooooooooooooo!
It’s been the same for as long as I have been trading since 1995. It’s always been easier to make money in mid cap growth stocks, there are times when the gorillas beat their chest, but it’s the chimps that can race to the top of the banana tree first. Monkeys (small caps) have their day, but they behave like their nature, erratically.
Get with the galloping Gazelles, not the Elephants.
Now and again I get an enquiry about a poor performing portfolio. Before I even look at it I know what the problem will be, too many old gorillas wallowing on the jungle floor. When I suggest selling them to re balance, or just downsizing to help the investor cope with the suffering of attachment to the size of a company, (sometimes size does not matter) I get the usual excuses. Oh I have had them for years, they were my families shares, I don’t want to pay the tax or its what I have always done. So the decision is made to avoid challenge and change, hold on and the portfolio either loses or underperforms.
Below are results using the 2 rule system discussed on the website. More info about that method here via the link.
The result with that system trading just the ASX 100 using 8% of capital in each stock which gives you a diversified 12 shares in the portfolio. The result was 2% p.a. for the last 2 years.
Compare that to this result: using the identical method on stocks ranked between the 100 and the 500, so that's the other 400 in the All Ords and the result is a whopping 25% p.a !
Astute readers may say its because of the systems function to favour the cheapest stock, and that there are more cheap stocks outside the 100. However if I remove the cheap price function from the method, the results improve even more. The real reason for the much better result between the two indexes are for the ones I stated above, indicating that what the Prime Minister said is probably correct.
We live in a world of data collection. However it's what we do with that data that will make the impact on our lives. Data and signals pointing to a better way come in many forms, how we analyse that data and the decisions we make with it determine the future. Do what you have always done and get the same result, embrace challenge and change and start to fly.
I have made some recent changes to Peters Portfolio, its now at 35% profit since inception. With 3 months to go before the 2 year mark its on target for 25% p.a. Details here