Portfolio Diversification

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A Small World After All
I am not a professional, and cannot tell you how to balance your portfolio, but I do want to share a couple of things.  In the video, Dale Jackson refers to geographical diversification.  I seldom buy shares of companies outside of Canada because I want to avoid exchange fees and currency fluctuations.  For companies outside of Canada and the U.S., I would rather hold a basket of companies, rather than individual stocks, so I use Exchange Traded Funds (ETF's).

Cyclical Sector Solutions
The TSX is comprised mostly of Energy, Materials, and Financial companies.  These sectors are largely cyclical in nature (fluctuate according to economic growth).  Still, we find some of the very best companies in the whole world trading on our very own TSX.  For times when economics are not in favour of cyclical companies, I buy inverse ETF's (which make money when markets decline) and/or bond ETF's.

Seasonality
The sector allocations shown in this video are based on the make-up of the S&P500, and not the TSX.  The underlying assumption is that we are always fully invested all of the time, so we need to weight our portfolio similar to the market in order to get market-like performance.  Studies done by people like Brooke Thackray, or the Stock Traders Almanac would suggest there is a certain seasonality to the various sectors.  Different sectors tend to outperform during different times of the year.  I seldom have all of my money invested in the markets at the same time, and I use Technical Analysis to detect which sectors are outperforming (usually based on seasonality).  There is a certain rotation I normally follow, rather than just blindly throwing money at everything in the market.

Trade-Offs
Because I am an active investor,  being overly diversified tends to make more money for my advisor in fees and commissions, while lowering my own overall return.  In my experience, one size does not necessarily fit all.

How do you allocate your portfolio?

February Portfolio Update

Year To Date Returns

Despite having taken my gains from the decline in gold stocks, I gave up those gains by being ahead of the pending market correction.  I have put money into inverse ETF's (they make money when the underlying index goes lower) since everything I have learned about these markets tells me we will end up lower than we are now.  Nobody can call the exact top for the markets.  In this case, it turns out I was too early. 

Even though the saying is that the market can stay irrational longer than one can stay solvent, I still expect to make up the difference, and then some, in the longer run.

The Basic Timing Model is doing slightly better than the TSX index as money makes its way into the stocks for larger companies - many of which make up the XIU ETF.
 
Two month return for TSX @ Feb. 28, 2011 = 5.37 percent
Two month return for Basic Timing Model using XIU = 5.4 percent
Two month return for Advanced Timing Model (my returns) = -2.7 percent
Money for charity = $411.27