My Personal Finance Journey

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Reengineering My Portfolio Management, Part I: Introduction

Contributed by mm | February 15, 2007 8:02 PM PST

This year I pledge to be more disciplined in my portfolio management.

By next month, I will have seven years of investment experience under my belt. So far, I've made a little more than $100,000 from the market, including nearly $80,000 profit from last year alone. Of course, many lessons have been learned:

• I started my investment journey in March 2000 by cashing out some employee stock options, but I immediately used the proceeds to buy more Microsoft stock (as if it was the only tradable stock on the market), only to catch the peak of the market and lost almost 40% of the value by the time I cut the loss.
• A few years ago, I got excited of trading stock options, and hoped to make a fortune by buying options on QQQ, only to lose my entire investment after betting on the wrong direction.
• I became so sure of my stock picking capabilities before I knew too much about value investing and corporate finance that I invested in some exotic companies; two of my small-cap picks turned up in the bankruptcy court.
• For some stock pick winners, I cashed out too soon, missing out two five-baggers (Sears and eBay), and many double-baggers.
• I only started to invest in mutual funds outside of my 401(k) account in August 2005 -- there were certainly quite a handful of money managers before 2005 who could turn in better returns for my money.
• I tend to be risk-averse by keeping a large portion of my portfolio in cash and equivalents, which may have affected my portfolio performance.

I do feel proud I become a more mature investor through this experience, though. Compared to who I was seven years ago, I know much more about 1) the investment landscape, 2) how to find and rely on the right resource to make investment decisions, 3) in general, how to pick up the right stock and fund, and 4) what I don't know about investing (and wisdom to stay away from that). More importantly, I'm glad I paid my tuition on these investing blunders while my portfolio size is still small. Now I am facing the challenging task of managing our family portfolio of more than $700,000 (which will likely grow to over $1,000,000 in 12-18 months), I'm more prepared than ever.

In this series, I intend to visit the following topics:

1) Portfolio Objectives: What's my goal and risk tolerance of my portfolio?
2) Asset Allocation: How should I distribute my portfolio across different asset classes?
3) Portfolio Construction: What are the best tools to deliver on the asset allocation plan?
4) Mutual Fund Management: What's the process I should follow to management my mutual fund holdings?
5) Individual Stock Management: What's the process I should follow to management my individual stock holdings?
6) Portfolio Review Process: How should I regularly review my progress in portfolio management, and make adjustments to asset allocation plan and rebalance if appropriate?

Next: Portfolio Objectives & Constraints

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This Post Has Received 2 Comments. Share Your Opinions Too.

Paul Commented on February 16, 2007

your experience tends to reinforce my belief that investing in the stock market is quite risky. I think that an alternative strategy would benefit many people. I've posted about one such idea here

WorkingWombat Commented on February 17, 2007


Great news that you are going to share information about Portfolio Management. I for one would be very interested to learn from your experience and not make the same mistakes - maybe different ones! There is definitely a large amount of information out there that supports _any_ investment strategy someone chooses, but I think your level of risk tolerance is similar to a lot of your readers, myself included, and so your methods and strategies I believe will be more relevant to my situation. Looking forward to reading the upcoming posts.

As an Australian expat living in the USA, we also share overlap in the decision of investment strategies between two (or more countries). I try to give people some idea of the pitfalls involved in moving from Australia to the USA at workingwombat, but I do not have a good grasp of what the best macro-economic strategies are in maintaining and diversifying investments between the two countries. For example, in moving from country_x to the USA, or vice versa, how should someone distribute their investments? Therefore, I would also be interested in your approach to this situation. Typically what I read in books, etc does not go further than just buying funds in another country from inside the USA.

On your asset allocation discussion, it would be good if you can give an idea of your approach to finding negatively correlated classes. As far as I can tell the lags between to asset allocations are often time varying, and so a negative correlation now could change to a positive correlation in 6-12 months (say). Do you care, as long as you check the correlations and rebalance every x months? So any insight or quality references you can provide in this area would also be appreciated.

Thanks and keep up the great posts.

- ww

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