(As an effort to become more disciplined in portfolio management starting 2004, I start to draft this document to summarize my portfolio management guidelines. I expect to finalize this guideline by end of 2003 for use starting in 2004.)
This guideline applies to my portfolio as a whole, including investments in my taxable accounts, Roth IRA, 401(k), bond account at TreasuryDirect and cash in saving accounts. This guideline does not apply to ESPP, ESOP and home equity management management.
1. Investment Objectives
The goal of this portfolio is to seek above-average capital appreciation with manageable risk. Quantitatively, I expect the portfolio to return 3% more than S&P 500 on a relative basis and to lose no more than 10% on an absolute return basis every year.
2. Investment Timeline
The portfolio has an investment horizen of 10 to 25 years. This means the portfolio may engage in certain long-term bets.
3. Asset Allocation
The portfolio can invest in any kind of investment tools, including but not limited to stocks, fixed income and money market funds. The portfolio can use mutual funds to achieve certain goals. The portfolio may use options and other derivatives from time to time for risk mitigation.
To achieve its goal, the portfolio will be heavily invested in stocks. In general at least 60% of the portfolio should be invested in stocks in any time. However, the portfolio may involve in market timing so the percentage may be lower when necessary. There is no limitation in terms of market cap size (small cap, mid cap, large cap) and industry.
The portfolio will have no more than 10% invested in fixed income (excluding saving bonds).
The portfolio will have no more than 10% invested in international equity or fixed income positions.
4. Investment Strategy
4.1 Buy Strategy
The portfolio adopts a value investing approach in selecting its stock investments. In general, the portfolio seeks stocks there are undervalued in test of conservative discounted cash flow analysis. (Discount rate is 10% for the near future to reflect the expectation of the portfolio gain.) The portfolio will look at stock's fundamentals, earning power and other factors in forming the decision.
For fixed income, the portfolio will mainly invest via mutual funds. The portfolio may engage in bet of yield trends.
4.2 Sell Strategy
The portfolio may sell part of all of its positions when price target is met. If price target is adjusted downward, the portfolio may dispose certain positions at a loss. The portfolio may also sell for tax purposes.
4. Investment Limitations
5.1 Diversification - Initial Investment
For every investment, it should not exceed 5% of my net worth (including ESPP, ESOP and home equity so it is larger than portfolio value) after the initial investment.
5.2 Diversification - Subsequent Investment
This portfolio may make subsequent investments in its current positions, but such additional investment should not make the position exceeds 10% of my net worth.
5.3 Diversification - Monthly Test
Every portfolio component will be retested for its value as a percentage of my net worth every month. The portfolio will be proactively rebalanced if one position is more than 15% of my net worth. In no time should one position exceed 20% of my net worth.
5.4 Diversification - Number of Different Holdings
The portfolio seeks to have 8-10 stock positions in the long term.
The portfolio should be kept ina relative liquid form so that 10% of the portfolio can be redeemed for cash within 3 days and 50% of the portfolio can be redeemed for cash within one week.
The portfolio will try to maintain a turnover ratio of less than 60% per year.
6. Investment Disciplines
All investment ideas and investment decisions will be documented timely.
For any investments more than $1,000, investment idea will be analyzed in detail before it is implemented.
6.3 Holding Management
A price target will be set for all stock holdings upon initial investment.
All quarterly earning release and annual reports will be read and analyzed within one week of availability. Price target will be revised if necessary.