2017 was a bull year in the financial
markets, and there are some opinions that 2018 would be the same as well. We
cannot exactly predict the future, but the fact remains that as a Bedokian
Portfolio investor, we have to stay invested, whether bull or bear.
In a bull market, exuberance and optimism
is in the air, so are the prices of equities and REITs, which typically thrive
in such economic conditions. If you are a passive Bedokian Portfolio investor,
just stay focused and rebalance to your asset class allocation periodically. If
you are in the active camp, or passive with some individual counters and
securities, then read on, for I will provide some strategies on how to invest
in a bull market.
Averaging Up Smartly
It is a good time to relook at your
portfolio and see if you wish to add positions further, if your asset class
allocation permits. One way would be to do an averaging up. I had covered the
basics of averaging up here, and now I would give you a further tip on how to
average up smartly.
Depending on the price of the equity/REIT
that you had entered before, the price of the same equity/REIT in boom time now
is probably higher than the actual current book value. In this case, you could
buy it up to the amount so as the average price across your entire holding of
the said equity/REIT is at below or close to the current book value.
For example, you have 1,000 shares of
Company A bought at $1.00 back then. Now, the share price is at $1.50 but the
actual book value is at $1.20. A purchase of 500 shares will bring your average
price to about $1.17 [{(500 x $1.50) + (1,000 x $1.00)}/1,500].
The main advantage in having the average
price of the shares (or REITs) below the book value is to provide a sort of
price buffer. Should the price of the shares head south, there is still some
reaction time for you to decide, through fundamental analysis (FA), whether to
exit or to add in more positions.
Sell Extreme Winners and Buy False Losers
If you look beyond this fancy term, it is
not really that difficult. In fact, it is one of the main tenets of rebalancing,
as in “selling the winners and buying the losers”. What I meant by “extreme
winners” was those equities/REITs that had ran up so high during these times
that they became much overvalued.
So how to tell if they are much overvalued?
We could use one of the selling triggers that I had mentioned in The Bedokian Portfolio, namely the
equity/REIT price has gone up by at least the dividend yield. Here, you can
even set the bar higher, like 1.5x or 2x the dividend yield before selling off.
It is up to you.
Of course, when you sell something, ideally
you have to buy something in order to stay invested. Enter the “false losers”,
where in other words these equities/REITs may look like losers but not really.
For this, the full suite of FA has to be employed, plus good judgment. You
could employ any known FA methods out there, or use the ones from The Bedokian Portfolio.
Other Asset Classes, Regions/Countries and
Sectors/Industries
From a holistic point of view, going back
to the basics of diversification, you can consider the other asset classes.
Despite the feeling of everything is up, there are still some different
correlations between the asset classes. Using ETFs of major asset classes from
the United States, for 2017 there was a correlation of -0.28 between the
Vanguard Total Stock Market ETF (VTI) and Vanguard Total Bond Market ETF1,
and zero between VTI and the SPDR Gold ETF2.
Cascading down the diversification level,
you could also look at other countries/regions or sectors/industries, for
correlation differences are applicable here as well. Again using ETFs as
references, the regional correlation between VTI and the Vanguard FTSE All
World ex-US ETF for 2017 was -0.143. Between sectors/industries for
the same year, using the Consumer Staples Select Sector SPDR ETF and Financial
Select Sector SPDR ETF, the correlation between them was 0.064.
You could either go for ETFs for a broad
exposure to the asset class/region/country/sector/industry, or use FA to
prospect the individual securities.
There you have it. The key things are to
stay invested, stay focused and observe The
Bedokian Portfolio guidelines.
1, 2, 3, 4 – Data source from www.portfoliovisualizer.com.
Correlation basis is on monthly returns, from 01 Jan 2017 to 31 Dec 2017.
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