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This portfolio was started on November 30, 1998. The portfolio is in an IRA account that was started with $250,000 at Fidelity Investments. Since inception all transactions on this account have been reported the day they occur on the Mechanical Investing board under the subject line "Real Money Port." The same reports have been put on the Foolish Workshop board since that board's inception. The money is that of a close relative of mine.
For this investor, the goal was to develop a diverse portfolio of strategies that outperformed the S&P 500. To do this I wanted a portfolio that included value stocks but put an emphasis on growth.
The portfolio consists of five strategies that began with equal amounts of money:
Value: A Foolish Four variation (Year 1: EY, Now: BTD4)
Large-cap Momentum: Keystone variations (Year 1: Keystone, Now: KeyEPS)
Large-cap Growth: Spark
Growth/Momentum/Value: PEG 26
Momentum: Relative Strength variations (Orig: RS-IBD and then RS-26, Now: RS-O)
From the list you can see I put 20% in pure value and then split the remaining 80% in both growth and momentum, further splitting that group into strategies that selected only large-cap stocks and those that take any size of stock.
I also wanted to have some diversification based on holding length. Based on the backtested performance of the strategies selected and my own bias to limit the number of trades (commissions), I set up three as annual strategies: Foolish Four, Keystone, and Spark. To get some short-term variation into the strategies, I renew the PEG strategy every quarter and the RS-O every month.
The only thing I left out was start date diversification. In those days I didn't realize the importance of such diversification, therefore all the five strategies used the same start date, the last Friday in November.
Eighteen months later this portfolio is a huge success. It is up 131.9% as of May 31, despite losing 24% over the last quarter. The 24% drop, while 3% lower than the drop in the Nasdaq over the same period, still shows that when investing in these strategies you have to be prepared to ride out some very volatile periods.
The results of the portfolio by quarter are shown below:
Strategy Q1 Q2 Q3
Dow30 0.07% 13.47% 5.02%
Nasdaq 15.27% 7.98% 11.67%
S&P500 4.50% 5.13% 3.57%
FF 0.92% 18.49% 0.76%
Key 25.79% 10.30% 10.57%
Spark 30.89% -4.84% 14.44%
PEG 20.48% 27.96% 1.77%
RS 34.66% 29.55% 36.09%
Portfolio
Total 22.55% 16.13% 13.96%
Strategy Q4 Q5 Q6 Total
Dow30 -1.91% -6.89% 3.89% 13.14%
NASDAQ 20.92% 40.78% -27.59% 71.33%
S&P500 3.03% -1.63% 3.97% 19.88%
FF 0.00% -26.44% 4.36% -7.52%
Key 23.93% 62.90% -18.70% 151.76%
Spark 20.19% 16.27% -2.04% 95.13%
PEG 57.64% 46.58% -29.27% 156.42%
RS 12.87% 110.83% -35.75% 263.01%
Portfolio
Total 23.01% 52.97% -24.03% 131.85%
Q1 = 11/30/98 to 2/26/99
Q2 = 2/26/99 to 5/28/99
Q3 = 5/28/99 to 8/27/99
Q4 = 8/27/99 to 11/30/99
Q5 = 11/30/99 to 2/29/00
Q6 = 2/29/00 to 5/31/00
You can see the big dog of the portfolio has been the Foolish Four, although it only lost money in one quarter. You can also see that the Foolish Four was the only strategy to perform well last quarter. The table also shows how the PEG and the RS strategies sometimes perform opposite of each other. Look at quarters 3 and 4 in particular.
You can see that a portfolio of strategies produced outstanding results. It even beat the Nasdaq every quarter, and it beat all three market indices overall and in five of the six quarters. Even with last quarter's high volatility, the returns were far less volatile than if I had just used one or two strategies.
Until next time, Fool On!
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