Our site runs on donations to keep it running for free. Please consider donating if you enjoy your experience here!

Model Portfolios

I have kept model portfolios (meaning they are not real, but educational ) for years–the ones on this site are just a few years old, but provide some insight, in particular to a newer investor.

The Enhanced High Yield Income Portfolio has worked fairly well–near the intent of the model. This model had an original goal of a 8.25% return, which we lowered to 7.50% a couple months ago as more and more high yield issues were redeemed. This portfolio began on 1/25/2018–so just short of 2 years old.

The portfolio is very rarely traded–and new purchases are primarily done to re-invest dividends. Occasionally issues with known problems are sold–but it is rare. I did unload the hated Spark Energy 8.75% Fixed-to-Floating Rate preferred because it is too volatile for my taste. This issue plunged as low as $17 last December/January and it took 8 months to get back near $25 where we took the opportunity to sell the issue.

The Enhanced portion of this portfolio was intended to hold a REIT or 2 which had some upside potential. The primary vehicles were to be issues like Whitestone REIT (WSR) and Independant Realty Trust (IRT), both issues that we had traded in and out of many times for short term profits. I simply have not had time to use this feature since the original profitable sale of WSR.

We had written before that this portfolio was too concentrated with energy related issues–which included some energy (LNG) shippers and in my opinion it is still too concentrated. Unfortunately just like real life decent high yield opportunities are few and far between.

So in spite of a high cash position of around 20% performance has been on target–14.77% in 22 months. So the portfolio should be right around 8% annually when the 2nd year ends. While not as great as it could be it is a lower stress 8%–no trading, no babysitting and no flipping.

The Medium Duration Income Portfolio, which should be the most steady portfolio of the 2 models, has performed poorly. These are shorter duration issues with maturities generally in 10 years or less–although we modified the ‘rules’ to allow up to 25% of the portfolio to have longer maturities as our choices became very limited.

This medium duration portfolio happened to hold a position in Atlas Financial 6.625% baby bonds until 5/2019 at which point the pain was great and the outlook for recovery was marginal so it was sold. The lesson here was that companies without longer histories can bring great pain as about a $5,500 loss was taken on this position–so about 5% of the portfolio evaporated.

So currently this more conservative (in duration) portfolio has a gain of about 6% in 21 months–which would be 11% without the Atlas issue–but it is what it is

It should always be expected that if you are buying issues with maturities in the near future you will be rewarded with a more meager coupon, but hopefully with a ‘date certain’ for return of your capital

Some of my most recent lessons are–

–even with a modest $100,000 portfolio you need diversification of issues. 10-12 is likely not enough to save you if 1 issues falls by 55%. I am thinking for $100,000 15-16 issues are probably better.

–sticking to rules that are not reasonable may well cost you in the end. For instance the Medium Duration Income Portfolio allowed for only issues with 10 years or less to maturity–because of this it held too much cash. Opening it up to allow 25% longer dated issues allows a much broader selection.

So while there are wild rides over a 2 year period in the end ‘buy and hold’ is not a terrible thing for those not wanting to be glued to the computer screen (or phone) like many of us are–unfortunately.

Leave a Reply

Your email address will not be published. Required fields are marked *