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.

13 thoughts on “Model Portfolios”

  1. As a portfolio grows what is less risky; adding bigger positions or adding more positions?

    Good day

    1. I’m a proponent of adding more positions, in most cases. It’s just so totally dependent on the myriad factors at the time when $ is avail to purchase items.

  2. Nomad,
    Let us know when you’re ready and we’ll head to Tim’s house and meet in the SCIF to discuss…. lol

    BTW Grid, you can’t cash Tim’s check until you turn in your 1099 to him. Ha!

    1. You better hurry–the snow will fly soon and then who the hell wants to be in Minnesota.

      1. Ha! Tim, went to the well for a 3rd time on VER-F. Wanted to note for the QDI shopping crowd at a very decent yield, is 5yr call protected CHSCM. Not that much difference in yield between VER-F and CHSCM but certainly the QDI and the call protection are appealing to make up the difference. Just FYI.

        1. A4I–was going to do this same this morning, but it ran before I could get to it. Will watch and see if it gives me another chance.

          1. Thanks AFI, dumped 100 ver-f at $25.26, and added to CHSCM at $26.49, ex div 12-16. May add back to VER-F if it par after called. Great heads up call!

            1. Glad to help. I had a lowball CHSCM order in for weeks and it wouldn’t trip. Then all of a sudden, whammo, it hit first thing today. Tried to go back to the well for more but that was a no go… Love the QDI and call protection of CHSCM.

  3. I am still holding the Atlas bond. It continues to pay it’s coupon. I keep reading about how they are exploring a sale of the company, seems like a real possibility,

  4. Ken, there are great lesson to be learned in all of our endless quests for knowledge. I would highly advise new investors to do their deep due diligence and research before committing new capital to create a portfolio; this is so they have realistic expectations and understand the volatility that can happen with too much concentration or other factors. Paper trading and watching model portfolios like yours are an excellent ideas for many investors.
    “Don’t think money does everything or you are going to end up doing everything for money.” Voltaire

    1. Nomad, what do you think about those LTS baby bonds being dragged through the mud? I cant say Im surprised they found a suitor as bad as they are. Good thing those preferreds had that change of control provision must wouldnt have known existed or they would have tanked worse than the baby bonds did.

      1. Grid, I’m unable to say what I’d like to tell you and everyone reading here because the SEC may not like my post. I would highly caution everyone that holds any security affiliated with LTS (common, preferred or baby bond) to do their deep due diligence and act accordingly…
        Smile, Nomad

      2. Grid, as a long term holder and trader of the illustrious monthly paying preferred LTS~A there is a certain satisfaction in knowing that the advice I was given to ‘invest with the rich owner’ was sound advice after all.

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