My Long Term Investment Plan

Just thought I would introduce myself and get some feed back on my current Share Portfolio investment plan.
A bit of background into my investments so far would lead you to high risk long term investments, mainly speculative shares with the possiblity of high reward but at a high risk.

However this economic downturn has some what enlightened me to modify my investment strategy some what.

Current holdings i would classify as the following
36% Low Risk
BHP
64% High Risk
FMG
AQA
BRM
LNC
Others ( Much Higher Risk)

My current plan is to position myself with the following rough Percentage of Low Med High risk shares. Low - 50%, Med - 25% ,High - 25%

with the goal to move to Low -75%, Med -15%, High - 10%

I have a few companies in mind for my low med and high risk and it will be obvious to some that my opinion to there risk rating will differ however I was interested on people opinion of such a investment strategy.

Your help is much appreciated as I find myself day in day out finding speculative shares with the possiblity of high return filling up my potential buy list but believe it is in my best interested to maintain the 14 i have listed as potential buy.

Doesnt look like I'm going to get much feedback on developing better risk management, I'll just have to continue reading.

I, for one, am not exactly sure what you want to know.

You've categorised companies you hold/are interested in, according to a definition of risk that seems meaningful to you. I can't comment on that as I don't look at risk in those terms. It doesn't make sense to me.

On the other hand what are you doing to contain risk to your capital?
How are you determining your worst case exit strategy?
When will you get out of a stock?
What kind of position sizing model are you using to determine how much to invest in each stock?
What kind of overall money management model are you using?
What kind of time-frame and profit-taking ideas do you have?

I don't require answers to these questions. I am just posing them for you to decide if they are factors you should consider in your strategy. Even if you believe yourself to be a long-term investor you need to think about this. Things go wrong.

How have you determined the risk?

prawn_86 said:

How have you determined the risk?

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I was gonna ask the same thing.

enigmatic said:

36% Low Risk
BHP
.

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LOL - BHP low risk!

If only I had read a few good books on Risk Management before I dove in.

Seriously start with the Risk Management books and build your investment strategy around them.

To reply to MS+Tradesim
I know you said you dont need answers however i will any how.

these questions which you asked.

"On the other hand what are you doing to contain risk to your capital?
How are you determining your worst case exit strategy?
When will you get out of a stock?
What kind of position sizing model are you using to determine how much to invest in each stock?
What kind of overall money management model are you using?
What kind of time-frame and profit-taking ideas do you have?"

Are really what I am looking for, I am mainly looking at a means to have others poke holes in what i believe is sound as i personally have a limited view point and knowledge which at times may be bias so its always good to have someone else point of view.
If you or anyone else can comment on my answers to your questions it would be appreciated

1.On the other hand what are you doing to contain risk to your capital?

Currently I haven't implemented anything in place however I am looking at a stop loss for each share based on 2 Standard deviation of the share over 21days. or 1% of my total portfolio capital depending on which is smaller.
Once the trade is positive a trailing loss will be applied however each trailing stop loss will need to be determined on an individual share basis.


2.How are you determining your worst case exit strategy?
I believe this is answered in the above case.

3.When will you get out of a stock?
Trailing loss or a better opportunity comes along, although i do plan to try and stay carry free with my high risk.

4.What kind of position sizing model are you using to determine how much to
invest in each stock?
Not exactly sure what you mean could you explain about a position sizing model.

6.What kind of overall money management model are you using?
Other one I'm not 100% certain what your on about

7.What kind of time-frame and profit-taking ideas do you have?
-Well long term.. Dividend based will be 15years likely
-Growth stocks time frame generally based on the market so depending on how long the market runs for.
-Speculative once I am carry free with 100% gain.
Obviously stoplosses will apply to the growth and spec stocks.
unsure how i will deal with my dividend based part of the portfolio.

To Reply to prawn_86

Currently I have been determining my risk on only a few key things however I am certain that there are many I am missing.

I currently have been looking at the following and rating each one with a value obviously the values i give them are up to me and until i get a bit more info on risk management and investment strategies the ratings i give them may be extremely out of whack however it is a start.
Dividend based Only
-Dividend Growth Rate
-Dividend Percent

All Stocks
-Total Debt/Asset Ratio
-Mkt Cap
-Asset Growth Rate
-Liabilities Growth Rate
-Current Book Value\Share Price
-Revenue Growth Rate (Last 2years)
-Profit Growth Rate (Last 2 Years)
-Future Earnings Growth Rate(2years Forcast)

Obviously Speculative shares which have no past growth generally get a increase risk.

Can you suggest better methods of determining risk.

Bushman what would you rate BHP and for what reason, just so i can get a better picture on how others rate risk.

JackJackJack I have been trying to read as much as i can about, how to get rich, Derivatives, Risk management.
Unfortunetly there are only so many books i can read at once If possible do you know of any good Risk Management books that you would suggest is a must have, I may not get to it now but By the end of the next 1-3months I would have read it.

enigmatic said:

Can you suggest better methods of determining risk.

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Risk management isn't my area, so not really sorry.

I would say if your looking at holding for 10+ yrs, then you should use 10+ yrs of growth data instead of the last 2 imo...

If you are truly looking to build a solid long term investment portfolio I would suggest looking outside the resources sector as well. You need to have some balance in your portfolio with different sectors.

With this downturn there will be good opportunities with some of the blue chip stocks in different sectors that have fallen a long way and now have some good d/e yields and potential long term growth.

My , good luck

Hey Nomore4s, yeah dont worry i have definetly noticed my desire to hold only Resource stocks.

Currently i have the following which I am looking at although please no need to discuss the validity of my pick unless you notice something important.

BHP - Sorry but Strong believer of this share and a little more exposure at current prices is a must for me.
CBA
CSL
WOW
WES
WDC

Few others but not quiet sure of them yet (Alot less research into the company) - Mostly resources as i have yet to find many No resources that i can related to.

WPL
WOR
BSL
LGL
SGP
NCM
ASX
LPL

the Speculative i wont mention as they are all specs minus a few property shares.

Prawn Ill take that into consideration, although one thing i find at looking at to long a term growth you may miss new emerging growth stocks.
however i guess it wouldnt hurt to look at both short term growth and long term growth, this way I cover both possiblities.

enigmatic said:

Bushman what would you rate BHP and for what reason, just so i can get a better picture on how others rate risk.

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BHP is a high-beta stock. So if equities tank, BHP will be leading the charge. Also its cash performance is tied to commodities which are incredibly volatile. Lastly it is an incredible capital intensive industry with long-lead times between exploration, scoping and production.However, within the listed commodity sector, it is a relatively low-risk entity as it is a diversified producer (so not reliant on an individual commodity exposure) and has a strong balance sheet.

Having said that, without a doubt has provided investors with terrific returns over a long period of time.

If you truely want a 'low risk' stock, get out of a cyclical producer like BHP and choose some low beta and defensive options. The classic defensive stocks are Woolworths (everyone needs to eat), CSL (everyone needs to be healthy) and some brownfield utilities providers (h/e, check the gearing).

Then again, you could also hedge BHP using a CFD but this is not my strong point.

H/E, if you truely want 'low risk', then you need to be looking outside equities in to fixed income products or bonds. Its all about correlation of returns and choosing exposure that do not behave the same way to the same 'shock' (i.e. credit markets seizing up). So if equities tank due to economic contraction, BHP will tank whereas bonds will often increase in value due to the inevitasble monetary policy response.

PS: if you truely want 'low risk', you would be investing in treasuries.

My 2c only ...

enigmatic said:

Currently I haven't implemented anything in place however...<snip>

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Ok. But implement something until you refine your exit idea. This is just basic capital preservation.

2.How are you determining your worst case exit strategy?
I believe this is answered in the above case.

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Have a think about what you will do if something changes and it still hasn't fallen to your worst case price. The initial stop, however it's determined, should be the worst case. There are times when there is no longer a reason to stay in a share but it still hasn't hit your initial stop. Will you exit straight away or wait?

3.When will you get out of a stock?
Trailing loss or a better opportunity comes along, although i do plan to try and stay carry free with my high risk.

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Ok.

4.What kind of position sizing model are you using to determine how much to
invest in each stock?
Not exactly sure what you mean could you explain about a position sizing model.

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There are different ways of determining how many units you will buy in each stock. 4 commonly used ones are:

1) Fixed dollar amount - eg. you might allocate $10,000 per share.

2) Fixed percent amount - eg. 10% of total equity to each investment

3) Fixed dollar risk - you determine how much you are prepared to lose in dollars and then buy X units based on that

4) Fixed percent risk - you decide how many % of total equity you are prepared to lose then buy X units based on that.

1 and 2 are self-explanatory. 3 and 4 may need a little more explaining. They are both calculated on your total equity (cash + value of open positions) - though some traders may just use cash + purchase price of open positions.

Assume you have $50,000 cash and no open positions. With model 3 you might decide you will risk $500 per investment. Take the intended purchase price less the intended initial stop. Say, XYZ, buy at $3.00, worst case exit at $2.50 = $0.50. So if it falls by 50c you want to lose no more than $500. That means you can afford to buy 500/0.50 = 1000 shares => 1000 x 0.50 = $500 risked

Model 4 works similarly except you calculate a percent of total equity. For example, you might decide to risk 2% on each investment. To use the above example: 2% x $50k = $1000. 50c risk on each share. So 1000/0.50 = 2000 units.

In reality there are variations on these ideas and in some cases you might use more than one of them at different times. Each have advantages and disadvantages.

Sadly, many investors/traders have no idea and just throw whatever seems good at the time into the purchase.

6.What kind of overall money management model are you using?
Other one I'm not 100% certain what your on about

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The position sizing examples used above should be employed in the context of an overall strategy. For example, will you deploy 100% of capital if you have sufficient buy signals? Or will you always hold back a portion in cash, say 20%? Will you contain portfolio heat? Heat is the total amount of equity at risk, or how much you lose if all your stops are hit. Example, say you use a %risk position sizing model, you have 10 open trades with 1% risked on each. If all your stops are hit over say a month then your heat is 10%. You will be down $5000 in that case. You might like to calculate the worst overall hit you are prepared to take and then build your position sizing model around that. For instance say you want no more than 5% at risk at any one time. That would mean you could buy 5 different stocks with 1% risk on each. Just examples here, not suggestions. You need to figure out your risk tolerance and plan accordingly.

unsure how i will deal with my dividend based part of the portfolio.

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In this environment especially, there is no such thing as a safe bet. IMO, you need to decide up front at what point you will accept you are wrong and exit a falling share.

And most importantly, if you don't know how you are going to get out of an investment before you actually buy it, then you have no business entering - that is not investing, it's gambling.

Just my thoughts.

I can't really be bothered reading all the above posts so if this is already covered then ignore me (im short on time right now so i'll blurt this out but i think ms+tradesim has this thread pretty much covered)

Before you go diving in you need to work out a few things. Even a long term portfolio needs risk management.

1. What are your entry criterea?
2. Are you using technical analysis or fundamentals?
3. It seems like you are sticking to mostly blue chips, im guessing you are hoping to rely mostly on divdend payments?


I'd suggest before you go and buy shares, to sit down, with a pen, and write down how you are going to trade. When you get some sort of system worked out backtest it (if you have the software). If you are happy with the results, stick to your system like a glove.

Much appreciated Both Bushman and MS+Tradesim

I think my term of Low risk maybe be incorrect, or you could say i have a high level of risk threshold, but your comments bushman about BHP and the others companies are appreciated.

MS+Tradesim, i think i will have to re read your post tommorrow however it was extremely informative and I think i will need to look at a few changes in my strategy to investing both future and current.

I'm definitely basing most of my investment on Fundamentals however the timing of my buying will also be based on TA, no point buying today if it is likely to drop down in the short term, due to broader market direction.

so far i have one position open using my current Investment Risk management.

Unlucky for me the investment is going well so not to sure i will actually learn off this one up 66% for the investment 1month
Purchused 1.12
Trailing loss 1.36

Now my only problem with using a trailing loss is if a known annoucement is coming up do most keep there normal trailing loss or modify.
the reason i ask is if the share price drops due to market movement before annoucement date triggering the trailing loss. Then I'm out with out seeing the outcome of the reason for the investment.

Or does this just mean that it allows me to re-valuate the situation and enter in the trade again if I believe the situation makes it still viable.